2012-13

PRE-BUDGET REPORT
Major Announcements expected Major beneficiary industries The likely impact

PRE-BUDGET 2012-13

PRE-BUDGET REPORT 2012-13

he upcoming budget would be critical as it would give an insight on the government policies as regard to growth and fiscal consolidation. And also this is the budget through which government can showcase its efforts for the growth of the economy as the next budget 20132014 may get influenced by the 2014 elections. The way Indian growth has moderated in the last one year; it has become imperative for the government to show its will and unveil pro-growth policies to stem the moderation and lay the foundation for the next phase of the growth. Finance Ministers dual task this time would be not only to enhance the revenues for the government but also to cut the subsidies and expenditures in such a fashion that it would not hamper growth. Seeing the ground realties, it looks like that the government has got little fire power to support the infrastructure needs and weakening growth in light of lower growth in revenues and inability to reduce the subsidy burden given the rising crude prices, weakness in the currency and risk of inflation creeping back to higher levels. Government, however may signal that it is working to reduce the bottlenecks in the policy making by speeding up the clearance processes, by bringing in more clarity in the policy making, more reforms for encouraging public private partnerships, etc. To enhance the revenues, there are fair chances that government would bring more services into tax net and also increase the excise duty to 12% from the current rate of 10%. At the same time there is likelihood that government may raise the depreciation rate for the corporate to boost the investment demand. If government does opt for both of these acts then it would be able to garner higher revenue from the indirect taxes and at the same time lower revenue from direct taxes (corporate tax), virtually ending up the situation where it is. Budget frame work would be done by keeping in mind the state elections, credit policy and subsidy burden on fiscal deficit.

State Elections
As per the state elections outcomes, congress would now find it more difficult to go ahead with the reform processes like rolling out FDI in multi-brand retail, cutting down subsidies by doing full decontrol of petroleum products, etc.

Credit Policy
Lot would depend on the Budget outcomes as regard to RBI action towards cutting down the interest rates which is very important from the economy point of view in light of continuing sagging growth. RBI has indicated that high fiscal deficit, rising crude prices and limited passthrough of higher crude prices in the domestic oil products are some of the concerns that can take inflation back to higher levels. If at all budget estimates indicate higher fiscal slippages then that would lead to further postponement of cutting interest rates by RBI. Such move would add to pessimism in general as that would mean lower credit offtake and economic growth. The fact of the matter is that government is taking out lot of money from the markets because of the large borrowing programme thereby crowding out private sector needs. As of now because of the general pessimism in the economy there is lower demand for credit by corporate. But if macro environment improves then both corporate and government money needs may again put pressure on the interest rates.

Growth of GDP at factor cost by economic activity (at 2004-05 prices)

Growth Industry Agriculture, forestry & fishing Industry Mining & quarrying Manufacturing Electricity, gas & water supply Construction Services Trade, hotels, transport & communication Financing , insurance, real estate & business services Community, social & personal services GDP at factor cost
QE: Quick

(Per cent)
Percentage share in GDP 201011QE 14.5 27.8 2.2 15.8 1.9 7.9 57.7 27.2 17.4 13.1 100.0 201112AE 13.9 27.0 2.0 15.4 1.9 7.7 59.0 28.3 17.8 12.9 100.0
Source: Finance Ministry

1 2 a b c d 3 a b c 4
PE:

200910PE 1.0 8.4 6.3 9.7 6.3 7.0 10.5 10.3 9.4 12.0 8.4

201011QE 7.0 7.2 5.0 7.6 3.0 8.0 9.3 11.1 10.4 4.5 8.4

201112AE 2.5 3.9 -2.2 3.9 8.3 4.8 9.4 11.2 9.1 5.9 6.9

200910PE 14.7 28.1 2.3 16.0 2.0 7.9 57.2 26.6 17.1 13.5 100.0

Provisional Estimates;

Estimates;

AE:

Advanced Estimates

PRE-BUDGET REPORT 2012-13

Fiscal Indicators - Rolling Targets as Percentage of GDP

Revised Estimates 2010-11 1 2 3 4 Revenue Deficit Fiscal Deficit Gross Tax Revenue Total outstanding liabilities at the end of the year 45.3 44.2 43.1 3.4 5.1 10.0 Budget Estimates 2011-12 3.4 4.6 10.4

(at current market prices)

Targets for 2012-13 2.7 4.1 10.8 Targets for 2013-14 2.1 3.5 11.3 41.5
Source: Finance Ministry

Fiscal deficit
The spiralling crude prices and higher current account deficit is making government uncomfortable in rolling out full decontrol of oil product prices especially in the case of diesel. High crude prices together with pressure on currency are making Indian crude basket imports expensive. Government has got little manoeuvre to raise prices to market level as it may again lead to higher inflationary pressures making a strong case for RBI to continue with the higher interest rate regime. If government does decide to raise prices marginally and continue to go with the higher fiscal deficit then it also means that it is indicating that they are ready for lower economic expansion.

Tax Reforms
On the Tax reforms front, we may have to wait for a year for the implementation of Direct Tax Code (DTC) and Goods and Services Tax (GST) in order to simplify tax system with minimum exemptions and low rates.

Disinvestment
The recent stake sale of ONGC through auction and higher dividend collections then budgeted is expected to make up of the shortfall in the disinvestment proceeds. Government is expected to budget around Rs 50,000 crores from the disinvestment proceeds going next year.

Deregulation of Oil Products

There are risks of inflation going back to higher levels given the crude prices are rising and it has become difficult for the government to deregulate the diesel prices. However some price rise cannot be ruled out in case of diesel and LPG. So far in the current fiscal upto December, government has lost nearly Rs 56,732 cr, 20,065 cr. and 20,516 cr on sale of diesel, PDS Kerosene and Domestic LPG respectively and is currently loosing around Rs 465 crore daily on the sales of these products.

Priority Sector
Agriculture, Infrastructure and Education are likely to see higher spending in the budget. Finance minister is likely to raise the agriculture lending target by about 25% from the last year target of 4.75 lakh crore.

Social Programmes
This time around it is out of question that Finance Minister would take a call to enhance the expenditure on social schemes like Mahatma Gandhi National Rural Employment Scheme, National Rural Health Mission, etc. given the tight balances. However, he may decide to continue with such schemes by budgeting expenditure at the last year's level.

Direct Taxes
The possibility of further enhancement of income tax exemption on the personal income tax by few thousand rupees cannot be ruled out keeping in the mind the tax structure of proposed DTC. Continuation of Infrastructure bonds exemption of Rs 20,000 is likely to continue for one more year and it may be enhanced to Rs.50000. Further in order to promote savings, limit of saving of Rs. 1,00,000 U/S 80C may be enhanced by another Rs. 30,000 or so.

SECTOR-WISE EXPECTATION

AUTOMOBILE
In the Automobile sector, car sales shown tepid growth because of higher interest rates and bad consumer sentiments. The margins were also got hit on account of rise in cost of material and inability of producer to pass on the entire rise in cost. The rising differential between petrol & diesel prices led to increase in diesel car sales and that helped car markers in gaining some volume growth. There are fair chances this time around that the government would impose higher tax on the diesel cars. By doing this, government wants to penalize the section of people who are enjoying the benefits of subsidy on diesel by purchasing the diesel cars. The thought has emerged as the government cannot fully decontrol the diesel prices as it is an engine or lifeline of the industry and does have adverse repercussions on the inflation. Government is expected to loose close to Rs 68,000 crore on the subsidy on diesel and by imposing higher tax on diesel cars government wants to make some money to counter the rising subsidy bill. Measures expected The Government is likely to hike the excise duty on diesel cars. If implemented, it would increase the prices of diesel cars, thereby affecting demand. Likely Impact Negative (This will be a bad news for the automobile sector, as the soaring demand for diesel cars has been helping to prop up sales volumes, even as sales of petrol variants have taken a hit after the recent surge in the fuel prices.) Key stocks to focus Mahindra & Mahindra, Maruti and Tata Motors

Increase in R&D benefits and higher Positive allocation to programmes like JNNURM (Jawaharlal Nehru National Urban Renewal Mission) will benefit bus makers.

Tata Motor and Ashok Leyland

FMCG
High volume growth and selective price increase has led to better revenue growth for the industry. However high inflation rate and intense competition coupled with rupee depreciation is eating the profitability of the industry. Going forward high inflation, commodity prices and depreciating rupee would remain a cause for concern. Palm oil prices have fallen from higher level, but is still high and on the contrary crude price is rising and coffee price is at all time high of last 14 years. The Ministry of Consumer Affairs has issued a notification to enforce uniform packaging for 19 product categories. The new regulations would come into effect from July 1, 2012 as a result, FMCG companies will lose flexibility to adjust grammage for increasing realization.

Measures expected Increase in Excise Duty from 10% to Negative 12% Increase the agriculture lending Positive target by around 25%

Likely Impact

Key stocks to focus All FMCG Companies All FMCG Companies

SECTOR-WISE EXPECTATION

CEMENT
Cumulative growth of cement production stood at 5.3 per cent during April-December 2011-12 as against its 4.4 per cent growth during the same period 2010-11. Cement dispatches also improved on the back of revival in infrastructure demand especially from Government projects and higher housing demand in rural and semiurban regions. During the period under review the industry witnessed improved margins on the back of higher price realisation and as a result posted strong growth in net profits. However, industry is likely to witness significant capacity additions in the near future which may have an impact on prices and capacity utilization. Measures expected Excise duty is likely to be hiked Negative Likely Impact Key stocks to focus ACC, Ambuja Cement, Grasim & Shree Cement, Ultratech Cement ACC, Ambuja Cement, Grasim & Shree Cement, Ultratech Cement

Scrap import duty on coal, pet coke, Positive (The cement industry is gypsum and other fuels. heavily dependent on imported coal and pet coke due to short supply of indigenous coal. Pet-coke & gypsum attract 2.5% duty and coal attracts 5% duty, if imported, while there is no duty on cement import. This leads to an anomaly in that import duty on inputs is higher than the finished product.) Royalty paid on Limestone as well as Positive duty /cess paid on Indigenous Coal be allowed as Credit - either as Cenvat Credit or as VAT Credit.

ACC, Ambuja Cement, Grasim & Shree Cement, Ultratech Cement

SECTOR-WISE EXPECTATION

ENGINEERING
The industry is passing through rough weather on the back of European debt crisis and economic slowdown both globally and domestically. The slowdown in infrastructure as well as key user industries has strained the industry players with slowdown in order inflow, delay in taking deliveries/execution of projects, delayed bill payments etc. Margins were seen under pressure due to competition within domestic players as well as overseas competitors. The government may increase the rate of depreciation on machinery as the industry in general has shown tepid growth year-to-date for the reason that interest rate are high and demand being lower locally and globally. If done then it is expected to boost the investment demand and contribute to the growth of capital goods sector. The government is also likely to raise the duty on import of power equipments to protect the domestic industry. However power producers wrote against such move to the ministry as this would add to their costs and delay in capacity utilisation resulting into higher per unit cost of production. Measures expected Accelerating infrastructure spending Positive and break the policy logjam. Government is likely to impose 10-12 Positive per cent duty on imported power gears Deemed Export status for Defence Positive Projects Increase in Excise duty from 10% to Negative 12%. Depreciation rates to be raised for Positive plant and machinery. Likely Impact Key stocks to focus All engineering companies. BHEL, Alstom Projects India and Larsen & Toubro

Bharat Electronics, BEML, Larsen & Toubro All engineering companies All engineering companies

IT INDUSTRY
Despite euro zone concern the industry has registered strong revenue growth during the first nine months of the current fiscal across geography and verticals except for telecom platform. The industry witnessed decline in the utilization rate during the period under review. The growth in revenue was led by stable pricing and increase in volume. The operating profit margin registered decline due to increase in employee cost, however part of the increase was offset by rupee depreciation. Most of the players witnessed net addition to their total head counts during the period. Management of Infosys expects that the IT budget of the corporate for 2012 would remain flat or marginally down, but much will depend upon the development in the euro zone. At the current situation in Europe the corporate would be cautious in the IT spending. Measures expected Clarification whether Packaged Positive Software should be considered as goods or service and if the same is considered as Service Exclude levy of VAT on software transaction. Safe Harbour Rules under Transfer Positive Pricing need to be notified Likely Impact Key stocks to focus TCS, Wipro, Infosys etc

All IT companies

SECTOR-WISE EXPECTATION

TEXTILE
In an environment of high interest rate and input cost coupled with lackluster global demand, the profitability of the industry was seen under pressure during the first nine months of the current fiscal. The industry witnessed better revenue growth on account of increased price realization. The price of key raw material, cotton, has though corrected from its peak in March 2011, but is still high. Going forward cotton price is expected to fall further on account of 10% increase in production in the 2011-12 season and enough inventories with the millers. The slowdown in global demand for yarn and ready made garments would also exert downward pressure in the cotton price. Meanwhile the government has also banned cotton export. Measures expected Increase in Excise duty from 10% to Negative 12% Likely Impact Key stocks to focus Arvind ltd, Alok ind., S kumar nation, Century Te x t i l e s , Va r d h m a n Textiles, Bombay Dyeing etc. Grasim Inds, Indo Rama Synth

Interest subsidy of 5% on all capital Positive investments made in Man Made Fibre (MMF) sector Extend the existing Technology Positive upgradation fund (TUF) scheme to Polymerisation and spinning in the manufacture of Technical Textiles Fibres/yarns.

All textile companies.

BANKS
Budget may announce good news for the banking sector; it may consider banks proposal to reduce the lock in period of Five year tax saver Fixed deposit to three years making it at par with the Equity linked saving schemes offered by the mutual funds. However the caveat to do so is that such move is not in agreement with the clauses incorporated in the direct tax code. Hike in limit of priority sector loans especially agriculture loans in the budget may further put pressure on banks in term of rise non-performing assets.

Measures expected

Likely Impact

Key stocks to focus All Banks

Tax Saving Fixed Deposits Lock-In Positive (It will turn bank fixed Period May Go Down To 3 Years from 5 deposits an attractive tax saving Years. option)

SECTOR-WISE EXPECTATION

TELECOM
Stability seems to be returning in the telecom industry with gradual increase in the average revenue per user, Average Minutes of usage per user and Average Realized Rate. Bharti Airtel during the quarter ended December 2011 witnessed marginal fall in average minutes of usage while the decline continued to be much higher in the previous quarters. These helped the industry to report better revenue growth. Burdened with high debt the profitability of the players is affected by high interest cost. The recent court ruling to revoke licences given to newer companies in a scandal-tainted 2008 sale is likely to reduce competition in the crowded 15-player market. The players in the industry have also raised the tariff rates in the selected circle; it has started to show its reflection in terms of growth in the topline of the players. The next growth phase for the industry would be Wholesale Data Service. Measures expected To clarify that the 3G spectrum fee Positive payment qualifies as Intangible asset. Likely Impact Key stocks to focus All telecom service providers like Bharti Airtel, Reliance communication, IDEA etc. All service providers

To provide for capitalization of Positive interest cost incurred on capital borrowed for the purpose of acquisition of 3G spectrum Telecom sector should be classified Positive: Boost significant foreign under infrastructure category. investment Moreover, grant Infrastructure status u/s 10(23G) to Independent telecom Infrastructure Services Providers. One year Extension of exemption of Positive custom duty on import of parts for manufacturing mobile Increase in Excise Duty from 10% to Negative 12%

GTL, Tulip Telecom, Gemini Communications, ITI Ltd, Avantel

Spice Mobility, MIRC Electronic

All telecom companies

SECTOR-WISE EXPECTATION

POWER
The most players in the sector are operating much below their installed capacity due to coal supply shortage and decline in domestic gas production. Plant load factor, of both coal based plant and gas based plant, have declined during the first nine month of the current fiscal. The profit margin remained under pressure due to high raw material cost, namely coal. During the period under review the industry witnessed increase in power transmission and electricity sales along with improved margin. Going forward coal shortage would remain a concerning factor for the industry. The committee of secretaries constituted by the Prime Minister has came out with a decision wherein Coal India would sign Fuel Supply Agreements (FSAs) by March 2012 with power plants that have entered into long-term Power Purchase Agreements (PPAs) and have been commissioned or would get commissioned on or before March 31, 2015. There are expectations that some restructuring plan would be announced in the budget to improve the financial health of the State Electricity Boards (SEBs). The cumulative losses of the distribution utilities are around Rs75,000 crore, and if the present trend continues, their projected losses in 2014-15 will be Rs1.16 trillion. Measures expected Government is likely to impose 10-12 Negative per cent duty on imported power gears Tax holiday under section 80-IA for Positive power plants is to be extended for another period of six years. i.e upto 31st March 2017 Removal of Minimum Alternate Tax Positive (MAT) and DDT for SEZ Units. S e r v i c e t a x e x e m p t i o n t o Positive infrastructure projects in the power sector Customs duty exemption for various Positive facilities such as coal transportation required for mega power projects Likely Impact Key stocks to focus Reliance Power and Adani Power

All power generating companies

NTPC and Adani power

All power companies

NTPC, Tata power, Adani Power, Reliance power

SECTOR-WISE EXPECTATION

OIL & GAS

Rising crude prices and deceleration in the local currency has emerged as the biggest concern for the Oil marketing companies and the government. Oil marketing companies are asking for 100% compensation for the under-recoveries as it happened in year 2008-09. In the nine months ending December, OMC's have been compensated 84% for the losses. Measures expected The provision of section 80- 1B (9) of the Income Tax Act should be amended to extend the tax holiday for the industry from seven to 10 years and to allow flexibility to companies involved to chose the period during initial 15 year period of operations. Likely Impact Positive (During the first seven years, companies have large expenditure to set up and hence the actual benefit of tax holiday does not reach them) Key stocks to focus BPCL, HPCL & IOC

Expenditure for drilling and Positive exploration activities should be treated at par with research and development expenditure, and weighted deduction of the actual expenses incurred by the assessee should be allowed. Removal of double taxation of same Positive taxable items under value added tax like in case of copyright, software, right to use goods and immovable properties. Validity of deduction on refinery Positive projects may be extended from 31.03.2012 to 31.03.2015.

ONGC and Reliance Inds.

All Oil & Gas Companies

BPCL, HPCL & IOC

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SECTOR-WISE EXPECTATION

REAL ESTATE
During the period April 2011 to December 2011, the Real Estate Sector continues to face funding constraints due to higher cost of borrowings, lack of PE interest and slack in capital markets, may result in some inventory liquidation in select micro markets with resultant impact on prices. Overall weak demand and higher construction costs have given a negative impact on the sector. The realty industry is going through a tough phase as the buyers are postponing their purchase in view of the higher interest rates. To add to this, the recent advice of RBI to banks to exclude stamp duty, registration fees, etc from total cost has led to higher down payment by the buyers. Though interest rates have peaked out and are expected to fall in the months to come but still much is needed from the government to support the industry. May be government can further enhance the limit for affordable home buyers to Rs 25 lakh for the 1% interest rate subsidy. Granting of an industry status to the Real Estate may not be reckoned this time also which is the demand from the players for a long time. Enhancement of FDI upto 51% for the multi-brand retailing may bring more cheers for the Real estate sector.

Measures expected Tax rebates, excise duty reduction, Positive stamp duty waivers and expansion of the interest subsidy on loans from 15 lakhs to 25 lakhs, should be the necessary tools for such policy action. The industry also expects more sops Positive and re-introduction of tax holiday for affordable housing projects. Increasing the limit of tax exemption Positive for home loan repayments will encourage more people to buy properties and will open up the demand which actually exists. Granting industry status to the Positive sector.

Likely Impact

Key stocks to focus DLF & UNITECH

All Real Estate companies

All Real Estate companies

All Real Estate companies

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SECTOR-WISE EXPECTATION

PHARMACEUTICAL
Domestic pharma retail market clocked a robust 15% growth during 2011. The domestic pharma retail reached a new milestone by recording overall sales of Rs 60,000 crore for the year 2011. As per All India Organisation of Chemists and Druggists (AIOCD), the pharma market grew at 15.7% during December, with growth in key therapy areas, including anti-diabetics, derma and vitamins outperformed the market. The pharmaceutical sector is expected to log reasonable growth next fiscal, whether or not the draft National Pharmaceuticals Pricing Policy is passed by the government in the near future. On the backdrop of fiscal constraint government in all probability would increase the allocation by modest 13-15% to around Rs. 27,000 crore from last year level of Rs24,000 crore for the Healthcare Ministry. Though Prime Minister had earlier indicated to fix the healthcare budget at 2.5% of the GDP for the 12th five year plan, still the same is expected to see higher allocation from next year. Measures expected Exempt all life-saving drugs from Positive Custom duty which is at 5 per cent at present and rationalise the duty on formulations by reducing it from 10 to 5 per cent. Exempt the expenditure on import of Positive all capital goods, raw materials and consumables to be used for R&D purposes from Custom duty, besides making Cenvat credit available on capital goods used for R&D to reduce research cost. Likely Impact Key stocks to focus Glenmark , Dr. Reddy' s , Ranbaxy, Biocon, Piramal Healthcare, Sun Pharma and Cadila Healthcare Glenmark , Dr. Reddy' s , Ranbaxy, Biocon, Piramal Healthcare, Sun Pharma and Cadila Healthcare

METAL
Slowdown in infrastructure activities in the country and European debt crisis had adversely affected the overall demand scenario in the metal industry. The margins have also got adversely affected due to high raw material cost, namely iron ore & coking coal and deceleration in rupee. There is uncertainty with regard to steel demand in Europe as contraction of manufacturing output is taking place. Going forward, ban on mining of iron ore in Karnataka and Goa would impact the supply of the key raw material and also result in rising iron ore prices. On the flip side even though the coal prices have corrected, they are still on the higher side. Rupee depreciation is also a cause for concern. Measures expected Customs Duty may be reduced from Positive present level of 7.5% on Vanadium Pentoxide (Chapter Heading 2825 30) and Vanadium sludge/ Ammonium Metavanadate (Chapter Heading 2841.90) Raising the import duty on steel Positive: local manufacturers would products from 5% to a minimum of have a level playing field vis-a-vis 10% imports from China and the Commonwealth of Independent States (CIS) countries. Increase in Excise duty from 10% to 12% Maintain export duty on iron ore at 30% Negative Positive Likely Impact Key stocks to focus All metal companies

All steel companies.

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All metal companies All steel companies

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