India Note

July 10, 2009

Budget 2009 – Repair and Reform at a Steady Pace

Overview
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India’s new budget, released July 6 , has invoked mixed reactions from both the Indian and international communities. Some see the budget
as neutral to positive – with more infrastructure spending, tax reliefs and funds for rural development - while some are dissatisfied at the
government’s failure to communicate what it intends to accomplish, in wider detail, in its 5 year term. The government, disappointingly, did
not address in the budget wider measures such as structural reforms and mechanisms to increase FDI. Either way, the equity market, up an
exuberant 50% in the three months to June, fell 6% after Finance Minister Pranab Mukherjee’s budget speech. Investors were alarmed at the
announcement of a budget deficit of 6.8% of gross domestic product and Mukerjee’s nods to statist policies with regards to privatisation.
However, we feel that while the budget does little to inspire, along with the announcement of a higher deficit, investors should not have been
shocked as the government has been in the red at 6.2% of GDP in 2008-09 due to a fiscal stimulus it is currently continuing. The government
does indeed need to contain the deficit (and stabilise and reduce eventually) but rightly placed the emphasis on growth. The deficit does not
have to be painful if India continues to grow at a higher rate. The government has spaced out this increased borrowing program so as to be
rate neutral (without hardening interest rates) and both S&P and Moody reiterating their confidence in the government’s ability to manage
the deficit.

Key Elements The Budget at a Glance

The government has taken steps towards Fiscal deficit: Forecast to rise to 6.8% this year from 6.2% the year before
rationalising taxes by planning to
implement the Goods and Service Tax Growth: Forecast to return to near 9% in the next fiscal year
(GST) by April 2010, which will replace Total spending: To rise to INR10,200 bln, up 36 % from 2008-09, with the emphasis on defending
multistage taxes such as the CANVAT, high growth rates
Service Tax, VAT etc., thereby simplifying
Structural reform: No big measures, such as disinvestment in state- owned companies or
tax collection and easing compliance by mechanisms to attract foreign direct investment. Asset sales to raise INR11.2 bln
tax-payers. There may not be major tax
relief for most sectors but almost every Infrastructure: Sharp increase to 9% of GDP in spending on highways, railways and urban and rural
sector will benefit from some sort of infrastructure
relief. For example, IT exporters have Rural development: Spending for rural employment to be increased 144% to INR391 bln. Targeted
received an extension of tax breaks; agricultural credit of INR325 bln, up 13%. Subsidised crop loans to farmers at 7% interest rates
removal of the Fringe Benefit Tax (a tax
Real Estate: No big measures announced but tax relief for individuals welcomed. Exemptions for
on benefits for employees); real estate prefab goods made at construction sites are a positive for low-income and affordable housing
developers involved in low cost (defined
as housing for the Low Income Group Tax: Removal of surcharge of 10% on personal income tax and Fringe Benefit Tax. Timeline for
end-user segment) housing will receive introduction of goods and services tax, optimistic but appreciated. Rise in minimum alternate tax to
15% from 10%. No change in corporate tax
tax exemptions; and removal of the
education cess (a tax on tax).
The budget has planned for the deregulation of the sugar and fertiliser industry, resulting in increased competition and lower prices from
producers. Additionally, provisions to subsidise fertiliser prices for the agriculture sector, as opposed to subsidising inputs for producers, will
benefit the sector and consumers.
The government also has planned disinvestments in Rail India, Cochin Shipyard amongst others but has fallen short of expectations of more
structural reforms and the privatisation of airlines and financial services. Disinvestment of loss making Public Sector Units (PSUs) would also
have provided more support to the economy as private players would increase efficiency and help in reducing the fiscal deficit.
Another major element involved the long term issue of deregulating fuel prices. This is expected to drastically change the transportation cost
of goods, affecting prices of goods invariably. This will have widespread effect throughout all consumer levels but will notably affect materials
pricing for the infrastructure sector as the government has aggressively increased funding.

Infrastructure & Real Estate

The Indian Infrastructure Finance Company (IIFCL) has been authorised to raise INR100,000 crore (US$20 bln) to facilitate incremental lending
to the infrastructure sector through refinancing via commercial banks. Additionally, an allocation increase of 87% for the Jawaharlal Nehru
National Urban Renewal Mission (JNNURM) is a definitive positive in the development of suburban infrastructure of Tier I cities to meet the
increase in demand for homes further out of city centres with road and transportation connectivity and addition of services, amongst other
benefits.
The government also increased plan allocation for the National Highways Development Authority (NHAI) by 23% to INR8,578 crore (US$1.7
bln) for the national highway development programme.

Elysium Capital Ltd info@elysiumprop.com

INR100 crore (US$20 mln) has been allocated for the Pradhan Manatri Adarsh Gram Yojana (PMAGY), a pilot government initiative to aid
development in rural villages with allocations over and above the Rural Development and Poverty Alleviation Schemes. This aims to improve
social and physical infrastructure at the rural level. If the economy is to grow at the 9% rate as the government intends, attention has to be
focused on nationwide infrastructure building and rural development.
With the majority of India’s population living in the hinterland, this budget addresses increased development at the grassroots level and tries
to bridge the gap to urban development. Allocations for rural development will indirectly boost the economies in Tier II and III cities as the
more economically empowered rural population spends their income there.
Rajiv Awas Yojana, a program to promote a slum free India in five years, was introduced to provide basic amenities and services for slum areas
and low income settlements as well as provide subsidised credit. However, no provisions were made for middle income home buyers.
On the somewhat negative note, the Software Technology Parks of India (STPI) scheme will now carry a higher burden of Minimum Alternate
Tax (MAT) thereby making it less attractive than Special Economic Zones (SEZ). The SEZs receives tax benefits on state taxes and stamp duty
with more exemptions offered depending on industry type. We expect to see STPI benefits phased out slowly even though, from a
development perspective, it is more attractive with higher Floor Space Index (FSI) allowances relative to SEZs.
The budget also did not stipulate any relaxation of rules for FDI investments in real estate and did not mention legislation or promotion of
REITs and REMFs (Real Estate Mutual Funds). No mention was made on removing service tax on rentals which was introduced in the last
budget, negatively affecting commercial and retail leasing.
Unfortunately, the budget does not do much to encourage ordinary Indians to become homeowners. The budget though, does increase
Income Tax exemption limits for individuals (removal of a 10% surcharge), which will increase purchasing power, but not by much. This will act
as more of a consumer confidence boost. There was also a lack of positive action on increasing tax exemptions on housing loans, interest and
principal repayments. This of course would have done much more towards encouraging homeownership.
The budget does provides tax relief for manufacturers of pre-fabricated concrete slabs (prepared onsite) thus benefitting lower income and
lower middle-income groups which, until now, were largely ignored by developers. This relief could motivate more developers to move into
the low-income and affordable housing sectors. Companies like Tata have already entered the market with projects like their Nano housing,
building apartments costing from INR4-7 lakhs per unit.

Oliver Ontiveros
Chief Investment Officer
Elysium Capital Ltd
+91 9500 103555
oliver@elysiumprop.com

MSR Krishnan
Director
Elysium Property Advisers P Ltd
+91 9952 415262
krishnan@elysiumprop.com

The views expressed above are based on information which we believe to be reliable but are not guaranteed as to accuracy or completeness by Elysium Capital. This document is not,
nor should it be construed as, an offer or the solicitation of any offer, or as general or definitive advice to buy or sell any investments and expressions of opinion are subject to change
without notice. Sources of data are available from Elysium on request.

Elysium Capital Ltd info@elysiumprop.com