Fairwealth Securities has come out with a report on Union Budget Preview 2011-12.
Union Budget Preview 2011-12:
Actions taken in FY11:
• Disinvestments worth - Rs 227 billion
• Allocation of 3G spectrum and Broadband Wireless Access that fetched over Rs 1000 billion
• Increased Spending on Infrastructure and Social sector
Grey Areas that remain a major cause of Concern:
• High WPI Inflation, especially food inflation
• Current Account Deficit at elevated levels
• Fiscal Deficit that may further widen in FY12 in the absence of appropriate measures
• Rising prices of Crude oil that may stoke fuel inflation further and fiscal deficit in case crude oil prices go beyond USD 100 per barrel and Government continues to bear the fuel subsidy
Actions Expected in Union Budget 2011-12:
• Tax reforms such as implementation of GST and DTC
• De regulation of Diesel Prices to contain under recoveries
• Subsidies to Oil and Gas, Fertilizer, Food etc
• Relaxation of FDI norms in sectors like BFSI, Media, Retail etc
• Restoration of Service tax to 12 per cent
• Introduction of Infrastructure fund
Key Expectations
Income Tax Exemption Limit could be hiked: Keeping in view the high inflation at 8 per cent-9 per cent which is eroding the incomes, the Finance Minister could hike the Income Tax exemption limit from the existing Rs 1.6 lakh. An increase in the limit would be a step towards aligning the tax structure with DTC which proposes the income tax exemption limit at Rs 2 lakh, 10 per cent tax for annual incomes in the range 2-5 lakh, 20 per cent for 5-10 lakh and 30 per cent for incomes over 10 lakh.
Some Clarity on the implementation of GST and DTC: Dissension between the Centre and the State have already postponed the implementation of GST which was scheduled for April 1, 2010. Now the Government is looking to roll out GST from April 1, 2012. If the issues are not resolved, the implementation could be further postponed to a date beyond April1, 2012. We expect a greater clarity on GST implementation after the government introduces Constitution Amendment Bill in forthcoming Budget Session.
Restoration of excise duty on selected sectors: Excise duty that was hiked by 2 per cent in the previous budget could see another hike in the sectors that are performing well. The excise duty on two wheelers and small cars could be raised to 12 per cent from the current 10 per cent.
A Wider Base and a Roll back expected in Service Tax: A greater number of services are expected to come in the ambit of service tax. In addition to this, the service tax rate that was left untouched in the previous budget could be hiked to 12 per cent owing to a strong performance by the services sector.
Customs Duty on petroleum products may be reduced/waived off: With crude hovering around US$ 100 per barrel and oil companies bearing the burden of huge under recoveries, we expect the Finance Minister to reduce/waive off the customs duty on various petroleum products. At present the customs duties on Crude Oil, diesel and other refined products are 5 per cent, 7.5 per cent and 10 per cent respectively.
Infrastructure likely to remain as a focus area: Infrastructure is likely to be a beneficiary in the forthcoming budget with main thrust on the power sector. We expect that allocations in schemes such as Accelerated Power Development and Reform Programme (APDRP) and Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) could be hiked from Rs 3700cr and Rs.5500cr respectively in Budget FY12. In addition to this the sunsetdate for power units to avail tax holidays may be extended by a year to 1st April 2012. The Finance minister might also introduce infrastructure debt funds in the forthcoming Budget.
Social Sector spending likely to remain flat: Though the ministry of Rural development has sought an allocation of Rs.64000cr (60 per cent higher than that in previous year) for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the act is unlikely to see a higher allocation in Budget FY12 than that in Budget FY11. In the Union Budget 2010-11, the finance Ministry had allocated Rs 40,100 Cr. for the NREGA. The allocation for the scheme in Union Budget 2011-12 is likely to be in the range Rs42000-45000 cr. The allocations in other social schemes are also likely to remain flat since we expect that food subsidy will be considerably higher this year.
The quantum of fertilizer subsidy likely to be increased: The allocation for fertilizer subsidy will be increased considering the under recoveries faced by the fertilizer companies and the rising prices of inputs globally so that the domestic prices of urea, di ammonium phosphate and Muriate of Potash do not increase.
Extension of 2 per cent Interest rate Subvention: Presently farmers can avail a 3 per cent interest subsidy on loans easing the effective cost of their crop loans to 7 per cent. Besides this, there is an additional 2 per cent interest rate subsidy for farmers who repay their loans on time. In the Union Budget 2011-12, the Finance Minister Pranab Mukherjee can extend the 2 per cent interest rate subvention to the farmers in districts that have been declared flood or drought struck.
Sector Wish list
INFRASTRUCTURE: The requirement for sustainable infrastructure development is paramount both to provide the backbone for economic activities as well to ensure that resources are conserved and used efficiently. The Union Budget 2011-12 would have to explore many options to see that growth of the economy remains robust next year and beyond. Emerging challenges such as rising input costs and interest rates amid still subdued global demand will have to be dealt with. In this context, expectations of NBFC’s and bank’s being allowed to raise Infra bonds could provide support to this capital intensive sector. More focus on PPP can be found place in Union Budget 2011-12 to make the sector more vibrant and for the timely competition of projects.
CAPITAL GOODS: Capital goods sector is expecting high worth orders from steel segment leading to an increase in its backlog since the steel sector is planning to increase capital expenditure on plants. Huge mismatch in demand and supply of power sector would claim for setting up more power plans, a positive trigger for capital goods.
STEEL: With increased focus of Government of India to build sound infrastructure, the domestic steel industry is expected to grow at a CAGR of 10 per cent in next five years against the average annual growth of 8 per cent achieved between 1991-2010. Going forward we expect steel prices to remain firm on account of strong demand lead by recovering global economies. However we believe higher raw material prices is a cause of concern for the Industry. With the resumption of supplies from Australia, prices of coking coal would also normalize from their highs. We believe this scenario would be positive for steel companies.
AUTO & AUTO ANCILLARY: We don’t expect any major move for the automobile industry in the budget except some incentives regarding green cars technology, as it will help to take the automobile industry to a new level in the form of hybrid and electric cars which will be free from pollution and reduce the country’s dependence on fossil fuels. Hence, we expect additional incentives for technology development of hybrid cars. In addition reduction in custom duty on energy efficient completely built units could also be considered. Auto Component Manufacturers are facing challenges in production as the raw material prices have soared dramatically in the previous year. Hikes in prices of steel, aluminium and rubber have dented the margins of the auto manufacturers.
TELECOM: The Sector is under scrutiny by the Government on 2G issues. This can result in the additional expenses by the service provider if additional amount asked to settle the accounts. The industry expects the mergers and acquisition in near future as the industry will face consolidation. New Telecom Policy is on the cards. It is expected to bring more transparency in the sector related to revenue structure of the companies, mergers & acquisition and spectrum prices.
INFORMATION TECHNOLOGY: Demand for IT Services exports is expected to continue to be robust with the recovery in developed countries like US & Europe. According to NASSCOM exports are expected to dominate the Indian IT industry, which account for 80 per cent of total software industry. Any clarifications regarding GST will provide a sigh of relief to the industry and will avoid double taxation which it has seen in the past few years.
PHARMA: Growth in the Indian pharmaceutical industry at 11-12 per cent remains robust surpassing the global average of 5 per cent-6 per cent. Exports still hold significant charm as Indian Pharma has a market share of 10 per cent in the USA and a 5 per cent share in the emerging markets. Large first to file (FTF) opportunities and strong ANDA pipeline signifies that the opportunities from US market remains attractive. The government has recently announced the setting up of a venture fund that will target the infusion of Rs 20bn into the sector. The recent acknowledgment by Finance Minister for R&D investment as one of the two major concerns along with infrastructure raises hope for the sector to receive necessary attention in the Union Budget to be announced.
FERTILIZER: Fertilizer remains a key sector in Budget 2011-12. Urea will be the key focus in the industry, which represents around 50 per cent of all fertilizer products consumed in the country with an annual consumption of 27mt of a total fertilizer consumption of 55mt. Urea production is based on different forms of feedstock such as gas, naphtha, fuel oil and coal. The finance ministry wants to immediately decontrol urea prices, but Department of Fertilizers wants subsidies to be continued until 2013-14. Chemicals and fertilizers minister has asked the government to further extend the NPS-III regime for urea prices. Thus, the Committee of Secretaries is currently working out a viable model to determine how the subsidy component would be fixed. They can also raise the urea prices by 2-5 per cent in 2011-12. De-canalisation of urea imports can also happen as at present only authorized agencies can import urea. The sector also wishes removal of import and export restrictions.
HOTEL: With the sharp spurt in businesses and leisure travelers to India, the country is currently experiencing a shortage of almost 100,000 hotel rooms to meet the accommodation needs of the foreign and domestic tourists. The hotel industry is a highly capital intensive industry. Construction of a new hotel project in 5 Star category demands massive capital investment ranging from Rs 500 to Rs 700cr. The hotel industry is highly capital intensive and require huge expenditure for construction of new hotels. We expect the government to come up with favorable clause for the industry resulting in availability of adequate accommodation.
AVIATION: Presently the Aviation Turbine Fuel (ATF) is chargeable to Excise duty at the rate of 8%, and VAT is levied by the States at varying rates generally in the range of 20-30 per cent, thereby resulting in a very high effective tax rate in the range of 30-40 per cent for ATF. This coupled with uncertain crude prices results in a major financial burden for the airlines. With this backdrop, the industry has been long demanding 'declared goods' status for ATF, which would help reduce the applicable VAT to 4 per cent or lower. Incentives in the form of a 10 year tax holiday are available to infrastructure facilities (including airports) with a view to attract investors in this space. These benefits are available for developing, operating and maintaining any new infrastructure facility. Common inference of this is believed to be that the term 'new infrastructure facility’ would refer to a green field project however it remains ambiguous whether the tax holiday would be available in respect of modernization, up gradation, redevelopment of the existing airports.
BANKS: India is considering allowing new private sector banks, including industrial houses, while the formal and final guidelines would be announced by RBI on the eligibility allowed to set up new banks and related to the terms and conditions for them, a roadmap on the subject could be announced in the Union Budget set to be announced on February 28. The Government has already approved additional capital infusion of Rs 6,000 crore in 10 public sector banks with an objective to raise its holding to a minimum 58 per cent in all state-run banks. With government holding at just 51 per cent, banks cannot access the capital market for raising additional capital by dilution of government holding. Banks with Government’s stake less than 58 per cent include, Bank of Baroda, Oriental Bank of Commerce, Andhra Bank, Dena Bank, IDBI Bank and Vijaya Bank. The exact amount and mode of infusion in each bank would be decided later.
OIL AND GAS: India imports almost 80 per cent of its crude oil requirement. Petrol and Diesel have weights of 1.09 per cent and 4.67 per cent respectively in the wholesale price index (WPI) inflation and any hike in fuel prices has a direct impact on consumers. The petrol price has witnessed a sharp increase of 16 per cent after deregulation in June, 2010. We expect that a proper and defined strategy should be provided regarding subsidy sharing process by the finance minister in the union budget to be announced. We do not expect deregulation of diesel prices on the back of high inflation at 8 per cent-8.5 per cent. Agriculture sector is expected to be provided with subsidy on diesel in the upcoming budget so as to mitigate the impact of any price rise in diesel post deregulation.
REAL ESTATE: Indian real estate sector plays an important role in the economy as more than 6 per cent of GDP is contributed by this sector, comprised of two main categories – residential (75 per cent of real estate space) and commercial (25 per cent). Real estate sector is one of the highest FDI attracting sectors in India with recorded FDI inflows worth more than $3 billion every year between 2000 and 2010. Current financial year for this industry has been quite depressing mainly because of recent housing loan scam, rising lending rates to curb the inflation and increasing input cost due to higher commodity prices which had an adverse impact on the profitability and credibility of companies.
Union Budget Preview 2011-12: Fairwealth Securities
Actions taken in FY11:
* Disinvestments worth ~ Rs 227 billion
* Allocation of 3G spectrum and Broadband Wireless Access that fetched over Rs 1000 billion
* Increased Spending on Infrastructure and Social sector
Grey Areas that remain a major cause of Concern:
* High WPI Inflation, especially food inflation
* Current Account Deficit at elevated levels
* Fiscal Deficit that may further widen in FY12 in the absence of appropriate measures
* Rising prices of Crude oil that may stoke fuel inflation further and fiscal deficit in case crude oil prices go beyond $100 per barrel and Government continues to bear the fuel subsidy
Actions Expected in Union Budget 2011-12:
* Tax reforms such as implementation of GST and DTC
* De regulation of Diesel Prices to contain under recoveries
* Subsidies to Oil and Gas, Fertilizer, Food etc
* Relaxation of FDI norms in sectors like BFSI, Media, Retail etc
* Restoration of Service tax to 12 per cent
* Introduction of Infrastructure fund
Key Expectations
Income Tax Exemption Limit could be hiked: Keeping in view the high inflation at 8 per cent-9 per cent which is eroding the incomes, the Finance Minister could hike the Income Tax exemption limit from the existing Rs 1.6 lakh. An increase in the limit would be a step towards aligning the tax structure with DTC which proposes the income tax exemption limit at Rs 2 lakh, 10 per cent tax for annual incomes in the range 2-5 lakh, 20 per cent for 5-10 lakh and 30 per cent for incomes over 10 lakh.
Some Clarity on the implementation of GST and DTC: Dissension between the Centre and the State have already postponed the implementation of GST which was scheduled for April 1, 2010. Now the Government is looking to roll out GST from April 1, 2012. If the issues are not resolved, the implementation could be further postponed to a date beyond April1, 2012. We expect a greater clarity on GST implementation after the government introduces Constitution Amendment Bill in forthcoming Budget Session.
Restoration of excise duty on selected sectors: Excise duty that was hiked by 2 per cent in the previous budget could see another hike in the sectors that are performing well. The excise duty on two wheelers and small cars could be raised to 12% from the current 10 per cent.
A Wider Base and a Roll back expected in Service Tax: A greater number of services are expected to come in the ambit of service tax. In addition to this, the service tax rate that was left untouched in the previous budget could be hiked to 12 per cent owing to a strong performance by the services sector.
Customs Duty on petroleum products may be reduced/waived off: With crude hovering around $100 per barrel and oil companies bearing the burden of huge under recoveries, we expect the Finance Minister to reduce/waive off the customs duty on various petroleum products. At present the customs duties on Crude Oil, diesel and other refined products are 5 per cent, 7.5 per cent and 10 per cent respectively.
Infrastructure likely to remain as a focus area: Infrastructure is likely to be a beneficiary in the forthcoming budget with main thrust on the power sector. We expect that allocations in schemes such as Accelerated Power Development and Reform Programme (APDRP) and Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) could be hiked from Rs 3700cr and Rs.5500cr respectively in Budget FY12. In addition to this the sunsetdate for power units to avail tax holidays may be extended by a year to 1st April 2012. The Finance minister might also introduce infrastructure debt funds in the forthcoming Budget.
Social Sector spending likely to remain flat: Though the ministry of Rural development has sought an allocation of Rs.64000cr (60 per cent higher than that in previous year) for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the act is unlikely to see a higher allocation in Budget FY12 than that in Budget FY11. In the Union Budget 2010-11, the finance Ministry had allocated Rs 40,100 Cr. for the NREGA. The allocation for the scheme in Union Budget 2011-12 is likely to be in the range Rs42000-45000 cr. The allocations in other social schemes are also likely to remain flat since we expect that food subsidy will be considerably higher this year.
The quantum of fertilizer subsidy likely to be increased: The allocation for fertilizer subsidy will be increased considering the under recoveries faced by the fertilizer companies and the rising prices of inputs globally so that the domestic prices of urea, di ammonium phosphate and Muriate of Potash do not increase.
Extension of 2 per cent Interest rate Subvention: Presently farmers can avail a 3 per cent interest subsidy on loans easing the effective cost of their crop loans to 7 per cent. Besides this, there is an additional 2 per cent interest rate subsidy for farmers who repay their loans on time. In the Union Budget 2011-12, the Finance Minister Pranab Mukherjee can extend the 2 per cent interest rate subvention to the farmers in districts that have been declared flood or drought struck.
Sector Wish list
INFRASTRUCTURE: The requirement for sustainable infrastructure development is paramount both to provide the backbone for economic activities as well to ensure that resources are conserved and used efficiently. The Union Budget 2011-12 would have to explore many options to see that growth of the economy remains robust next year and beyond. Emerging challenges such as rising input costs and interest rates amid still subdued global demand will have to be dealt with. In this context, expectations of NBFC’s and bank’s being allowed to raise Infra bonds could provide support to this capital intensive sector. More focus on PPP can be found place in Union Budget 2011-12 to make the sector more vibrant and for the timely competition of projects.
CAPITAL GOODS: Capital goods sector is expecting high worth orders from steel segment leading to an increase in its backlog since the steel sector is planning to increase capital expenditure on plants. Huge mismatch in demand and supply of power sector would claim for setting up more power plans, a positive trigger for capital goods.
STEEL: With increased focus of Government of India to build sound infrastructure, the domestic steel industry is expected to grow at a CAGR of 10 per cent in next five years against the average annual growth of 8 per cent achieved between 1991-2010. Going forward we expect steel prices to remain firm on account of strong demand lead by recovering global economies. However we believe higher raw material prices is a cause of concern for the Industry. With the resumption of supplies from Australia, prices of coking coal would also normalize from their highs. We believe this scenario would be positive for steel companies.
AUTO & AUTO ANCILLARY: We don’t expect any major move for the automobile industry in the budget except some incentives regarding green cars technology, as it will help to take the automobile industry to a new level in the form of hybrid and electric cars which will be free from pollution and reduce the country’s dependence on fossil fuels. Hence, we expect additional incentives for technology development of hybrid cars. In addition reduction in custom duty on energy efficient completely built units could also be considered. Auto Component Manufacturers are facing challenges in production as the raw material prices have soared dramatically in the previous year. Hikes in prices of steel, aluminium and rubber have dented the margins of the auto manufacturers.
TELECOM: The Sector is under scrutiny by the Government on 2G issues. This can result in the additional expenses by the service provider if additional amount asked to settle the accounts. The industry expects the mergers and acquisition in near future as the industry will face consolidation. New Telecom Policy is on the cards. It is expected to bring more transparency in the sector related to revenue structure of the companies, mergers & acquisition and spectrum prices.
INFORMATION TECHNOLOGY: Demand for IT Services exports is expected to continue to be robust with the recovery in developed countries like US & Europe. According to NASSCOM exports are expected to dominate the Indian IT industry, which account for 80 per cent of total software industry. Any clarifications regarding GST will provide a sigh of relief to the industry and will avoid double taxation which it has seen in the past few years.
PHARMA: Growth in the Indian pharmaceutical industry at 11-12 per cent remains robust surpassing the global average of 5 per cent-6 per cent. Exports still hold significant charm as Indian Pharma has a market share of 10 per cent in the USA and a 5 per cent share in the emerging markets. Large first to file (FTF) opportunities and strong ANDA pipeline signifies that the opportunities from US market remains attractive. The government has recently announced the setting up of a venture fund that will target the infusion of Rs 20bn into the sector. The recent acknowledgment by Finance Minister for R&D investment as one of the two major concerns along with infrastructure raises hope for the sector to receive necessary attention in the Union Budget to be announced.
FERTILIZER: Fertilizer remains a key sector in Budget 2011-12. Urea will be the key focus in the industry, which represents around 50 per cent of all fertilizer products consumed in the country with an annual consumption of 27mt of a total fertilizer consumption of 55mt. Urea production is based on different forms of feedstock such as gas, naphtha, fuel oil and coal. The finance ministry wants to immediately decontrol urea prices, but Department of Fertilizers wants subsidies to be continued until 2013-14. Chemicals and fertilizers minister has asked the government to further extend the NPS-III regime for urea prices. Thus, the Committee of Secretaries is currently working out a viable model to determine how the subsidy component would be fixed. They can also raise the urea prices by 2-5 per cent in 2011-12. De-canalisation of urea imports can also happen as at present only authorized agencies can import urea. The sector also wishes removal of import and export restrictions.
HOTEL: With the sharp spurt in businesses and leisure travelers to India, the country is currently experiencing a shortage of almost 100,000 hotel rooms to meet the accommodation needs of the foreign and domestic tourists. The hotel industry is a highly capital intensive industry. Construction of a new hotel project in 5 Star category demands massive capital investment ranging from Rs 500 to Rs 700cr. The hotel industry is highly capital intensive and require huge expenditure for construction of new hotels. We expect the government to come up with favorable clause for the industry resulting in availability of adequate accommodation.
AVIATION: Presently the Aviation Turbine Fuel (ATF) is chargeable to Excise duty at the rate of 8 per cent, and VAT is levied by the States at varying rates generally in the range of 20-30 per cent, thereby resulting in a very high effective tax rate in the range of 30-40 per cent for ATF. This coupled with uncertain crude prices results in a major financial burden for the airlines. With this backdrop, the industry has been long demanding 'declared goods' status for ATF, which would help reduce the applicable VAT to 4 per cent or lower. Incentives in the form of a 10 year tax holiday are available to infrastructure facilities (including airports) with a view to attract investors in this space. These benefits are available for developing, operating and maintaining any new infrastructure facility. Common inference of this is believed to be that the term 'new infrastructure facility’ would refer to a green field project however it remains ambiguous whether the tax holiday would be available in respect of modernization, up gradation, redevelopment of the existing airports.
BANKS: India is considering allowing new private sector banks, including industrial houses, while the formal and final guidelines would be announced by RBI on the eligibility allowed to set up new banks and related to the terms and conditions for them, a roadmap on the subject could be announced in the Union Budget set to be announced on February 28. The Government has already approved additional capital infusion of Rs 6,000 crore in 10 public sector banks with an objective to raise its holding to a minimum 58 per cent in all state-run banks. With government holding at just 51 per cent, banks cannot access the capital market for raising additional capital by dilution of government holding. Banks with Government’s stake less than 58 per cent include, Bank of Baroda, Oriental Bank of Commerce, Andhra Bank, Dena Bank, IDBI Bank and Vijaya Bank. The exact amount and mode of infusion in each bank would be decided later.
OIL AND GAS: India imports almost 80 per cent of its crude oil requirement. Petrol and Diesel have weights of 1.09 per cent and 4.67 per cent respectively in the wholesale price index (WPI) inflation and any hike in fuel prices has a direct impact on consumers. The petrol price has witnessed a sharp increase of 16 per cent after deregulation in June, 2010. We expect that a proper and defined strategy should be provided regarding subsidy sharing process by the finance minister in the union budget to be announced. We do not expect deregulation of diesel prices on the back of high inflation at 8 per cent-8.5 per cent. Agriculture sector is expected to be provided with subsidy on diesel in the upcoming budget so as to mitigate the impact of any price rise in diesel post deregulation.
REAL ESTATE: Indian real estate sector plays an important role in the economy as more than 6 per cent of GDP is contributed by this sector, comprised of two main categories – residential (75 per cent of real estate space) and commercial (25 per cent). Real estate sector is one of the highest FDI attracting sectors in India with recorded FDI inflows worth more than $3 billion every year between 2000 and 2010. Current financial year for this industry has been quite depressing mainly because of recent housing loan scam, rising lending rates to curb the inflation and increasing input cost due to higher commodity prices which had an adverse impact on the profitability and credibility of companies.
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