2012 march budget

8/2/2019 2012 March Budget

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Union Budget, 2012-13: Realistic Assessment of Fiscal

Situation and an absence of Big-Ticket Announcements

There was near unanimity amongst most observers and analysts about what the Union Budget for 2012-13needed to address: lay down a credible road map for fiscal consolidation; ensure the revival of theinvestment cycle that has virtually ground to a halt; and spell out the key priority areas in terms of policyaction and reforms. Equally, the expectations were muted, given the magnitude of challenges involved aswell as the lack of political space to introduce reforms, as highlighted by the extraordinary dramasurrounding a modest hike in rail fare after several years. Of particular interest was also what the

Governments approach to the populist entitlement programmes would be, given the series of electoralreversals in the recent past.

Eventually, as anticipated, the Budget was devoid of any big-bang announcements and stuck to achievingfiscal consolidation that was realistically possible under the prevailing circumstances, though there aresome doubts about the growth estimates made in the Budget. There are a number of directionally positivestatements on the need to rein in subsidy and effect cash transfers in areas like fuel and fertilisers,although the ability to stick to the subsidy cap of 2% remains to be seen. As further proof of realism, thedisinvestment targets have been kept at a modest Rs. 30,000 crore. Lack of a definite timeframe for theintroduction of the relatively less controversial Direct Tax Code (DTC) is a disappointment, even as theintroduction of the Goods and Services Tax (GST) still requires considerable consensus to be achievedwith the States. A number of small steps have been introduced in the area of infrastructure, such as theextension of the Viability Gap Funding mechanism to support PPP initiatives, doubling of the amountproposed to be raised through tax free bonds and wider use of ECBs in sectors like Road, Power and Civil

Aviation. Measures like allowing Qualified Foreign Investors (QFI) in the Corporate bond market, andwithdrawal of Dividend Distribution Tax would also be expected to impact some companies positively.

Overall, there are no major gains for the Corporate sector and given the magnitude of the fiscal deficit,chances of a meaningful reduction in interest rates in H1FY13 appear uncertain. In fact, the yields mayharden following the announcement of a higher than expected net market borrowing of Rs. 4.7 lakh crore.Some sectors would be adversely affected because of the increase in excise duty, though the same was onexpected lines. There has been some minor relief provided to some of the stressed infrastructure sectors interms of reduction in withholding taxes; also reduction in import duty on steam coal would provide somebenefits to the power sector. The increase in investment linked deduction of capital expenditure to 150% forselect sectors and increase in weighted deduction of 200% for R&D expenditure is also somewhat positive.Going forward, the key challenge would be the Governments ability to jumpstart the investment cycle andrevive investor confidence; it is hoped that steps designed to achieve the same are being contemplatedthrough administrative actions through the year. Moreover, it is unlikely that investor sentiments would be

substantially boosted by the retrospective amendment to Income Tax provisions that the Budget seems tohave attempted.

The Budget has introduced a few steps with regard to indirect tax collections, including a calibratedincrease in tax rates and expanding the tax base to boost collections. Moreover, the introduction of anegative list for service tax; input tax credit for various services; and measures to enhance the alignmentbetween excise and service tax would aid in the transition to the Goods and Services Tax. The changesregarding personal income tax were largely along expected lines, and would only provide a limited boost toconsumption growth. The allocation for food subsidies would likely need to be enhanced upon theintroduction of the National Food Security Act. Whether the allocation for fuel subsidies is adequate wouldcritically depend on the global prices of crude oil and ability to increase fuel prices. The 22% increase inplan expenditure is welcome, as is the provision of funds for recapitalisation of Banks

The budgeted fiscal deficit of 5.1% of GDP in 2012-13 is substantially higher than the rolling target of 4.1%of GDP set previously. However, the former represents a reasonably realistic assessment of the fiscal

situation given the changing dynamics. Nevertheless, the main challenges to achieving even the targetedfiscal deficit remain economic growth falling short of the optimistic 7.6% forecast made by the Governmentof India (GoI) and fuel and food subsidies exceeding the budgeted levels. Additionally, the magnitude ofreceipts from disinvestment and telecom auctions would remain subject to market conditions.

ICRA Comment

March2012


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ICRA Comment

ICRA Rating Services Page 2

ASSESSMENT OF GOVERNMENT OF INDIAS FISCAL SITUATION

The Union Budget for 2012-13 has placed the fiscal deficit for the coming fiscal year at 5.1% of GDP, adecline relative to substantial fiscal deficit of 5.9% in 2011-12 (according to Revised Estimates or RE).

As anticipated, corporation tax and union excise duty collections are expected to fall short of the Budget

Estimates (BE) for 2011-12, by Rs. 32,300 crore and Rs. 13,400 crore, respectively. However, this wouldbe partially offset to by higher service tax collections, which are expected to exceed the BE for 2011-12 byRs. 13,000 crore. Moreover, disinvestment proceeds are estimated at Rs. 15,493 crore, considerablysmaller than the budgeted Rs. 40,000 crore. In contrast, Revised Estimates for 2011-12 indicate thatexpenditure commitments overshot the budgeted levels substantially, particularly in the case of subsidies(Rs. 72,700 crore), defence services (Rs. 9,600 crore) and interest payments (Rs. 7,600 crore). As a result,the revenue and fiscal deficit for 2011-12 are forecast to exceed the Budget Estimates by a substantialmargin of Rs. 88,000 crore and Rs. 1.1 lakh crore, respectively, in 2011-12.

The tax revenues of GoI are estimated to expand by 20% in 2012-13, following an increase in excise dutyand service tax rates; a widening of the service tax base; and factoring in GoIs expectation that realeconomic growth would be 7.6% +/- 0.25%. ICRA however expects economic growth to be lower at 6.9-7.0% in 2012-13.

In line with our expectations, the peak rates of excise duty and service tax have been increased by 2%, to

further rollback the stimulus measures that had been provided previously. At the same time, the lower 1%increase in excise duty (from 5% to 6% and from 1% to 2%) would limit the additional burden on meritgoods. Excise duty on cars was enhanced from 22% to 24%. Additionally, an ad valoremrate of 27% wouldbe imposed on cars that were being taxed at the rate of 22% +Rs. 15,000 per vehicle. Duty on refined goldhas been increased to 3% from 1.5%. On balance, GoI has estimated that its excise collections wouldexpand by 29% in 2012-13 relative to the RE for 2010-11.

In addition to the increase in the rate of service tax to 12%, a negative list has been introduced , therebysubstantially widening the service tax net. Accordingly, GoI has forecast its service tax collections toexpand by 31% in 2012-13.

GoI has forecast customs duty collections to expand by 22% in 2012-13, considerably higher than thegrowth of 13% in 2011-12 (RE). While no change has been proposed in the peak rate of customs duty (10%) on non-agricultural goods, basic customs duty on standard gold bars, gold coins (purity exceeding 99.5

%) and platinum has been raised to 4% from 2% while duty on non-standard gold has been hiked to 10%from 5% to dampen the pace of gold imports. Additionally, the rate of customs duty has been brought downto 2.5% from 7.5% for certain agriculture-related items while various fuels such as steam coal, natural gas,liquefied natural gas etc. have been exempted from basic customs duty to reduce input costs for powergeneration.

The exemption limit for individual tax payers has been increased to Rs. 200,000 from Rs. 180,000, whichwould provide some benefit to the taxpayers. Moreover, the upper limit of the 20% tax slab has been raisedto Rs. 10 lakh from Rs. 8 lakh. Individual taxpayers have been permitted a deduction of up to Rs. 10,000 oninterest earned on savings bank accounts. No major changes have been introduced with respect tocorporation tax. However, withholding tax on interest payments on external commercial borrowings (ECBs)is to be reduced to 5% from 20% for a period of three years for sectors such as power, airlines, roads andbridges, ports, etc. GoI has estimated the proposals regarding direct taxes to result in a net revenue loss ofRs. 4,500 crore and direct tax collections to expand by 14% in 2012-13.

BE for 2012-13 forecast inflows of Rs. 40,000 crore from the proposed auction of telecom spectrum.Additionally, the target for disinvestment proceeds has been set at Rs. 30,000 crore, nearly twice thereceipts of Rs. 15,493 crore in 2010-11 RE. Notwithstanding the budgeted figures, the magnitude of inflowsfrom these sources would depend crucially on market conditions, timing of sale, valuations etc.

Rs. Crore 2011-12 BE(1)

2011-12 RE(2)

2012-13 BE(3)

Variation in2011-12

(2)/(1)

Growth in2012-13 BE

(3)/(2)

Gross Tax Revenues 932,440 901,664 1,077,612 -3% 20%

- Corporation Tax 359,990 327,680 373,227 -9% 14%

- Income Tax 172,026 171,879 195,786 0% 14%

- Customs Duty 151,700 153,000 186,694 1% 22%

- Union Excise Duty 164,116 150,696 194,350 -8% 29%- Service Tax 82,000 95,000 124,000 16% 31%

Note: BE: Budget Estimate; RE: Revised EstimateSource: Union Budget 2012-13, ICRA Estimates


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ICRA Comment


Revenue expenditure is budgeted to increase by a moderate 11% in 2012-13, aided by a 12% reduction inthe allocation for subsidies relative to the RE for 2011-12. In the Budget Speech for 2012-13, theGovernment has committed that from 2012-13 onwards, subsidies related to food and funding foradministering the National Food Security Act would be fully provided for. In spite of the impendingenactment of the National Food Security Bill, the allocation for food subsidies has been increased by arelatively small amount to Rs. 75,000 crore for 2012-13 from Rs. 72,800 crore in 2011-12 RE. While theidentification of beneficiaries through the Socio Economic and Caste Census is yet to be completed, the

introduction of enhanced entitlements during 2012-13 may necessitate an upward revision in foodsubsidies.

The Budget further clarified that subsidy expenditure would be limited to 2% of GDP in 2012-13, and bereduced to 1.75% of GDP over a three-year period by curtailing subsidies other than those related to food.This is proposed to be achieved through a combination of improvements in targeting, reduction of leakagesas well as reforms in the delivery mechanism including provision of direct cash transfers using the uniqueidentification system. Given the elevated global crude oil prices, the provision of Rs. 43,580 crore for fuelsubsidy for 2012-13 suggests that GoI is likely to revise the administered prices of various fuel items overthe course of the coming fiscal year.

Some of the sectors with substantially higher outlays in 2012-13 relative to the RE for 2011-12 includeeducation, health & family welfare, water supply & sanitation, in line with the Governments inclusive growthagenda. At the same time, the outlay for rural employment has been increased by a relatively small amount

to Rs. 33,000 crore in 2012-13 from Rs. 31,000 crore in 2011-12 RE. The Budget increased allocations forvarious schemes related to agriculture and allied activities, which would play a role in easing supplybottlenecks. Moreover, the allocation for the Rural Infrastructure Development Fund has been augmentedto Rs.20,000 crore, of which Rs. 5,000 crore has been earmarked for the creation of warehousing facilities.The Budget also announced that the interest subvention scheme for farmers would be continued in 2012-13.

Rs. Crore 2011-12 BE(1)

2011-12 RE(2)

2012-13 BE(3)

Variation in2011-12

(2)/(1)

Growth in2012-13 BE

(3)/(2)

Revenue Expenditure 1,097,162 1,161,940 1,286,109 6% 11%

- Interest 267,986 275,618 319,759 3% 16%

- Subsidies 143,570 216,297 190,015 51% -12%

- Pensions 54,521 56,190 63,183 3% 12%- Defence 95,216 104,793 113,829 10% 9%

- Debt Waiver 6,000 1,500 0 -75% -100%

- Grants for Capital Assets 146,853 137,505 164,672 -6% 20%

- Balance 383,016 371,537 434,651 -3% 17%

Capital Exp. Gross Loans &Adv.

160,567 156,780 204,816 -2% 31%

- Defence 69,199 66,144 79,579 -4% 20%

- Provision for Contribution/Subscription to Multilaterals

3,424 447 14,346 -87% 3107%

- Recapitalisation of Banksetc.

7,800 14,000 15,888 79% 13%

- Other 80,144 76,189 95,004 -5% 25%Memo Item

Non Defence Capital Exp +Grants for Capital Assets

238,221 228,141 289,909 -4% 27%

Source: Union Budget 2011-12, ICRA Estimates

Inclusive of grants for creation of capital assets (which are included in revenue expenditure), and excludingcapital expenditure towards defence, the total allocation for expenditure that is capital in nature is estimatedto increase by a healthy 27% relative to the revised estimates for 2011-12. Grants for creation of capitalassets are estimated to expand by a healthy 20%. Additionally, non-defence capital outlay and gross loans& advances are estimated to expand by a sharp 38%. This includes an allocation of Rs. 15,888 crore forcapitalisation of Public-Sector Banks, Regional Rural Banks etc., as compared to a revised allocation ofRs. 14,000 crore in 2011-12. Additionally, over Rs. 14,300 crore has been allocated for contribution or

subscription to various multilateral agencies such as the International Monetary Fund (IMF), AsianDevelopment Bank (ADB), World Bank etc.


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ICRA Comment


At an absolute level, the revenue deficit, effective revenue deficit and fiscal deficit are estimated to declinein 2012-13 as compared to 2011-12 (RE). In particular, the effective revenue deficit is estimated to declineappreciably to Rs. 1.86 lakh crore in 2012-13 from Rs. 2.57 lakh crore in the ongoing fiscal year.Nevertheless, the targeted revenue deficit of 3.4% of GDP and fiscal deficit of 5.1% of GDP remainconsiderably higher than the rolling target of 2.7% and 4.1%, respectively, that had been set previously.The Statements under the FRBM Act attribute the same to economic growth falling short of the potentialrate of growth as well as lower anticipated non-debt capital receipts (0.4% of GDP) as compared to the

estimate made previously by the Thirteenth Finance Commission (0.8% of GDP).

Notwithstanding the improvement forecast by the BE for 2012-13, the assumed tax buoyancy is likely to besomewhat optimistic even as actual proceeds from disinvestment and telecom auctions would depend onmarket conditions. Moreover, the outlay for subsidies may exceed budget estimates unless a substantialupward revision in administered fuel prices is undertaken over the course of the year. Although there maybe some slippages relative to the fiscal targets set in the Union Budget for 2012-13, the extent of theslippage is expected to be substantially smaller than that seen in 2011-12 (1.3% of GDP).

BE RE BE Rolling Targets

Rs. Crore 2011-12 2011-12 2012-13 2013-14 2014-15

Revenue Deficit -307,270 -394,951 -350,424 NA NA

Percentage of GDP -3.4% -4.4% -3.4% -2.8% -2.0%

Effective Revenue Deficit -160,417 -257,446 -185,752 NA NAPercentage of GDP -1.8% -2.9% -1.8% -1.0% 0.0%

Fiscal Deficit -412,817 -521,980 -513,590 NA NA

Percentage of GDP -4.6% -5.9% -5.1% -4.5% -3.9%

Total Outstanding Liabilitiesas a Percentage of GDP#

44.2% 45.7% 45.5% 44.0% 41.9%

Source: Union Budget 2011-12, ICRA Estimates#Does not include the portion of National Small Savings Fund and Market Stabilisation Scheme that are notused to finance GoIs fiscal deficit

GoI has indicated a net long term borrowing programme of Rs. 4.79 lakh crore in 2012-13 as compared toborrowings of Rs. 4.36 lakh crore in 2010-11. With the gross borrowings to be undertaken by GoI in 2012-13 exceeding the level in 2011-12 as well as market expectations, bond yields are likely to harden in the

coming months. Moreover, if the fiscal deficit exceeds the Budget Estimates, yields may harden furtherover the course of the fiscal year.

The rolling targets indicated by GoI for 2013-14 and 2014-15 aim to curtail the revenue and fiscal deficit to2.0% of GDP and 3.9% of GDP, respectively, in 2014-15. This is substantially less stringent than thetargets of a revenue surplus of 0.5% and fiscal deficit of 3.0% that had been indicated by the ThirteenthFinance Commission. However, outstanding liabilities are projected to decline to 41.9% of GDP in 2014-15,an improvement as compared to the target of 44.8% set by the Thirteenth Finance Commission.

Additionally, GoI has indicated that by 2014-15, it would eliminate the effective revenue deficit, defined asrevenue deficit less grants for creation of capital assets that GoI provides to State Government, LocalBodies etc. GoI plans to accord statutory recognition to the concept of effective revenue deficit in theproposed amendment of the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act).Eliminating the effective revenue deficit would enable GoI to continue to provide grants for asset creation,

while focusing its efforts on reducing consumption expenditure, which is a positive step.Additionally, the amended Act would make a provision for a Medium-Term Expenditure FrameworkStatement, which would set a three-year rolling target for expenditure indicators. This is expected toimprove efficacy in allocation of expenditure and impart greater certainty to multi-year budgeting.


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ICRA Comment


ICRA SECTORAL ANALYSIS

Banking and Financial Services

Proposals

Proposal to create a financial holding company to raise resources to meet Public Sector Banks(PSBs) capital requirements

Government of India (GoI) to recapitalise PSBs, Regional Rural Banks and other FinancialInstitutions by infusing Rs. 15,888 crore in 2012-13

Several pending legislative reforms, including Microfinance bill and Public Debt Managementagency bill, to be introduced in the current parliamentary session

Tax-free bonds limit doubled to Rs. 60,000 crore from Rs. 30,000 crore

Establishment of a Credit Guarantee Trust Fund for financing housing and educational loans

Interest subvention of 1% on housing loans upto Rs. 15 lakhs (cost of house upto Rs. 25 lakhs)for one more year

Limit of indirect finance under priority sector to housing loans enhanced to Rs. 10 lakhs from Rs.5 lakhs

Increase in credit flow to farmers from Rs. 4,75,000 crore to Rs. 5,75,000 crore

Additional interest subvention of 3% for farmers repaying promptly

Impact -Posi t ive

The setting up of the proposed financial holding company could help the PSBs in meeting largecapital requirement for Banks. Incremental equity allocation for PSBs demonstrates continued GoIscommitment to recapitalise PSBs. Issue of tax-free bonds would be positive for National HighwayAuthority of India (NHAI), IRFC, India Infrastructure Finance Company Limited (IIFCL), HUDCO, NHBand SIDBI enabling access to low-cost funds.

Credit guarantee trusts for educational loans would help in the Banks in protecting their asset qualitywhile increasing loans to priority sector education loans. Interest subventions on timely repaymentscould partly reverse some of the damage done by the debt waiver scheme as far as credit culture isconcerned.

Housing Finance Companies

Proposals

Credit Guarantee Trust Fund to be set up for better credit flow for housing loans

Provisions under Rural Housing Fund (RFH) enhanced from Rs. 3000 crore to Rs. 4000 crore

interest subvention of 1% on housing loans upto Rs. 15 lakhs (cost of house upto Rs. 25 lakhs)for one more year

Limit of indirect finance under priority sector increased from Rs. 5 lakh to Rs. 10 lakh

Impact - Posi t ive

Operationalisation of credit guarantee trust fund could help lenders mobilise long term funds andtherefore reduce asset liability mismatches; diversify their funding sources and improve access tocapital markets. With the increase in provision for RHF, smaller HFCs focused on rural housing wouldbenefit with a larger share of low cost and relatively longer tenure funds. Higher limit for eligibilityunder priority sector borrowings could help HFCs in increasing the proportion of low cost prioritysector funding.


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ICRA Comment


Real Estate

Proposals

Interest subvention scheme for home loans extended till March 2012.

ECB allowed for low cost affordable housing projects

Setting up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housingloans

Increase in provision under Rural Housing Fund to Rs. 4,000 crore from the existing Rs. 3,000crore to provide housing finance to targeted groups in rural areas at competitive rates

Priority sector lending limit increased from Rs. 5 lakh to Rs. 10 lakh

Introduction of tax deduction at source (TDS) on transfer of immovable property (other thanagricultural land) above a specified threshold

Increase in service tax from 10% to 12%

Impact-Neutral

The budget proposals such as extension of interest subvention scheme till March 2013; increase inpriority lending limit to Rs. 10 lakh from Rs. 5 lakh and increase in provision under Rural HousingFund to Rs. 4,000 crore from the existing Rs. 3,000 crore are likely to boost the demand for rural andaffordable urban housing. Further, allowing ECB in the low cost affordable housing projects and alsoreduction in the withholding tax on ECB interest from 20% to 5% would help the sector in assessingcheaper funding. Setting up Credit Guarantee Trust Fund would also encourage investment in theaffordable housing sector. Large real estate developers may benefit from the proposal of allowingQFIs to access Indian Corporate Bond market, as it would provide an avenue to raise fund at lowercost of borrowings. On the flip side, the increase in service tax from 10% to 12% will increase theoverall cost of dwellings for the buyers.

Hotel and Tour ism

Proposals

Increase in service tax rates from 10% to 12%

Increase in excise duty from 10% to 12%

Utilisation of input tax credit permitted for services such as catering, restaurants and hotelaccommodation

Entertainment and amusement services placed on the negative list of the service tax net.

Impact- Negative

The increase in service tax rates (effectively increase ~2%, if abatement is used) is expected to makehotel stays and dining out dearer for guests, thereby impacting demand to an extent. Further the widerservice tax net and the higher excise duty would translate into higher costs for hotels. However on apositive note the utilisation of input tax credit would prevent cascading impact of taxes. Despite thewider service tax net, placing of entertainment and amusement services on the negative list wouldcontinue to support demand in the entertainment/amusement/tourism industry.


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ICRA Comment


Coal

Proposals

Full exemption from basic customs duty and a concessional CVD of 1 per cent to steam coal for aperiod of two years till March 31, 2014

Reduction in basic customs duty on machinery and instruments for surveying and prospectingfrom 10% and 7.5% respectively to 2.5%

Full exemption from basic customs duty for coal mining projects

Impact- Neutral

The duty exemption on steam coal is expected to reduce the operating costs of players in the power(including captive power), cement and sponge iron industries, providing a support to their margins.However, this is unlikely to affect the scale of operations or margins of domestic coal miningcompanies, given the huge coal shortage scenario in India, and the significant price differentialbetween domestic and imported coal. Coal mining projects are expected to benefit from the lower dutyon machinery for prospecting and surveying, and full exemption of such projects from basic customsduty.

Cement

Proposals

Unified rate of excise duty of 12% + Rs. 120 PMT for non-mini cement plants and 6% + Rs. 120PMT for mini-cement plants

Extension of scheme for interest subvention of housing loans, enhancement in provisions underRural Housing fund, ECB for low cost affordable housing, setting up of Credit Guarantee TrustFund to ensure better flow of institutional credit for housing loans

Slew of measures for improving funding of infrastructure projects (VGF, enhancement of limit fortax-free infrastructure bonds and allowing ECBs for funding power projects)

Impact-Neutral

Increase in long term funding availability for infrastructure projects will facilitate more investment inthese sectors and thereby boost cement demand. Further subventions on housing and increasedprovision under rural housing fund will also boost urban and rural housing demand and in turndemand for cement. However, the increase in excise duty is likely to impact the margins of cementcompanies since they may not be able to fully pass on the hike to the customers given theovercapacities.

I ron & SteelProposals

Increase in basic customs duty on non-alloy flat-rolled steel from 5% to 7.5%

Reduction in basic customs duty on imported machinery for iron ore pellet and beneficiationplants from 7.5% to 2.5%

Exemption from basic customs duty and concessional CVD on imported steam coal till March 31,2014

Exemption from basic customs duty on nickel ore & concentrate, and increased export duty onchromium ore from Rs. 3000 per tonne to 30 per cent ad valorem

Exemption from special CVD on prime quality cold rolled grain oriented (CRGO) sheets of silicon

electrical steel

Increase in excise duty from 10% to 12%


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ICRA Comment


Impact - Posi t ive

The increase in custom duty on flat steel is expected to provide a cushion to domestic flat steel prices.Reduced duty on imported equipment for iron ore pellet/beneficiation plant is likely to benefit domesticsteel companies, especially the ones that purchase iron ore fines. Additionally, the 2 year dutyexemption on steam coal import is expected to reduce the coal costs of sponge iron manufacturersdependent on imported coal. The stainless steel industry would also benefit from an expected drop in

nickel and chromium ore prices. However, the impact of the increase in central excise duty would beadverse for steel players, as manufacturers may not be able to pass on the entire hike in the nearterm, given the current slowdown in demand conditions.

Oil & Gas

Proposals

Increase in cess on domestic crude oil production from Rs 2,500 per ton to Rs 4,500 per ton

Increase in service tax from 10% to 12%

Exemption of custom duty on import of LNG for power generation for two years

Eligibility of LNG storage facilities and oil & gas pipelines for VGF

Relaxation of ECB norms for gas pipelines and regassification companies

Provision of subsidy for sensitive petroleum products: Rs. 68493 cr for 2011-12 (RE) and Rs.43695 cr for 2012-13 (BE)

Direct payment of subsidy to the people living below poverty line (BPL) on LPG (domestic) andSKO (PDS)

Impact- Negative

The cess on domestic crude oil has been increased from Rs 2,500 per ton (~US $ 6.7/MT) to Rs

4,500 per ton (~US $ 12/MT), which would result in lower net realisation for Public Sector Undertaking(PSU) upstream companies, while for private NELP JVs the additional cess is cost recoverable whilearriving at profit petroleum, which partly mitigates the additional levy. Further, the increase in servicetax from 10% to 12% will lead to higher cost of various oil field services as the same is not eligible forCENVAT credit. The provision of subsidy for 2011-12 and 2012-13 for PSU Oil Marketing Companies(OMCs) is expected to fall short of requirements and might call for additional subsidy provision ormaterial price revisions if the OMCs profits are to be preserved. Steps with regard to LNG such asduty exemption for power sector and easing of funding will encourage more investments in the sector.

Power Sector

Proposals

Full exemption from basic customs duty & concessional Countervailing Duty (CVD) of 1% onsteam coal for two year period till March 31, 2014.

Full exemption from basic customs duty on Natural Gas & Liquefied Natural Gas (LNG)

Coal India advised to sign fuel supply agreement (FSA) with power projects which have long termPPAs with discoms and are expected to be commissioned on or before March 31, 2015

Inter-ministerial group (IMG) to be formed to periodically review allocated captive mine blocks ormake recommendations for de-allocation, if required

Limit for tax-free infrastructure bonds to be raised by FIs, doubled to Rs. 60,000 Cr.

Qualified Foreign Investors (QFIs) allowed to access corporate bond market

ECB allowed for part-financing of rupee debt for power projects;

Withholding tax on interest payments on ECB reduced to 5% from 20%


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ICRA Comment


Extension of tax-holiday under section 80-IA till March 31, 2013

Additional depreciation of 20% allowed in the initial year for new assets acquired by powergeneration companies

Impact - Posi t ive

The exemption of customs duty on coal would result in lower cost of power generation by about 3%(~11 paise/unit) for power projects (assuming use of 100% imported coal). The provisions of doublingof tax-free bond limits, inclusion of ECB for to part financing project costs & reduction of withholdingtax on ECB would improve long-term funding availability and also result in a marginal reduction inborrowing costs or power projects. Extension of tax holidays and additional depreciation will improveprofitability and cash flows of power companies. Moreover, stated intent of ensuring timely signing ofFSAs by Coal India Ltd & periodic review of allocated mines by IMG so as to fast-track captive minedevelopment remains extremely crucial, given increasing coal shortages for power sector.

Roads and Ports

Proposal

8,800-km of highways to be covered under National Highway Development Program (NHDP)during FY2013. The allocation towards NHDP has been increased by 14% to Rs 25,360 crore inFY2013

Increase in budgetary allocation towards Pradhan Mantri Gram Sadak Yojna (PMGSY) by 20% toRs 24,000 crore

Tax free bonds of Rs. 10,000 crore to be issued each by NHAI and IIFCL

ECB allowed for capital expenditure on the maintenance and operations of toll systems for roadsand highways. Reduction in the withholding tax on ECB interest from 20% to 5% would furtherreduce the funding cost

Full exemption from import duty on specified equipment for road construction; benefit extended tocontracts awarded by Metropolitan Development Authorities

Impact - Posi t ive

The increased outlay on road transport would favourably impact companies involved in roadconstruction. Further, the tax-free bond issues by NHAI and IIFCL, and proposal to allow QFIs toinvest in corporate bond market would increase the funding options for the road construction sector.The Government also seeks to increase the funding options for the infrastructure projects throughtakeout financing and credit enhancement schemes floated by IIFCL. Moreover, exemption providedto specific construction equipment from import duty will provide some respite.

Fert i l isers

Proposals

Direct payment of subsidy to retailers initially and farmers eventually in a phased manner

Implementation of new urea pricing and investment policy to attain self sufficiency in the next 5years

Capital investments in fertiliser sector eligible for VGF

Investment linked deduction on capex in fertiliser sector enhanced from 100% to 150%

Exemption of import duty of 5% on capital equipments for Greenfield and substantial expansion offertiliser plants for 3 years upto 2014-15

Budgetary provision for subsidy: Rs. 71,579 cr (RE 2011-12) and Rs. 65606 cr (BE 2012-13)

Continuation of payment of subsidy in cash to the fertiliser companies rather than by way ofbonds


10/16

ICRA Comment


Impact - Posi t ive

GoIs roadmap towards direct transfer of subsidy to farmers through transfer to retailers in the firstphase has been stated in the past two budgets. Although, the same is positive for the liquidity positionof fertiliser companies, the ability of retailers to manage such high working capital blockage would bea key challenge. Implementation of new investment policy of urea would be positive for the majorplayers in the sector to implement their expansion plans, provided issues related to gas availability at

the cut off prices are addressed. Measures to encourage fertiliser capital investments, such aseligibility for VGF, enhancement of investment linked tax deduction to 150%; exemption of import dutyon capital equipments are expected to be positive for the players undertaking brownfield andgreenfield projects.

However, the subsidy provisions for both 2011-12 and 2012-13 are inadequate even after accountingfor the recent reduction in nutrient subsidy rates for non urea fertilisers in 2012-13.

Pharmaceuticals

Proposals

Weighted deduction of 200% on R&D expenditure on in-house activities extended for five years

Increase in excise duty to 12% from 10% may result in a hike in bulk drug prices

No change in the MAT rates is a positive

Impact-Neutral

The impact of most proposals announced during the budget is unlikely to have a material impact onthe pharmaceutical sector as the impact of increased excise duty would be passed on by domesticformulation companies. The extension of tax exemption on R&D expenditure on in-house activities forfive years would continue to support higher investments by research-led companies in areas ofNCE/NDDS related research programs. After two years of successive hike in MAT rates, no change incorporate taxes is a positive for the pharmaceutical industry.

Capita l Goods

Proposals

Slew of measures for improving financing of power and other infrastructure projects (Viability GapFunding (VGF), enhancement of limit for tax-free infrastructure bonds and allowing ECBs forfunding power projects) and enhancing fuel security of power plants (advice to CIL for signingFSAs, exemption of coal and LNG from customs duty and review of captive mine developmentprocess).

Impact - Margina l ly Posi t ive

Measures which will speed up implementation of infrastructure (including power projects and coalprojects) are positive from the demand perspective. However, absence of measure regarding importduty on imported power equipments remains negative for capital goods sector, especially for BTGplayers, given the stiff competition from imports.

Auto 2W/ Passenger Vehicles

Proposals

Central Excise Duty on 2W and small cars increased from 10% to 12%

Central Excise Duty on large cars (engine capacity 1,200-1,499cc) increased from 22% to 24%;duty on large cars (engine capacity 1,500cc-1,999cc) increased from 22%+Rs. 15,000 to 27%;

duty on large cars (engine capacity>1,999cc) increased from 22%+Rs. 20,000 to 27%


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ICRA Comment


Basic customs duty on Completely Built Units (CBUs) of large passenger vehicles having enginecapacity above a prescribed threshold and value exceeding USD 40,000 enhanced from 60% to75%

Full exemption from Basic Customs Duty and concessional CVD of 6% extended to specifiedadditional parts such as lithium ion batteries used in hybrid and electric vehicles

Impact- NegativeIncrease in excise duty by 2% would result in increase in prices of automobiles in the following range:at least Rs. 700 for two-wheelers, Rs. 5,000 for small cars and Rs. 9,000 for bigger cars. Since theOEMs may be unable to fully pass on the increase in excise duty to customers, given the subdueddemand environment currently prevailing in the domestic market, it may exert pressure on OEMsprofitability. However, the Governments thrust on rural development remains a key positive as theproportion of automobile sales in the rural markets is steadily on the rise. Also, unlike industryapprehensions there has been no increase in tax for diesel vehicles, which is a positive for theindustry, especially considering rising proportion of diesel vehicles in passenger car segment.

Commercial Vehicles

Proposals

Central Excise Duty increased from 10% to 12%

Commercial vehicle (CV) body building activity to be charged at an ad valorem rate of 3%

Thrust on infrastructure spending increased through higher budgetary allocation and easing offund raising for infrastructure.

Impact: Negative

The increase in excise duties, while on anticipated lines, is expected to increase prices of commercialvehicles as OEMs pass on the impact to the end customer. While the increased prices could have adetrimental impact on the immediate term demand, the step up in infrastructure expenditure

particularly in segments such as roads will not only increase demand for CVs (for construction) butalso improve connectivity enabling easier freight movement. Steps for easing fund raising in theinfrastructure sector is expected to drive both public and private spending (under public-privatepartnerships (PPPs)) in gross capital formation. This is a positive for demand in the commercialvehicle sector.

In lieu of excise duty, commercial body builders are charged a mixed rate of Rs.10,000 and theapplicable ad valorem duty. This going forward has been streamlined to an ad valorem rate of 3%.

Tyres

Proposals

Hike in Central Excise Duty from 10% to 12% Full exemption on basic and additional customs duty on new and retreated pneumatic tyres, used

in aircraft; excise duty on the same reduced from 10% to nil

Impact- Neutral

Increase in excise duty rates from 10% to 12% to lead to an increase in tyre prices; also likely tomarginally impact the market share of domestic players in the replacement segment. Similar duty hikeon automobiles, especially large cars, could affect derived demand for tyres. Duty exemptions onpneumatic tyres (both new and retreaded), used in aircrafts is a positive.


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ICRA Comment


Tractors

Proposals

Target for institutional credit flow to agriculture raised by Rs. 1,00,000 crore to Rs. 5,75,000 crorein 2012-13; interest subvention scheme for crop loans to continue in 2012-13 along with additionalsubvention of 3% to prompt-paying farmers

Setting up of Irrigation and Water Resource Finance Company to mobilize resources to fundirrigation projects. Structural changes and increase in planned expenditure for AcceleratedIrrigation Benefit Programme along with allocation of Rs. 300 crore for Vidarbha IntensifiedIrrigation development Programme

Total plan outlay for agriculture increased by 18% to Rs 20,208 crore with allocation underRashtriya Krishi Vikas Yojna (RKVY) increased from Rs 7,860 crore in 2011-12 to Rs 9,217 crorein 2012-13. Increase in allocation towards National Rural Livelihood Mission to Rs 3,915 crore, agrowth of 34%

Impact - Posi t ive

With strong co-relation between farm mechanisation and credit availability, increase in institutionalcredit flow to the agricultural sector augurs well for the tractor industry. Also focus on irrigationprojects shall enable faster shift from rain-fed agriculture to irrigated farming, thus reducing exposureto the vagaries of monsoons. Further, Governments thrust on rural and agricultural developmentcontinues with increased allocations to RKVY, Rural Infrastructure Development Fund and MahatmaGandhi National Rural Employment Guarantee Scheme, which is expected to have positive influenceon demand side drivers.

Auto Anci l lary

Proposals

Central Excise Duty on manufactured goods increased from 10% to 12%

Weighted deduction of 200% currently available on in-house R&D expenditure extended beyondMarch 31, 2012 for a further period of five years

Introduction of weighted deduction of 150% of expenditure incurred on skill development

Impact-Negative

Increase in excise duty by 2% would translate into increase in prices of automobiles that is likely toweigh on early demand recovery and consequently slower recovery in auto component supplies toOEMs. Continuity of benefit available from weighted deduction on in-house R&D expenditure wouldencourage auto ancillaries to invest in building technical capabilities. Introduction of 150% weighteddeduction on skill development related expenditure should partly enable address the problem relatedto short-supply of skilled labour.

Aviat ion

Proposals

Increase in service tax

Proposal for allowing foreign carriers to pick upto 49% equity stake in domestic carriers is stillunder consideration, no final decision yet

ECB upto $1 billion for working capital requirements; withholding tax on interest payments onECB is proposed to be reduced from 20% to 5% for three years

Custom duty exemption for imports of certain aircraft parts and testing equipment for third-partymaintenance, repair and overhaul (MRO Services)


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ICRA Comment


Impact-Neutral

Increase on service tax rates is a negative, while it is likely to be passed on by the carriers in the formof higher air fares. Moreover, the proposal for allowing foreign carriers to pick upto 49% equity stakein domestic carriers still remains under consideration only.

However, the Government has proposed allowing ECB for working capital requirements and reducing

withholding tax on interest payments, which could reduce interest costs and provide much neededliquidity for the airline industry. Besides, the custom duty exemption for imports of aircraft parts andMRO testing equipments is expected to provide some relief.

Telecommunication

Proposals

Fixed network for telecommunication and telecommunication towers made eligible sectors forVGF for support to projects undertaken on PPP basis.

Full exemption from customs duty on parts of memory card for mobile phones.

Impact - Posi t iveVGF is likely to promote laying of fixed networks, which is important for development of high-bandwidth connectivity. Also, VGF could provide impetus to development of new telecom towers,which has witnessed some slowdown in recent months. The budget initiative should have greaterimpact on expansion of telecommunications in rural areas, which has lagged in contrast to the growthwitnessed in urban areas. Nevertheless, eligibility and implementation of VGF remain to be seen.

Exemption on customs duty on parts of memory card for mobile phones is a positive for domesticmanufacturing of these memory cards.

Retai l

Proposals

Excise duty on branded apparels increased to 12% from 10% with abatement levels increased to70% from 55%, resulting in reduction in effective tax rate to 3.6% from 4.5%

No guidance on the roll-out of Foreign Direct Investment (FDI) in Multi-Brand Retail

Impact- Neutral

During the last budget, an excise duty of 10% was imposed on branded apparels, which put pressureon sales of organised retailers, especially in the fashion segment. The proposed hike in excise duty to12% with increase in abatement levels will effectively bring down on the net tax impact on brandedapparels and allow organised retail to pass on some of the benefit to attract growth. Overall, thebudget, lacked to provide any clarity on the much anticipated FDI in multi-brand retailing nonetheless

increased investment allocations in supply-chain related infrastructure continue to favour the modernretail in improving efficiencies in back-end.

FMCG

Proposals

Increased allocation towards rural development and agriculture-centric schemes

Marginal reduction in personal tax rates

10% ad valorem duty on 50% of the Retail Sale Price for >65mm cigarettes; Increase in exciseduty on hand-rolled bidis and other tobacco products; Basic Customs duty on Cigarettes reduced

Increase in central excise duty from 10% to 12%


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ICRA Comment


Impact - Posi t ive

Increased allocation towards agriculture and rural development is a positive for the sector, since it isexpected to improve farm production and rural prosperity. The marginal reduction in personal incometax rates is expected to increase disposable incomes and boost consumer spending. Besides, amoderate hike in excise duty for above 65 mm cigarettes and increase in excise duty for hand-rolledbidis is a marginal positive from branded cigarette manufacturers. However, the hike in central excise

duty, if passed on to the consumers, may lead to some demand moderation.

Texti les

Proposals

Increase in standard excise duty

Exemption from 5% custom duty for new automated shuttle-less looms and new automatic silkreeling and processing machinery along with parts and components; Second-hand machinery toattract basic duty of 7.5%

Exemption from basic customs duty to aramid yarn and fabric used for the manufacture of bullet

proof helmets

Reduction of basic custom duty on wool waste and wool tops from 15% to 5%

Budgetary allocation to Ministry of Textiles increased by 27% to Rs. 7,000 crore

Allocation of Rs. 500 crore to a pilot scheme in the Twelfth Plan for promotion and application ofGeo-textiles in the North East Region

Allocation of Rs. 70 crore to set up a power loom mega cluster in Ichalkaranji in Maharashtra

Impact- Neutral

Reduction in effective excise duty on branded garments to improve the profitability of the domesticbranded apparel industry. However the positive impact of reduction in excise duty would be

moderated due to higher input costs on account of higher excise duty on man-made fiber. Increase inexcise duty to have negative impact on the man-made fiber segment as higher levy would increasethe duty disparity with respect to cotton. Exemption from custom duty for new automated shuttle-lesslooms is a positive for the weaving segment and would support capacity addition and modernisation.Though the budgetary allocation to the ministry has been increased by 27%, the allocation towardstechnology upgradation fund scheme has reduced to Rs. 2,914 crore from Rs. 3,100 crore.

Healthcare

Proposals

Income tax deduction on capital expenditure incurred on hospitals increased to 150% from 100%

Allocations under the NHRM scheme increased to Rs. 20,822 crore from Rs. 18,115 crore in2011-12

Introduction of new schemes like National Urban Health Mission (NUHM) and increased scope ofexisting schemes like PMSSY

Full exemption from customs duty & CVD to raw materials used in manufacture of coronarystents & artificial heart valves

Concessional import duty regime on raw materials used in manufacture of medical devices likesyringes, cannulae, catheters, needles, blood pressure monitors and gluco-meters

Basic customs duty reduced from 10% to 5% with full exemption from excise duty on 6 life savingdrugs

Impact - Moderate ly Posi t ive

Contrary to industry expectations the healthcare sector has not been given infrastructure status.However increased capex deduction on hospitals is expected to provide impetus to investments in the


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ICRA Comment


sector. Further, increased allocation to existing schemes such as NHRM and PMSSY andintroduction of new schemes like NUHM augur well for the healthcare sector. The concessional dutyregime on raw materials of specified medical devices is expected to help medical devicesmanufacturing companies improving their export competitiveness.

Media and Enterta inmentProposals

Film Industry exempted from service tax on copyrights related to recording of cinematographicfilms

Impact-Neutral

While various other copyright services are already under the service tax ambit, those related tocinematographic films have been put in the negative list which should be a positive for entitiesengaged in offering such services. However, since no major positive announcements have beenmade related to relaxation in FDI norms for print, news broadcasters, radio and DTH segments, theoverall impact on the media & entertainment sector is neutral.


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ICRA Comment


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2012 march budget

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