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The Government of India today released the Economic Survey for 2011-12, giving a backdrop of
macro-economic challenges and trends for India along with an outlook on growth for the next two
years. Although the past year has registered some weakness in the economy, the tone of the Survey
sets a rather positive view for the coming years, with economic activity having bottomed out and a
gradual upswing being imminent.
Challenges in FY12
On the domestic front managing growth and price stability has been a prime concern in policyformulation. While agriculture and services sector have provided support to overall growth,
weakening industrial activity (against monetary tightening causing borrowing costs to rise and
investments to fall) has pulled down economic performance.
Simultaneously, the global economic environment has been tenuous through the year, particularly
turning adverse post-September 2011, against the Euro-zone crisis, downgrades of sovereign credit
rating of euro-zone and other advanced countries (including the US), followed by political unrests,
currency wars and the more recent oil crisis.
Macro-economic Performance
The performance of the Indian economy, on the domestic front and external sector is captured in
the trends shown in the following table
Picture in FY12
GDP Growth estimated at 6.9%
Growth in Agricultural sector estimated at 2.5%, growth in services robust at 9.4%
Growth in industrial activity at 4.5% a concern, with contribution of this sector to GDP
slipping to 25% (as shown in table 1), a direct fall-out of lower rate of gross fixed capital
formation (GFCF). GFCF a proxy for investments was earlier estimated at 31.9% of GDP in
FY12 by MOSPI, when compared with 32.5% in FY11
The rate of both savings and investments has slowed in FY11. It may be expected that these
numbers continue to be low in FY12 as well, on account of monetary tightening pursued during
the year to control inflationary pressures
ECONOMIC SURVEY 2011-12
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Table 1: Domestic Macro-economic Indicators (%)
FY08 FY09 FY10 FY11 FY12 (E)
Growth RatesGDP 9.3 6.7 8.4 8.4 6.9
Agri. & allied 5.5 0.4 1.7 6.8 2.5
Industry* 10.3 4.7 8.6 7.4 4.5
Services 39.9 10.0 10.5 9.3 9.4
Share in GDP
Agri. & allied 19.3 18.1 17.0 16.8 16.0
Industry* 26.3 25.8 25.8 25.6 25.0
Services 54.5 56.1 57.2 57.7 59.0
Other IndicatorsInflation 4.8 8.0 3.6 9.6 9.1#
Savings 36.8 32.0 33.8 32.3 n.a.
Investment 38.1 34.3 36.6 35.1 n.a.
Government Finances
Internal Debt/GDP 36.3 36.3 35.7 34.7 n.a.
External Debt/GDP 4.2 4.7 3.8 3.5 n.a.
GFD/GSDP 2.5 6.0 6.3 4.8 4.6
Source: Economic Survey 2011-12
*Industry includes construction #April-January FY12
Fiscal management is crucial, the fiscal slippage in FY12 has halted fiscal consolidation, with
central spending on social services pegged at 18.5% this fiscal
Table 2: External Sector
FY08 FY09 FY10 FY11 FY12 (E)
Trade
Exports growth (%) 29.0 13.6 -3.5 40.5 23.5*
Imports growth (%) 35.5 20.7 -5.0 28.2 29.4*
CAD (% of GDP) -1.3 -2.3 -2.8 -2.7 -3.6#
Foreign Investment Flows (US $ bn)
FDI 15.9 19.8 18.0 9.4 n.a.
Portfolio Invt. (FII) 27.4 -14.0 32.4 30.3 n.a.
Reserves (US $ bn)
Forex Reserves 309.7 252.0 279.1 304.8 292.8//
*April-January FY12, #April-September FY12, //As at end of January 2012
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Between April and January FY12, exports have grown by 23.5% and imports by 29.4%
In H1 FY12 the current account deficit stood at 3.6% of GDP
Foreign investment flows, particularly FDI have slowed down in FY11 over FY10, the same
have been volatile in FY12 amidst uncertain global conditions
Forex reserves moderated below the $300 bn mark, with the RBI intervening in the forex
market this year to curtail the appreciation of the rupee against the dollar
Going Ahead? ...
Outlook for real GDP growth promising at 7.6% in FY13 and 8.6% in FY14
Recent decline in inflation is expected prompt ease in interest rates, which is likely to spurinvestments
Suggested Policy Measures
In the backdrop of the current domestic and global environment, uncertainty continues to prevail
thereby, rendering economic slowdown inevitable in India as in other countries across the globe.
The Survey thus identifies a need for innovative policy strategies on the fiscal and monetary side.
Some important suggestions have been enlisted below -
Progressive deregulation of interest rates on savings accounts to help mobilise financial savings
and improve monetary policy transmission
Deepening of financial markets, especially corporate bond market (for instance the introduction
of credit default swaps and increasing limits for FIIs in the corporate bond market)
Attracting foreign long-term investment flows, particularly dedicated infrastructure funds. The
process for institutionalising infrastructure debt funds has already begun through both mutual
funds and NBFCs
Whats New?
The Economic Survey this year has announced a methodology to rank sovereigns across the world,
through the launch of a new index, the Comparative Rating Index for Sovereigns (CRIS). Each
nations CRIS is calculated based on Moodys foreign currency credit rating and IMF GDP statistics
with no purchasing power parity correction.
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This new index suggests that countries with low per capita incomes tend to show greater
improvement over the years, emphasising the potential of the country. Paraguay, Indonesia,
Philippines, Brazil and Turkey are the top five countries, with the US having the 13th
rank. 27economies (largely in the Euro-zone) have recorded negative growths in this index.
India remains one of the fastest growing economies of the world, with the sovereign credit rating
registering substantial increase of 2.98% for the period 2007-12
The index and performance, there-from for select countries has been shown in table 3 below
Table 3: Sovereign Ratings The CRIS
2007 2012 % change
Paraguay 14.4 19.6 36.2
Brazil 22.7 26.0 14.4
India 23.8 24.5 2.9
China 28.7 30.8 7.2
US 32.1 32.8 2.1
UK 32.1 32.8 2.1
Japan 32.1 30.5
Portugal 30.5 20.5 -32.8
Greece 29.0 7.4 -74.5
Ireland 32.1 23.0 -28.4
Spain 32.1 27.3 -14.9
Conclusion
The Survey states that sustainable development would be vital for the Indian economy, with the
country actively and constructively partaking in global negotiations. The role of India has expanded
in the world economy along with other major emerging market economies.
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Overview
Table 1: Summary of accounts (` crore)FY09 FY10 FY11 FY12(RE) FY13(BE)
Revenue Receipts 5,40,259 5,72,811 7,88,471 7,66,989 9,35,685
Tax revenue(net to centre) 4,43,319 4,56,536 5,69,869 6,42,252 7,71,071
Non tax revenue 96,940 1,16,275 2,18,602 1,24,737 1,64,614
Capital Receipts 3,43,697 4,51,676 4,08,857 5,51,730 5,55,241
Recoveries of loans 6,139 8,613 12,420 14,258 11,650
Other receipts 566 24,581 22,846 15,493 30,000
Borrowing and other liabilities 3,36,992 4,18,482 3,73,591 5,21,980 5,13,590
Total Receipts 8,83,956 10,24,487 11,97,328 13,18,720 14,90,925
Non plan Expenditure 6,08,721 7,21,096 8,18,299 8,92,116 9,69,900
On revenue account of which, 5,59,024 6,57,925 7,26,491 8,15,740 8,65,596
Interest payments 1,92,204 2,13,093 2,34,022 2,75,618 3,19,759
On capital account 49,697 63,171 91,808 76,376 1,04,304
Plan Expenditure 2,75,235 3,03,391 3,79,029 4,26,604 5,21,025
On revenue account 2,34,774 2,53,884 3,14,232 3,46,201 4,20,513
On capital account 40,461 49,507 64,797 80,404 1,00,512
Total Expenditure 8,83,956 10,24,487 11,97,328 13,18,720 14,90,925
Revenue expenditure 7,93,798 9,11,809 10,40,723 11,61,940 12,86,109
Capital expenditure 90,158 1,12,678 1,56,605 1,56,780 2,04,816
Revenue Deficit 2,53,539 3,38,998 2,52,252 3,94,951 3,50,424
Fiscal Deficit 3,36,992 4,18,482 3,73,591 5,21,980 5,13,590Primary Deficit 1,44,788 2,05,389 1,39,569 2,46,362 1,93,831
Key Tax Proposals
Benefit to individual tax payer -
Personal Income tax exemption limit raised to `2,00,000/- from `1,80,000/-, resulting in taxrelief of`2,000/-
Deduction of up to `10,000/- for interest from savings banks account.
The 20% tax slab to be raised from
`8 lakh to
`10 lakh.
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Boost to government resource base -
Central Excise and Service Tax being harmonized
o Standard rate of excise duty raised from 10% to 12%
o Service tax levy on all goods except those on the negative list comprising 17 heads (by and
large all service provided by the Government or local authorities); rate increased from 10%
to 12%
Incentive to corporates in raising finances abroad -
Rate of withholding tax on interest payments on ECBs reduced from 20% to 5% for 3 years
for certain sectors viz infrastructure sectors
Deepening financial markets -
Reduction in Securities Transaction Tax (STT) by 20% from 0.125% to 0.1% on cash delivery
transactions
Tax Reform
The GST network to be set up as a National Information utility that would be operational by
August 2012
Policy Reforms
Permit the airline industry to raise working capital through External Commercial Borrowing
(ECB) up to US$1 bn.
To allow qualified foreign investors in THE Indian corporate debt markets.
ECB to part finance rupee debt in THE existing power projects.
Implementation of Advance Pricing Agreement in Finance Bill, 2012
Sector Spending
`25,360 crore has been allocated towards road transport and highways.
A provision of`1,93,407 crore has been made for defence sector in the Budget 2012-13.
Healthcare spending to be increased from `24,000 crore to `26,760 crore.
The allocation for defence under capital expenditure has been estimated at `.79,590.
To strengthen the financial health of Public Sector Banks (PSBs) and financial intuitions
`15,888 crore have been allocated for capitalization
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Revenue
The tax proposals announced this year have the objective of boosting the resource base of the
government. A comparative picture of the tax proposals of THE last year and this year are given
below in Table 2
Table 2: Tax Measures
Tax Measures 2011-12 2012-2013
Direct Taxes
Exemption limit for general category `1,80,000 `2,00,000
Corporate taxes 18.5% of book profits
(MAT rate)
retained
Investment in long-term infrastructure
bonds
`20,000 deduction retained
Deduction on interest from savings bank
accounts
- `10,000
Net revenue loss(direct taxes) ` 11,500 crore for year ` 4,500 crore for yearIndirect Taxes
Central Excise Duty 10% standard rate 12% standard rate
Service Tax 10% 12%
Peak Customs Duty on non-agricultural
goods
10% retained
Net revenue gain (indirect taxes) `7,300 crore `45,940 crore
Overall Net revenue gain (loss) ( 200 crore) `41,440 crore
Gross Tax Revenue `9,32,440 crore `10,77,612 crore
Impact
1. Although, the government has raised its sources of revenue/ revenue stream, its expenditure
still remains high, so any slippages in its revenue collection and disinvestment targets would
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have an adverse impact on its fiscal situation making the fiscal deficit target of 5.1% difficult to
achieve. The Budget 2012-13, has envisaged considerable improvement in revenue receipts
buoyancy, which is expected to move from the negative zone (-0.2 times) in FY12 to 1.6 timesin FY13. In particular if the GDP growth target of 7.6% is not attained, revenue collections will
be impacted.
2. Inflation is likely to be pressurized with the increases in excise duty and service tax (as a part of
the alignment process towards the GST) and the likely rationalization of fuel and fertilizer
subsidy. Moreover, the recent increment in railway freight charges could increase costs by 1-3%,
which too would translate into higher prices.
3. Given the risk associated with oil prices, in the scenario of rising prices, the under- recoveries
of oil marketing companies would see a commensurate increase wherein the budget envisaged
fuel subsidy of`43,580 crore would be inadequate and if oil companies increase prices as a
result it would translate into inflationary pressures.
4. With no substantial reforms being announced in the budget the expected policy boost to
economic growth has not been forthcoming. A close watch has to be maintained on the various
bills proposed to be moved in the budget session of parliament.
Expenditure Measures
Total plan expenditure allocation has increased by 22.1% over FY12 (RE), with non-plan
expenditure showing an increase of 8.7%.
Table 3: Expenditure (` crore)Expenditure FY11 FY12 (RE) FY13 (BE)
Non Plan expenditure 8,18,299 8,92,116 9,69,900
Revenue non- plan expenditure 7,26,491 8,15,740 8,65,596
Interest payments 2,34,022 2,75,618 3,19,759
Subsidies 1,73,420 2,16,297 1,90,015
Pensions 57,405 56,190 63,183
Social services 35,014 19,709 20,784
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Expenditure FY11 FY12 (RE) FY13 (BE)
Economic services 28,051 23,702 24,105
Capital non plan expenditure 91,808 76,376 1,04,304
Plan expenditure 3,79,029 4,26,604 5,21,025
Revenue plan expenditure 3,14,232 3,46,201 4,20,513
Capital plan expenditure 64,797 80,404 1,00,512
Total expenditure 11,97,328 13,18,720 14,90,925
Subsidies
Food, fertilizer and petroleum are the main components of the subsidies given by the
Government.
With subsidy rationalization as the road map, the Union Budget targets to reduce fertilizer
subsidy by 9.3% (to `60,974 crore) and petroleum subsidy by 36.4% (to `43,580 crore).
Food security would be fully covered by the Government.
Endeavour to keep subsides under 2% of GDP in FY13. Further bringing it down to 1.75%
in FY15
Agriculture
Plan outlay for Department of Agriculture and Co-operation increased by 18%.
Target for agricultural credit raised by`1,00,000 crore to `5,75,000 crore in FY13.
`200 crore set aside for incentivizing research with rewards
Food grains storage capacity is to be increased by 2 mn tonnes.
Continuation of lower farm interest rate (at 7%) and interest rate subvention of 3% for
prompt paying farmer.
Interest subvention on post harvest loans up to six months against negotiable warehouse
receipt. This will encourage the farmers to keep their produce in warehouses.
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Infrastructure
During 12th plan period, investment in infrastructure to go up to `50 lakh crore, half of
which is expected from private sector.
Telecom towers and irrigation projects to get viability gap funding.
Setting up of the infrastructure debt fund.
Tax free bonds of`60,000 crore to be allowed for financing infrastructure projects in FY13
Other Announcements
Proposal to lay a White Paper on Black Money
Interest subvention scheme for providing short term crop loans to the farmers at 7% p.a.
Additional subvention of 3% available for prompt paying farmers.
NREGA assistance is revised from `35,840 crore in FY11 to `31,000 crore in FY12 (RE).
The same is expected to increase to `33,000 crore in FY13 (BE)
Non-plan capital expenditure dominated by defence expenditure in FY13 which accounts
for 76% of total
Impact
1. Higher direct flow of credit to agriculture will help to improve the production and logistics
for various crops.
2. The interest rate subvention for the farmers will help to accelerate repayment. The
governments interest subsidy outgo is projected to increase by 37.5% in FY13 to `7,968
crore. The interest subsidy for providing short-term credit to the farmers has been set at
`6,000 for FY13, up 50% from the revised estimate of`4,000 crore in FY12.
3. The slew of initiatives and outlays for the agri -sector would aid in increasing productivity
and overall growth of the sector.
4. During 12th plan period, investment in infrastructure is estimated to increase to `50 lakh
crore, indicating emphasis on infrastructure and industrial development thereby relieving
structural bottlenecks. The allocation of tax-free bonds for financing infrastructure projects
in 2012-13 would improve funding for the sector.
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Deficit Position
Table 4: Deficit Position (as a % of GDP)
FY11 (A) FY12 (RE) FY13(BE)
Fiscal Deficit 4.90 5.90 5.10
Revenue Deficit 3.30 4.40 3.40
Effective Revenue Deficit 2.10 2.90 1.80
Disinvestment (`crore) 22,846 15,493 30,000
Fiscal balance has been adversely impacted in FY12 on account of lower than estimated direct tax
revenue collection (as profitability of corporate entities, impacted by high interest rates, shrunk) and
increased subsidy burden (on food bill on account of high inflation and on fuel and fertilizer on
account of rising global oil prices).Fiscal deficit is estimated to be `5,13,590 crore in 2012-13. It was
`5,21,980 crore(RE) in 2011-12 and `3,73,591 crore in 2010-11(A).
The budgeted fiscal deficit of 5.1% in FY13 is marginally higher than that of FY11 (at 4.9%) when
revenue receipts were backed by one-time windfall income through the auctioning of telecom
spectrum. Simultaneously, however, this estimate is lower than the 5.9% of FY12. The re-auction of
telecom spectrum, is expected to yield only `40,000 crore of receipts in FY13 (as against nearly
`100,000 crore in FY11). A slippage on account of this source would impact the deficit position of
the State. Prima facie, it appears that indirect tax revenues would perhaps be the major support factor
for curbing the deficit gap in FY13.
Effective Revenue Deficit is defined as the difference between revenue deficit and grants for
creation of capital assets. This bifurcation helps in reducing the consumptive component of revenue
deficit thereby creating space for increased capital spending. The revenue deficit stood at 4.4% in
FY12 and is budgeted at 3.4%, with the effective revenue deficit budgeted at a much lower 1.8%.
Performance on the disinvestments front has been rather subdued in FY12, where the State is
expected to mobilise `15,493 crore of funds (as against a budget estimate of `40,000 crore in
FY12). The budget estimate for the same in FY13 stands at `30,000 crore, perhaps a more
achievable amount (closer to the FY11 sum).
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Implications
1. Given the fiscal slippage in FY12 (fiscal deficit at 5.9% under revised estimates as against 4.6%
of budget estimates of FY12) the path of fiscal consolidation has been adversely affected.
However, Budget 2012-13 makes the much required attempt to balance a growth oriented
strategy whilst reverting to fiscal prudence.
2. The amount of resources actually mobilised through equity disinvestment in public sector
enterprises during the course of the year would be critical for the government to meet the
above-mentioned deficit targets, especially if liquidity conditions continue to remain tight.
3. The enthusiasm of telecom players in the second round of auctions of telecom spectrum in the
upcoming fiscal would be a crucial determinant of the fiscal gap that materialises at the end of
the year.
Fiscal Consolidation
Table 5: Borrowing Position (` crore)FY09 FY10 FY11 FY12 FY13
Actuals RE BE
Internal Borrowings
Net Borrowings 2,33,630 3,98,424 3,25,414 4,36,414 4,79,000
Gross Borrowings 2,73,000 4,51,000 4,37,000 5,10,000 5,69,616
Repayments 39,370 52,576 1,11,586 73,586 90,616
External Borrowings
Net Borrowings 11,015 11,038 23,556 10,311 10,148
Gross Borrowings 21,022 22,177 35,330 24,177 26,048
Repayments 10,007 11,139 11,774 13,866 15,900
The long-term gross internal market borrowing programme of the Government is envisaged at
`5,69,616 crore for FY13, 11.7% increase over the last year. Gross external market borrowings have
been estimated to grow by 7.7% to `26,048 crore in FY13.
Public debt for FY13 is expected to increase by 12% to `50,25,072 crore, of which internal debt
stock contributes 96% at `48,46,973 crore. Proportion of the external debt has been declining over
the years and stood at 3.5% in FY13 (BE). In order to maintain a healthy mix of internal and
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external debt the Government intends to explore other sources of external debt in the form of
sovereign bonds.
In FY12, the Government revised its borrowings upwards to `5,10,000 crore on account of the
shortfall in receipts. This brought about a sharp increase in the liquidity deficit leading to bank
borrowings of over `1,00,000 crore from the RBI through the LAF. The hardening of interest rates
alongwith the enhancement of the government borrowings in FY12 took a toll on the government
securities.
The Government is committed to prudent debt management in order to sustain public debt within
comfortable limits so that it does not crowd out private investment. Budget 2012-13 targets debt
stock to be 45.5% of the GDP, well ahead of the Thirteenth Finance Commission (TFC) targets of
50.5% of GDP.
Interest Payments Burden
Table 6: Trends in Interest payments of the Government
FY09 FY10 FY11 FY12 FY13
Actuals RE BE
Interest Payments (`crore) 1,92,204 219500 2,34,022 2,75,618 3,19,759
Growth (%) 12.4 14.2 6.6 17.8 16.0
Interest/Revenue Receipts (%) 35.6 37.2 29.7 35.9 34.2
The Governments interest payment burden increased by 17.8% to `2,75,618 crore in FY12 (RE).
However, Budget 2012-13 estimates a slight slowdown in this growth rate to 16.0%, with interest
payments burden amounting to `3,19,759 crore.
Implications
1. The implicit rate of interest on the government debt is expected to increase marginally from
6.6% in FY12 to 6.7% in FY13. Furthermore, the governments market borrowings are to
grow by`60,000 crore. This could add to the already prevailing liquidity pressures in the
system as well as interest rates.
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Current dividend liability of`6,735 crore to be fully discharged.
Excess of receipts over expenditure of`1,492 crore as against the budget amount of`5,258
crore
Operating ratio at 95%
Budget Estimates FY13
Freight load of 1,025MT
Passenger growth pegged at 5.4%
Gross receipts `1,32,552 crore
Ordinary Working Expenses `84,400 crore.
Dividend payment estimated at `6,676 crore
Operating ratio estimated at 84.9%
Surplus expected to be `15,557 cr.
Budget Implications
1. The expected decline in operating ratio in FY13 will need to be monitored as the drop expected
is quite sharp compared to the increase witnessed in FY12 (revised) over FY12 (budget). Share
of goods earnings could come down in case there is substitution to road transport.
2. With highest ever allocation of`60,100 crore, the budget looks positive on moving towards
building a strong infrastructure. The budget provides significant opportunities for private
investment through public-private partnership resources. In particular on account of the focus
being put on modernization, electrification, increasing the lines, use of solar energy etc, there will be a positive boost for related industries such as cement, steel, containers, carriages,
electrical equipment, cables, solar equipment etc.
3. The increase in freight rates across the board will have an impact on prices and will affect
goods that use railways as a mode of transport. A guesstimate is that for industry as whole the
average increase of over 20% in freight rates (will vary depending on the class as well as
distance) cost of production could increase by between 1-3% which will exert pressure on
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Industry Snapshot
India is the ninth-largest and one of the fastest growing aviation markets in the world. During
2011, domestic passenger numbers increased to 60.66 million passengers, a growth of 16.6%
y-o-y, primarily driven by Low Cost Carriers (LCC) segment (Source: Centre for Monitoring Indian
Economy).The growth momentum is expected to continue given the strong market fundamentals.
However, though the Indian aviation sector witnessed significant growth in passenger traffic over
the last few years, Indian carriers lost money in FY11 (refers to period April 2010 to March 2011)and are expected to post significant losses even during 12 months ending March 31, 2012. This is
primarily due to combination of low fares in a competitive market and sustained high costs on
account of high fuel cost, wages and rising debt levels. In these challenging circumstances, Indias
airlines are struggling to raise capital and even banks are wary of extending additional bank
facilities.
During January 2012, private carrier Jet group (Jet Airways + Jet Lite) was the market leader with
28.8% share, closely followed by Indigo with 20.8%, National Aviation Company of IndiaLimited (NACIL) with 17.1%, SpiceJet with 16.3%, Kingfisher Airlines with 11.3% and Go Air
with 5.8% (Source: Directorate General of Civil Aviation).
The key challenges for the industry are inadequate infrastructure, FDI restrictions, high taxation,
highly competitive domestic market, high fuel costs and rising debt levels.
Duty Structure
Travel Type Service Tax
(Before)
Service Tax
(After)
Impact
Domestic Travel (Economy Class) `150 Same as PY International Travel (Economy Class) `750 Same as PY Domestic Travel (Other than economy class) 10% 12% International Travel (Other than economy class) 10% 12%
AIRLINES POSITIVE
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The concessional rate on economy class is subject to a bar on taking CENVAT credit, but there is
no such bar for the tariff rate of 12% chargeable for first / business class passengers.
Sales Tax on Aviation Turbine Fuel (ATF):At present, sales tax on ATF varies from 4 per
cent to more than 30 per cent across the country.
Proposal and Impact
Budget proposals Impact on the industry
FDI in aviation not announced in Budget,
however, under active consideration
Airlines expected an announcement about
Government permitting FDI by foreign airlines in
the Indian aviation sector, which could have
eased tight liquidity position and provided the
much-needed relief.
Government has permitted direct import
of ATF by Indian Carriers, as actual users.
This will have positive impact on the profitability
on airlines as fuel cost comprises of around 40%
of total operating cost for airlines. However,
infrastructure & logistics challenges for
importing ATF remains a concern.
ECB for working capital requirements of
the airline industry for a period of oneyear, subject to a total ceiling of US
Dollar 1 billion.
Will help Airlines to get working capital at lower
rates. This should provide some respite to airlinesconsidering their huge debt position.
Withholding tax on interest payments on
ECB reduced from 20% to 5%.
Will help reduce the cost of borrowings.
Full exemption from basic custom duty on
import of parts of aircraft and testing
equipment. It is also proposed to fully
exempt both new and retreaded aircrafttyres from basic customs duty and excise
duty.
Will help Maintenance, Repair and Overhaul
(MRO) sector to become more competitive and
grow, which is presently at nascent stage.
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Excise Duty(%)
Before After Impact
Trucks 10+`10,000 12+`10,000 Two-wheeler 10 12
Three-wheeler 10 12
Proposal and Impact
Budget proposals Impact on the industry
Hike in excise duty
Small Cars : From 10% to 12% Other Cars*: From 22% to 24%
Other Cars#: From 22%+`10,000 to27%
The rise in the excise duty would result inprice hikes across all the segments in thepassenger car industry, which consecutively
would dent the demand by some extent.
Hike in custom duty for imported cars from 60%to 75%, where value of the vehicle exceeds USD40,000
Rise in custom duty on imported completelybuilt units (CBUs) on large cars and SUVs isalmost 25%. This will lead to considerable risein prices of luxury cars and UVs.
Imposing of 3% ad valorem excise duty on bodybuilding of commercial vehicle from flat rate of
`10,000
Increase in the excise duty on body buildingof commercial vehicles would exert extra
burden on end customers i.e. freight transportoperators.
Interest subvention schemes on short-term croploans continued at 7%. Further, additionalsubvention of 3% will be available for promptpayment
Continuation of interest subvention schemewould lead to higher farm income with smallfarmers and thereby push the demand formid-size and small tractors.
Investments towards infrastructure development(mainly roads and highways)
Increase of financing of infrastructureprojects through tax-free bonds from `30,000
crore to `60,000 crore Allocation of`25,360 crore on NHDP
proposal
Aggressive investments towards infrastructuredevelopment would drive the demand forM&HCV tippers.
Increase income tax exemption limit from`180,000 to `200,000
Minimal rise in disposable income due toincrease in the tax slab combined withincreased farm income will be the key driverfor two-wheeler demand.
*Indicates cars which have engine capacity more than 1,500cc in case of diesel and 1,200cc in case of petrol and length exceeding4 meters.
#Indicates cars having engine capacity more than 1,500cc in case of diesel cars and 1,200cc in case of petrol cars and exceeding4 meters.
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Impact on companies
Company Impact Comments
MSIL Compact and mini car segments are major revenue contributor for MSIL.
Hence rise in excise duty on large cars is not a major concern factor for the
company.
TML The commercial vehicle business of TML would be benefited from
aggressive investments proposed in infrastructure projects.
In passenger vehicle industry, the company will have to face challenge
to pass on the rise excise duty in the gloomy current scenario where the
industry is facing demand pressure as well as rise in competition levels.
The company will also have to pay higher custom duty on import of itsluxury cars from Jaguar and Land Rover.
M&M The commercial vehicle business of M&M would be benefited from theinvestments proposed in infrastructure projects.
In passenger vehicle segment, M&M product portfolio mainly consists
of vehicles with engine capacity greater than 1,500cc. Hence it will be
challenging to negate the pressure in demand owing to rise in prices
The tractor business of M&M is likely to benefit due to thecontinuation of interest subvention scheme.
ALL
Rise in allocation towards infrastructure to push demand for M&HCV
HMCL Price hike will be offset by rise in income-tax slabs
BAL Price hike will be offset by rise in income-tax slabs
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Industry Snapshot
Banking
Total bank credit for Scheduled Commercial Banks (SCBs) as on December 30, 2011 stood at
`4,365,640 crore, registering a y-o-y growth of 15.9%. The credit growth has been decelerating
continuously since December 2010 on account of economic slowdown coupled with tightening of
policy rates. The Incremental Credit-to-Deposit (ICD) ratio for all SCBs moderated from over
100% for twelve months ended January 2011, to 78.5% for twelve months ended January 2012. Inline with the slowdown in credit growth, the deposit growth has also started slowing down from
over 17% y-o-y level till September 2011 to around 15.7% level by January 2012. Money market
liquidity tightened significantly since November 2011 partly due to dollar sales by RBI. Despite the
tightening liquidity situation, the banks continue to maintain excess SLR in the range of around 5%
partly due to rising risk aversion among the banks as well as deployment of funds in Gsecs on
account of the rise in the Government borrowing programme.
With headline WPI standing at over 9.5% in H1FY12, the regulator continued to maintain ahawkish stand and cumulatively increased the repo rate by 175 bps in FY12. The banks however,
refrained from passing the entire impact of rise in cost of borrowings to prevent asset quality
pressures resulting in Net Interest Margin (NIM) of most of the banks seeing some pressure. On an
overall basis, provisioning expenses rose by around 30% on y-o-y basis in 9MFY12 on the back of
higher NPA provisioning by banks with the sharp increase in NPAs and RBI guideline mandating
higher specific provisioning for all NPAs. Consequently the overall Net Profit growth was muted at
around 6% year-on-year due to rise in provisioning cost as well as margin pressures. The overall
Gross NPAs of the banks covered in CAREs banking study (study covered 26 PSU and 13 Private
banks) stood at 2.88% of Advances) as on December 31, 2011. During 9MFY12, the absolute level
of Gross NPAs for these select 39 banks rose by over 40% y-o-y with Public Sector banks seeing a
jump of over 50% y-o-y. PSU banks NPA addition is due to migration to system based NPA
recognition as well deterioration in general economic environment. Capital adequacy ratio for the
banking system as a whole however continued to be comfortable with median capital adequacy ratio
standing above 12% as on December 31, 2011.
BANKING AND FINANCIAL SERVICES POSITIVE
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Budget proposals Impact on the industry
institutions including NABARD. Extension
of the scheme of capitalisation of weak RRBs
by another 2 years.
Rise in overall limit of issuance of tax free
bonds from `30000 last year to `60000 cr in
2012-13 by certain institutions such as
NHAI, IRFC, IIFCL, HUDCO, NHB and
SIDBI.
Financial Institutions to benefit from cost
effective funding avenues
To overcome the shortage of housing for
low income groups in major cities and towns,the government proposes to:
a) Allow ECB for low cost affordable
housing projects;
b) Set up Credit Guarantee Trust Fund
to ensure better flow of institutional
credit for housing loans;
c) Enhance provisions under Rural
Housing Fund from `3000 crore to`4000 crore;
d) Extend the scheme of interest
subvention of 1 per cent on housing
loan up to `15 lakh where the cost of
the house does not exceed `25 lakh
for another year; and
e) Enhance the limit of indirect finance
under priority sector from
`5 lakh to `10 lakh
Housing Finance Companies engaged in low and
middle income housing segment stand to benefit
on account of the rise in indirect finance housing
eligibility limit.
Allowing Qualified Foreign Investors (QFIs)to access Indian Corporate Bond market
Allowing Qualified Foreign Investors (QFIs) to
access Indian corporate bond market will help in
deepening debt markets in India and allow
companies especially non bank finance companies
to widen their resource base through capital
market borrowings.
Introduction of a new scheme called Rajiv
Gandhi Equity Savings Scheme. The scheme The government has introduced a tax exemption
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Budget proposals Impact on the industry
would allow for income tax deduction of 50
per cent to new retail investors, who investup to `50,000 directly in equities and whoseannual income is below 10 lakh. The scheme
will have a lock-in period of 3 years.
scheme (Rajiv Gandhi equity scheme) for equity
markets targeted at new investors and will
increase the retail participation in equity market.
This will improve the depth of the domestic
capital market.
Reduction in Securities Transaction Tax
(STT) by 20 per cent (from 0.125 percent to
0.1 per cent) on cash delivery transactions
Reduction in Securities Transaction Tax (STT) is
likely to have positive impact on the investors and
also benefit broking firms as there would be
increase volumes in equity market
Tax all services except those in the negative
list which also includes services of business
facilitators and correspondents to the banks
and insurance companies
This step is to increase financial inclusion and
take delivery of financial services to the door step
of the unbanked section of the population. This
would be one of the factors for the intermediaries
to act as business facilitators and correspondents.
Process of financial sector legislative reforms,
the Government proposes to move the
following Bills in the Budget Session of theParliament including The Micro Finance
Institutions (Development and Regulation)
Bill, 2012
The MFI bill is likely to remove the uncertaintyexisting in the microfinance sector on theregulatory front would make way for clear set of
guidelines for the MFIs to operate.
Impact on segment
Segment Impact Comments
Banking Sector PSU banks to benefit from capital infusion by GoI
Financial
Institutions To benefit from rise in tax free bond issuance as it would help in
raising funds at relatively finer rates
Housing Finance
Companies
To benefit from rise in housing loan eligibility limits for qualifying
as indirect priority sector lending by the banks
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Segment Impact Comments
Non Bank
Finance
Companies
To benefit from participation on QFIs in the bond market
Microfinance
To benefit from the exemption of business facilitators from
service tax
Introduction of Microfinance bill to remove uncertainty on the
regulatory front
Broking Firms
To benefit from reduction in STT
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Industry Snapshot
The Indian cement industry recorded a moderate growth of 5.1% in FY11 on account of
slowdown in construction activities due to prolonged monsoon, heavy winter, delay in execution
of infrastructural projects etc. During the first nine months of FY12, cement demand has
registered a growth of about 5.3% on a y-o-y basis. During the third quarter of FY12, the
quarterly cement demand picked up post monsoon and registered a growth of about 9.5% on a
y-o-y basis. The long-term cement demand in the country is expected to remain intact. Cement
demand will largely be driven by increased focus of the government on promotion of low-cost
affordable housing and infrastructure development.
Average cement prices have increased by about 10% from `253 per bag in FY11 to `278 per
bag in FY12. On the back of pick up in cement demand, especially during the third quarter of
FY12, quarterly average cement prices rose by about 13% to `284 per bag.
The cement industry has been grappling with cost pressure in FY12 due to rise in raw material
cost & freight charges, increase in prices of imported coal on account of rupee depreciation, etc.
However, the industry has managed to pass on the higher input cost through a series of price
hikes in the past few months.
Duty Structure
CustomsDuty (%)
Before After Impact Excise Duty
(` per tonne)Before After Impact
Coal 5% NIL
Retail- Price below`190 per 50 kg
bag
- Price above`190 per 50 kgbag
10% ad-valorem+`80
10% ad-valorem+
`160
12% ad-
valorem*+ `120
Bulk 10% ad-valorem
12% ad-valorem*
Clinker 10% ad-valorem+`200
12% ad-valorem
* An abatement of 30% has been notified on the Retail Sale Price.
CEMENT POSITIVE
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Proposal and Impact
Budget proposals Impact on the industry
Excise duty structure has been revised as per
details given in the above table.
This will lead to reduction in excise duty by about
`5-7 per bag.
Customs duty on coal has been exempted. Marginal reduction in the input cost is positive for
the cement industry.
The scheme of 1% interest subvention on
housing loan (for a loan amount upto `15
lakh for the cost of house not exceeding`25
lakh) is extended for the next fiscal.
The increased impetus of the government oninfrastructure development and affordable
housing will continue to drive the cement
demand.
ECB allowed for low-cost affordable housing
projects.
Allocation towards PMGSY has been
increased by 20% to `24,000 crore.
Allocation of the Ministry of Road Transport
and Highways for road development has
been increased by 14% to `25,360 crore.
Allocation to AIBP increased by 13% to
`14,242 crore.
Impact on companies
Company Impact Comments
UltraTech Reduction in cost (with reduction in excise duty and customduty on coal) and increased allocation towards infrastructure
projects is positive for the cement players. Further, continued
focus of the government on affordable housing will also augur
well for the cement companies.
ACC
Ambuja
Shree Cement Since the company uses pet coke as a fuel, the reduction in
custom duty of coal will have no impact on the cost structure.
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Industry Snapshot
Chemical Industry is highly diverse and primarily consists of basic chemicals, petrochemicals,
pesticides and agrochemicals, specialty and fine chemicals, drugs and pharmaceuticals, paints
and varnishes, dyestuff and inks, etc. The size of the Indian Chemical industry is estimated at
USD 108 billion and accounts for approximately 7% of the Indian GDP. The sector contributes
heavily to the export import segment of the country accounting for around13-14% of total
exports and 8-9% of total imports. In terms of volume, India is the third-largest producer of
chemicals in Asia, after China and Japan and 12th largest in the world.
The per capita consumption of chemicals in India is about 1/10th of the world average
indicating more room for growth.
Challenges faced by the industry are high prices of basic feedstock, SSI reservation/fragmented
nature of the industry, low R&D levels, low level of brand development, issues related to
dumping, environmental regulations etc.
Duty Structure
Customs Duty
(%)
Before After Impact Excise Duty
(%)
Before After Impact
Organic and
inorganic
coating
10 5 Overall 10 12
Boric Acid 5 7.5
Titanium dioxide 10 7.5
CHEMICALS NEUTRAL
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Proposal and Impact
Budget proposals Impact on the industry
Reduction of customs duty on
organic/inorganic coating material for
manufacturing electrical steel from 10% to
5%.
Expected to benefit companies engaged in
manufacturing of electroplating chemicals.
Customs duty on titanium dioxide is reduced
from 10% to 7.5%.
Expected to help manufacturers of dyes and
pigments. Titanium dioxide is a key input in the
paints industry and constitutes 12-15% of total
raw material cost.
Enhancement of customs duty on boric acidfrom 5% to 7.5%
Expected to negatively affect the insecticide andpesticide manufacturers.
Higher excise duty of 12% ad valorem Expected to have a negative impact acrosschemical manufacturers. However it is expectedto affect small unorganized players more.
Impact on companies
Company Impact Comments
Asian Paints, Kansai Nerolac
Paints,Berger Paints and ICI Profitability margin is expected to improve due toreduction in customs duty of titanium dioxide (one of
the key inputs).
Grauer & Weil (India)
Decline in input prices is expected to be offset by risein excise duty.
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Industry Snapshot
Construction activity is an essential part of countrys growing need for infrastructure and
industrial development. Construction as a percentage of GDP has been in the narrow range of
7.9-8.1% in the past six years. Considering first three quarters of FY12, the construction growth
slowed down to 4.2% from 7.7% registered in the corresponding period of previous year. The
slowdown in construction is mainly on account of delay in the project awarding & execution
due to environmental clearance hurdles, political instability in some states etc.
Since last couple of years, margins of construction companies are under pressure due to muted
topline growth led by the delay in execution of orders, rising interest rates and fairly high prices
of key input materials like steel, cement, bitumen, copper.
At the end of third quarter of FY12, the ratio of order backlog to net sales (four trailing
quarters) of the major construction companies was in the range of 2.6-5.5 times. However,
execution of the order backlog remains a key challenge due to various constraints like land
acquisition, environmental clearances, political issues etc.
Duty Structure
Excise Duty (%) Before After Impact
Cement
Retail
- Price below`190 per 50 kg bag
- Price above `190 per 50 kg bag
- Price above `190 per 50 kg bag
10% ad-valorem +`
80 per tonne10% ad-valorem +`160 per tonne
12% ad-valorem* +
`120 per tonne
Bulk Cement 10% ad-valorem 12% ad-valorem*
Steel 10% 12%
*An abatement of 30% has been notified on the Retail Sale Price of cement.
CONSTRUCTION POSITIVE
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Proposal and Impact
Budget proposals Impact on the industry
The government has proposed to issue tax free bonds to the tune
of`60,000 crore through various infrastructure institutions.
The sustained focus of the
government on
infrastructure development
especially power, roads,
irrigation etc through
increased allocation to
schemes like PMGSY,
RIDF, AIBP would be
beneficial for the
construction sector. Also,
continued focus of the
government on the low-
cost and affordable housing
will augur well for the
sector. The easy availability
of funds and relaxation in
ECB norms will be positivefor the construction
industry.
Allocation of the Ministry of Road Transport and Highways for
rood development has been increased by 14% to `25,360 crore.
Allocation towards the PMGSY has been increased by 20% to
`24,000 crore.
Allocation to AIBP increased by 13% to `14,242 crore. In order
mobilize large resources to fund irrigation projects, government
owned Irrigation and Water Resource Finance Company is being
operationalised.
Allocation towards RIDF has been increased to `20,000 crore.
The scheme of 1% interest subvention on housing loan is extended
till next fiscal for a loan amount upto `15 lakh, with the cost of
house not exceeding`25 lakh.
ECB allowed for low cost affordable housing projects.
The rate of withholding tax on interest payment on ECB forPower, Roads, Ports & Shipyards, affordable housing, Dams etc. is
proposed to be reduced from 20% to 5% for next 3 years
ECB is permitted to part finance rupee debt of existing power
projects.
Impact on companies
Company Impact Comments
IVRCL Infrastructures & Projects Increased allocation towards variousinfrastructure projects is expected to result inincreased order inflow to the construction
companies.
Hindustan Construction Company Gammon India Ltd Patel Engineering Ltd Nagarjuna Construction Company
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Industry Snapshot
Educational services consist of Academic, Non-Academic, Vocational, Technical and Other
certified and training courses. India has the third-largest education system in the world after
America and China with around 13.5 lakh schools and 31,000 higher education institutes (HEIs).
It is home to the largest population in the age group 0-24 years.
The growth in the personal disposable income of the Indians, growing contribution of the
services sector to Indias GDP thereby requiring greater number of qualified youths and theincreasing thrust of the GoI to improve the countrys educational system and eventually the
literacy rates has resulted in manifold growth of the Indian Educational sector since the last
decade. Correspondingly, the countrys literacy rate has improved from 64.8% during 2001 to
74% as per the Census 2011. With the growing penetration of educational concepts such as Pre-
school, Information & Communication Technology (ICT) in schools etc the market size of the
Indian Education industry aggregated US$66.6 bn during FY11. Importantly, over the years, the
role of private sector in education has increased with the setting-up of institutes especially in the
K-12 & Higher education segment. Even, the GoI has emphasised on Public Private Partnership
(PPP) in education so as to expand the reach and provide quality education to students in small
towns & villages.
The growth in the Indian Education System is expected to be fuelled by growth in disposable
income, acceptance of vocational courses, GoIs orientation towards Public Private Partnership,
entry of corporate and foreign educational institutions and growing focus on distance education
mode.
Duty Structure
Service Tax (%) Before After Impact
Service Tax on other educational services such as
coaching class etc (excluding pre-school and school
education, recognised education at higher levels and
approved vocational education)
10 12
EDUCATION POSITIVE
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Proposal and Impact
Budget proposals Impact on the industry
Budgetary allocation for Right to Education
scheme under the Sarva Shiksha Abhiyan
(SSA) at `25,555 crore; y-o-y increase of
21.7%
In an effort to improve the literacy rates of the
country, the GoI has been emphasising on
providing subsidised education to the populace
specially in the rural India. The increase in
budgetary allocation under the various
educational schemes of GoI augurs well for the
private players in the industry in terms of greater
flow of orders to be received by the private
players from the government bodies.
Budgetary allocation for Rashtriya
Madhyamik Shiksha Abhiyan (RMSA)
scheme at `3,124 crore; y-o-y increase of
29%
6,000 schools proposed to be set-up at block
level as model schools during the XIIth plan
period. Of the same, 2,500 schools are
proposed to be set-up through the PPP
mode
The setting-up of 2,500 schools through the PPP
mode would result in greater involvement of the
private industry players thereby increasing their
penetration in the brick-n-mortar form of
education service.
Budgetary allocation of `1,000 crore to
National Skill Development Fund (NSDF).
This would result in increased demand from the
GoI for skill development-related programmes
being offered by the private players in order to
increase the number of skilled youths in the
nation.
Service tax on Pre-school and school
education, recognised education at higher
levels and approved vocational education
exempted
The exemption from service tax; being an indirect
form of taxation would be passed on to the
students / consumers in the form of lower cost of
educational services. However, the exemption
remains restricted to certain categories of
educational services only.
Budgetary allocation for Mid Day Meal
programme in schools at `11,937 crore, y-o-y
increase of 15%
No impact on the private players in the industry
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Impact on companies
Company Impact Comments
Everonn Education Ltd. The increased budgetary allocation by the GoIunder various educational schemes such as SSA,
RMSA and skill development / vocational
education augurs well for private players in the
education industry with the allocation expected
to result in higher inflow of orders to these
players especially in the Information and
Communication Technology (ICT) segment of
education. Further, the announcement of set-up
of schools through the PPP mode during the
XIIth plan period is expected to enable these
players establish a greater footprint in the brick-
n-mortar form of education service.
Compucom Software Ltd.
Educomp Solutions Ltd.
Core Education &
Technologies Ltd.
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Industry Snapshot
The Indian fertilizer industry is dominated by urea comprising around 50% of the volume of
fertilizer consumption followed by di-ammonium phosphate (DAP; 20%), complex fertilizers
(17%), single super phosphate (SSP; 6%) and muriate of potash (MOP; 7%).
The skewed consumption is a result of uneven subsidy policy reforms in the fertiliser sector.
The Government brought most fertilisers under nutrient-based subsidy (NBS) scheme from
April 1, 2010; however, urea remains under the old subsidy regime. The New Pricing PolicyStage III for urea units that ended on March 31, 2010 was extended until the formulation of the
new policy. As a result urea subsidy follows fixed retail price and floating subsidy and all other
fertilisers under NBS follow fixed subsidy with floating prices. Hence, the government bears
most of the input price fluctuation through subsidy for urea, whereas some amount of price
fluctuation is passed on to the farmers through retail prices in other fertilisers
The fertilizer sector is expected to remain a priority for the Government due to its larger role in
the national food security. However, the new allocation of natural gas may not increase in thenear term due to reduction in output from a major source in KG basin and the existing
allocation may get hampered if the output is reduced further. This is likely to necessitate higher
import of gas and investment in THE overseas companies with firm tie-up for gas.
The steps the Government takes to bring urea under NBS scheme and move towards the direct
transfer of subsidy to the farmers would remain crucial.
Duty Structure
Customs Duty
(%)
Before After Impact Excise Duty
(%)
Before After Impact
Urea 10% 10% Urea Nil Nil
DAP 5% 5% DAP Nil Nil
Complexes 5% 5% Complexes Nil Nil
Rock Phosphate 5% 5% Rock Phosphate Nil Nil
FERTILIZER POSITIVE
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Proposal and Impact
Budget proposals Impact on the industry
Eligibility of capital investment in the
fertilizer sector under viability gap funding
under the scheme of support to public
private partnership
The proposal would boost up investment in the
sector and would see more private participation
Reduction of withholding tax on interest
payments on external commercial
borrowings from 20% to 5%
Would bring down the effective rate of interest
on the ECBs and would make projects more
viable
Increase in investment linked deduction ofcapital expenditure from 100% to 150%
The proposal would make capital investmentmore attractive with better returns to equity
Import of equipment for fertilizer plants, for
initial setting up or substantial expansion, to be
fully exempt from customs (5% earlier) duty
for three years
The tax exemption would reduce the landed cost
of equipments and encourage investments
Proposal to implement direct transfer of
subsidy to the farmers in phases
If implemented, would reduce the working-capital
requirement of fertilizer companies, save their
interest costs and improve their capital structure.
It would also benefit farmers and would reduce
expenditure on subsidies by encouraging judicious
use of fertilizers
Increase agricultural credit by`1 lakh crore
to `5.75 lakh crore in FY13
Interest subvention for short term crop loan
at 7% and an additional subvention of 3%
for prompt paying farmers
Proposal to allocate `10,000 crore toNABARD for refinancing the regional rural
banks to in-turn extend short term crop
loans to the small and marginal farmers
Fertilizer demand would to get a fillip on account
of cheaper and easy credit availability to the
farmers
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Impact on companies
Company Impact Comments
IFFCO The budget proposal would increase the demand forfertilizers on the back of cheaper farm credit. While
the direct transfer of subsidy, if implemented, would
have favourable impact on interest cost and
improve their capital structure.
The budget proposal makes a conducive
environment for capital expenditure, however, the
extent of gas availability would remain crucial for
new capital investment decisions.
The budget remained silent regarding bringing the
subsidy on urea under NBS scheme leaving a cloud
of uncertainty.
GSFC Ltd.
GNFC Ltd.
Tata Chemicals Ltd.
Nagarjuna Fertiliser and
Chemicals Ltd.
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Industry Snapshot
The Indian consumer goods industry remains highly fragmented and is classified into two major
segments namely, consumer durables and Fast Moving Consumer Goods (FMCG), which
comprises a wide array of products. The Indian FMCG sector is the fourth-largest sector in the
economy accounting for 5% of the total factory employment in the country.
The industry is mainly driven by changing demographic pattern, increasing disposable income,
entry of new players, greater product awareness and affordable pricing/financing options whichis leading to robust growth of the consumer durables industry.
Penetration level of consumer goods in rural areas comprising 70% of Indias population is still
low indicating the untapped market potential. Wider marketing and distribution network remains
key to increase penetration and market share.
Challenges faced by the industry are adverse monsoon (at times), spurious products, illegal
imports, cost escalation, intense competition, high advertisement cost and complex distribution
system besides the recent economic slowdown.
Duty Structure
Customs Duty
(%)
Before After Impact Excise Duty
(%)
Before After Impact
LCD/LED panel 5 0 General Mfg 10 12
Memory card
components formobile handset
5 0 Processed Soya 10 6
Proposal and Impact
Budget proposals Impact on the industry
Increase in standard excise duty from 10% to
12%
Excise duty on 130 consumer items have been
increased from 1% to 2%
With higher competition in most segments, it will
be difficult for companies to pass on the higher
duty to consumers. Hence, margins will be
impacted.
FMCG AND CONSUMER DURABLES NEUTRAL
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Budget proposals Impact on the industry
Increase in Tax Slabs Higher disposable income in the hands of
consumers will be positive to FMCG andconsumer durable industry
Impact on companies
Company Impact Comments
Nestl Custom duties on certain products like probiotics and coffee vending
machines have been reduced from 10% to 5% which is offset by rise
in excise duty.
HUL Decrease in excise on certain food products like processed soya from10% to 6% being offset by increase in general excise duty from 10%
to 12%.
Blue Star Rise in excise duty cannot be easily passed on to consumers given
high competition
Eureka Forbes
Rise in excise duty cannot be easily passed on to consumers given
high competition
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Industry Snapshot
India is the world's largest processing centre for G&J and the industry contributed
approximately 17.5% to the total export earnings of the country during FY11.
In FY11, the G&J domestic market size was valued at approximately US$27.5 billion and
exports amounted to US$43.14 bn. CARE Research expects sale of domestic G&J sector, to
grow by approximately 15% CAGR till FY2016 and G&J export market to grow at 12% CAGR
during the same 5 year period.
The key drivers for growth in the domestic market will be higher disposable income, rising
young population with the urge to spend, higher number of working women and conscious
marketing efforts of the companies. Consumption growth will come from metropolises and
Tier-I and II cities.
Duty Structure
Customs Duty
(%)
Before After Impact Excise Duty
(%)
Before After Impact
Gold bars &gold coins(`per 10 gm),Platinum
2 4 Gold bars &
gold coins(`per 10 gm)
2 3
Silver(`per kg)
6 6 Silver and articlesof silver
1 0
Non StandardGold
5 10
Gold and articlesof gold
1.5 3
C&P Colouredgemstones
0 2
GEMS AND JEWELLERY NEGATIVE
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Proposal and Impact
Budget proposals Impact on the industry
Increase in custom duty on gold bars, coins
and gemstones alongwith refined gold
The GJ products would become more expensive
and would impact purchasing power of the
consumers as prices are already high of these
products.Custom duty on polished colored gems has
been introduced at 2% and on platinum it
has been increased to 4% from 2% earlier
Impact on companies
Company Impact Comments
Gitanjali
Gems Though the companies will pass on the increased duty, purchasing power
of the consumers would be impacted due to already high prices of these
products and high inflation. Sales volumes could see slight impact.Titan
Industries
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Industry Snapshot
The Indian healthcare industry is estimated to be valued at `2.8 tn in size in FY11, growing at a
5-year CAGR of 13.1% p.a. The hospital industry accounts for roughly 70% of total healthcare
market. The Indian hospital industry can be broadly categorized as 1) highly fragmented in nature
due to large presence of unorganized players, 2) capital-intensive with long gestation period, 3)
positive supply-demand fundamentals, 4) favourable government policies and 5) attractive
business model for long-term investors with project IRR of 15-17%.
Indian government targets to increase the share of public expenditure on health to at least 2.0%-
2.5% of GDP by the end of 12th five year plan (FY13-17) from the current level of around 1.3%
of GDP, which is well below the emerging market average of 3.0%. The government has used its
own resources to focus on delivery of effective and affordable healthcare services to the
vulnerable sections of population by setting up primary clinics in rural areas, while encouraging
private sector to meet the growing demand of quality health services in the form of favourable
investment policies.
Organized corporate hospitals form
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Budget proposals Impact on the industry
Increase in investment-linked deduction of
capex from 100% to 150% u/s 35AD
At present, the government allows 100%
deduction of capex (excluding cost of land,goodwill and financial instruments) for setting
up a new hospital with at least 100 beds
anywhere in India under Sec 35AD. The
proposed increase in investment-linked
deduction is expected to boost more private
investment into the sector.
Impact on companies
Company Impact Comments
Fortis
Healthcare The increase in investment-linked deduction of capex from 100% to
150% will positively benefit the company on the ongoing/new capex plan
Apollo
hospital The increase in investment-linked deduction of capex from 100% to
150% will positively benefit the company on the ongoing/new capex plan
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Industry Snapshot
Indian Logistics industry is highly fragmented and can be classified into seven broad categories:
rail freight, Container Freight Stations/ Inland Container Depot, Multi-modal Transport
Operator, coastal shipping, trucking, warehousing and express logistics. However over the past
few years the concept of third party logistics (3PL) have evolved which involves bundling of
various logistics services such as warehousing, inventory management, transportation, freight -
forwarding and packaging.
The domestic logistics industry is growing at 8-10% per annum and is currently estimated at
USD 225 billion. The warehousing segment which forms an important constituent of logistics
value chain is dominated by small players with limited capacity. As of March 2011, India has a
warehouse space of around 1800-2000 million sq ft. However, most of the warehouses in India
are small in size- between 5000 to 25,000 sq ft as compared to 2,50,000 to 1 million sq ft in the
US or Western Europe.
The overall cost of the logistics in India is estimated to be 13% of GDP. This is on the higherside as compared to 8-9% of the GDP in US. The reason for the same being structural
inefficiencies resulting from poor infrastructure, inconsistent tax system, rail haulage rates,
wastages in truck transport due to congestion, octroi duty on truck transportation and no tax
incentives. The major growth drivers for the sector would be increasing investment in
warehousing, CFS/ICD and Multimodal Logistics Park, reduction of documentation and
introduction of GST (Goods and Service Tax), uniform toll policy, granting of infrastructure
status to the sector as a whole etc.
Duty Structure
Service Tax (%) Before After Impact
Service Tax 10% 12%
LOGISTICS & WAREHOUSING NEUTRAL
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Proposal and Impact
Budget proposals Impact on the industry
GST introduction timeline not announced The expected benefits to the industry remains
delayed.
Investment linked tax deduction of capital
expenditure at an enhanced rate of 150% as
against the current rate of 100% for cold
chain facility and warehouses (including
CFS/ICD)
Expected to draw fresh investments from
unconventional sources thus enhancing the
storage capacity.
Big boost to grain storage capacities
Central assistance of `18,500 crore (over aperiod of 5 years) to be provided to the Delhi
Mumbai Industrial Corridor.
Expected to expedite the work on the same,improving the transportation efficiency.
Several measures to increase investments in
roads
Reduction in transportation bottlenecks
Impact on companies
Company Impact Comments
Continental Warehousing
Corporation (Nhava Sheva) Enhanced benefits for investment linked
deductions
National Collateral Management
Services
Boost to grain storage capacities with
enhancement of investment linked deduction on
capital expenditure and funding available to
warehouse receipts.
Agility Logistics
Rise in service tax rate is expected to affect the
profitability
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Industry Snapshot
Media and Entertainment industry is highly fragmented and is classified into various segments
namely, Television, Print, Film, Radio, Music, Out of Home, Animation and VFX, Gaming and
Digital Advertising. As per FICCI KPMG Report, Media and Entertainment industry grew at
11.7% yoy in 2011 to `728 bn backed by digitalisation, increasing penetration in Tier 2 and Tier
3 cities, regionalisation and new media business. Television (45%), Print (29%) and Film (13%)
continue to be the major contributing sectors to the industry. The advertising segment, which is
a key contributor to the M&E industrys revenue (41%), grew at 13% yoy in 2011 to `300 bn
wherein Print Segment accounts for 46% of the advertising pie.
Industry is estimated to grow at CAGR of 14.9% (2011-2016) driven by strong growth in
segments like gaming, digital advertising, Radio and Animation & VFX. However similar to the
past trend, Television (CAGR growth (2011-16)): 17% and Print (CAGR growth (2011-16)): 9%
followed by Film (CAGR growth (2011-16)): 10% shall continue to dominate the sector. Going
forward, the potential for advertising spends remains strong and is expected to grow at a CAGR
of 14.3% (2011-2016) to reach`
586 billion in 2016.
Some of the key growth drivers for the sector are increasing Digitalisation due to changing
regulatory policies, Regionalisation, New Media and Social Media. Challenges for the sector (like
piracy and inadequate industry measurement systems) leading to revenue leakages are being
addressed albeit gradually.
Duty Structure
Service Tax (%) Before After Impact
Service Tax on copyrights relating torecording of Cinematographic films
10 0
Proposal and Impact
Budget proposals Impact on the industry
Service Tax exemption on copyrights relating
to recording of Cinematographic films
Lower cost for various players in the value chain
of Film Industry
MEDIA AND ENTERTAINMENT POSITIVE
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Customs Duty (%) Before After Impact Excise Duty (%) Before After ImpactZinc Concentrates 2.5 2.5 Refined Lead 10 12
Refined Zinc 5 5 Non-Coking Coal 0 0 Lead Concentrates 2.5 2.5 Petroleum Coke 10 12
Refined Lead 5 5 CalcinedPetroleum Coke
10 12
Non-Coking coal 5 0
Petroleum Coke 2.5 2.5
Calcined PetroleumCoke 0 0
Proposal and Impact
Budget proposals Impact on the industry
Increase in Excise Duty from 10% to 12%
on all non-ferrous metal products.
Increase in excise duty is likely to be completely
passed on to the end-users, owing to the positive
demand-supply outlook.
Relaxation in Customs Duty for thermal coal
from the existing 5% to Nil and nickel ore
and concentrates from 2.5% and 7.5% to Nil
Relaxation of Customs Duty on coal from the
existing 5% to Nil is likely to reduce cost of
captive power generation plants. Further
relaxation in customs duty for nickel ore and
concentrate will prove beneficial in importing
cheaper raw material requirements.
Impact on companies
Company Impact Comments
Sterlite Industries
India Ltd. Complete pass through of rise in Excise duty and partial
benefits in cost reduction to the extent of imported coal if any.
Hindalco Ltd.
Complete pass through of rise in Excise duty and partialbenefits in cost reduction to the extent of imported coal if any.
NALCO
Complete pass through of rise in Excise duty and partialbenefits in cost reduction to the extent of imported coal if any.
Hindustan Zinc Ltd.
Complete pass through of rise in Excise duty and partialbenefits in cost reduction to the extent of imported coal if any.
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Industry Snapshot
Oil & Gas sector is dominated by few players mainly Public Sector Undertakings. The sector
primarily consists of three segments namely Exploration & Production aka upstream, Refining
and Marketing. The sector caters to the energy needs of the economy and hence is directly linked
to the economic activity of any country or region. It is a highly regulated sector and operated
primarily by government-promoted companies.
Prices of sensitive petroleum products are regulated by government hence oil marketing
companies incur huge under-recoveries. The 9-month under-recovery reported at the end of
December 2011 was `97,313 crore. The continued incurrence of under-recoveries by Oil
Marketing Companies OMCs is adversely affecting their financial and liquidity position.
Borrowing of OMCs (in thousand crores)
Source: RAJYA SABHA STARRED QUESTION NO. 126
Our economy is highly dependent on imported crude oil for various petroleum products as the
domestic crude oil production merely accounts for 20 per cent of the consumption. This makes
us further vulnerable to not only international crude oil prices but also to exchange rates.
Falling output of indigenous natural gas has made us more dependent on the international
markets for LNG imports. The dependency on LNG is paralyzed by infrastructure bottlenecks
such as regasification capacity.
Diesel contributes to around 40 per cent of all petroleum products in India followed by LPG and
Petrol. India possesses excess refining capacity and therefore exports petroleum products except
for Liquefied Petroleum Gas wherein we are in deficit and import LPG.
OIL AND GAS NEGATIVE
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Duty Structure
Customs Duty Before After Impact
Liquefied Natural Gas LNG 5% Nil
Cess on Crude Oil Imports 2,500/MT 4,500/MT
Proposal and Impact
Budget proposals Impact on the industry
Oil & Gas pipeline
infrastructure eligible forviability gap funding
The proposal would act like a catalyst thereby increasing
investments into the pipeline infrastructure.
Removal of 5 per cent custom
duty on LNG imports
Currently, regasification capacity is in deficit i.e. there is ample
demand for imported LNG. Hence removal of custom duty
would not have any impact on the current situation.
Increase in cess on imported
crude oil from `2,500/MT to
`4,500/MT
India is heavily dependent on imported crude oil. The proposal
would adversely impact on both refiners as well as marketers.
The exporters would not be able to pass on the cess to importers
as prices of petroleum products are determined in Internationalmarkets. Further, the budget was not able to throw light on
much awaited petroleum product pricing mechanism. The
present opaque pricing mechanism of petroleum products would
adversely impact the industry considering the mounting subsidies
on the back of increasing crude oil prices. The new cess rate on
imported crude oil would only amplify the worsening situation.
Impact on companies
Company Impact CommentsPetronetLNG
Removal of 5% customs duty on LNG will have neutral effect on thecompany as it is already running full capacity.
Reliance Largest refinery and biggest importer of crude oil would be adverselyimpacted by the increase in cess on imported crude oil.
GAIL GAIL, the major gas transporter would slightly benefit from the proposedinclusion of pipeline infrastructure in viability gap funding. There wasno solution to the core problem of acquisition of land for laying pipelines.
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Industry Snapshot
India is the 15th largest paper manufacturer in the world, accounting for around 2.5% of the
worlds output. Demand for paper sector is closely-linked to economic activity as demand has
grown at an average of 0.9x multiple of GDP in the past 5 years. The industry can be broadly
characterized as 1) capital, energy and water intensive, 2) highly fragmented structure and 3) poor
economies of scale due to use of obsolete technology. Raw-material, energy and stores and
spares (including chemicals) forms about 75-80% of the total operating costs for the paper
industry.
India is selfsufficient in most paper segments, except for newsprint and higher grades of P&W
papers. The country imports roughly 35% of coated woodfree paper demand and 50% of
newsprint demand. On the raw-material front, the industry imports roughly 33% of its pulp
requirement (both wood and recycled) to meet the domestic demand.
The industry has experienced a very sharp fall in margin in FY12 due to imbalance of demand-
supply fundamentals and significant increase in raw-material and fuel costs. The domestic paperproducers are finding difficult to pass on the costs due to significant increase in domestic
capacity and increase in imports. As per the recent statistics, paper imports as a percentage of
consumption has increased from 22% in March 2011 to 31% in July 2011.
Duty Structure Finished goods
Customs Duty(%)
Before After Impact Excise Duty(%)
Before After Impact
Paper &Paperboard
10 10 Paper &Paperboard
5 6
Newsprint Exempt Exempt Newsprint 5 6
PAPER AND PAPER PRODUCTS NEGATIVE
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Duty Structure Raw-material
Customs Duty (%) Before After Impact
Wood Pulp 5 5
Wastepaper 2.5 0
Coal 5 0
Proposal and Impact
Budget proposals Impact on the industry
Increase in excise duty from 5% to 6% Paper players may face difficulty to pass on theentire increase in excise duty to end customers
due to excess supply over demand
Increase in excise duty on chemicals & other
inputs from 10% to 12% and decrease in
custom duty on wastepaper/coal from
2.5%/5% to nil
Profitability of the paper industry will be
adversely impacted as the impact of increase in
excise duty on chemicals and other inputs would
more than offset the benefit from exemption of
custom duty on waste paper and coal
Increase in budgetary allocation for education
by 21% to `74,000 crores in FY13
Will positively impact the demand for printing
and writing papers
Impact on companies
Company Impact Comments
Emami
Paper The impact of hike in excise duty from 5% to 6% on finished products
and increase in excise duty on chemicals & other inputs from 10% to
12% would more than offset the benefit of exemption of custom duty
on waste paper and coal
BILT/JK
Paper Margins would be adversely impacted due to retention of import duty
on finished products and wood pulp, hike in excise duty on finished
products and other inputs
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Industry Snapshot
The Indian Pharmaceutical Industry (IPI) has a market size of`117,860 cr as on March 2011
and is expected to grow at a CAGR of 13.4% between FY10 and FY15E.
The branded generics dominate about 90% of the total sales which includes the OTC segment
and the remaining 10% constitutes of commodity generics. Going forward, CARE Research
believes there will be increased demand of drugs for lifestyle related diseases such as oncology,
obesity, respiratory, cardiovascular, CNS diseases and immune system disorders given rapidurbanization and increase life-expectancy.
Indian pharma industry exports to more than 200 countries including highly regulated markets
like the US and Europe. Export market which constitutes 41% of the total IPI sales in FY2011
has shown a robust growth rate of approximately 19% y-o-y over the 5-year period ending
FY2011. Contract Research & Manufacturing Services is also considered an important growth
driver for pharma exports
CARE Research expects this positive trend in the Indian pharmaceutical industry to continue in
the coming years on the back of its manufacturing prowess coupled with a large domestic
market having strong macroeconomic growth, expansion of healthcare infrastructure (private
and public), rising incidence of chronic diseases and healthcare penetration to the extended
urban and rural regions.
Duty Structure
Customs Duty (%) Before After Impact Excise Duty(%)
Before After Impact
Bulk Drugs & Vaccines 5 5
Bulk Drugs & Vaccines 10 12
Formulations 10 10
Formulations 5 6
Medical Devices 5 5
Medical Devices 0 0
PHARMACEUTICALS NEUTRAL
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Proposal and Impact
Budget proposals Impact on the industry
Extended the weighted deduction on R&D
expenditure to 200% for in-house research
for the next five years till FY2017
Positive for the companies as this would widen
the scope of R&D in the industry
MAT announced for partnership units Negative for companies that have partnership
unit, as it would result in higher tax outflow.
Impact on companies
Company Impact Comments
Sunpharma
Industries
The share of profit from the partnership unit holding 97.5%(approximate 30% of Sunpharmas revenue) would witnessadditional tax burden.
Dr. Reddys Extension of weighted R&D deduction till FY17.
Cadila Healthcare The share of profit from the partnership unit holding 96%(approximately 20% of Cadilas revenue) would witness
additional tax burden.Ranbaxy Lab
Extension of weighted R&D deduction till FY17.
Divis Lab Excise duty increase on bulk drugs and formulation would bepassed on to innovator companies
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Industry Snapshot
Historically, Indian power sector commissioned only half the targeted capacity addition for most
of the 5-year plans. However, with private sector entry, the country added ~52.6GW in 11th
Plan (v/s initial target of 78 GW) till February, 2012. At this juncture, the Indian Power sector is
grappling with twofold problems-1) financial distress of distribution companies leading to
inability to pay and 2) fuel shortages leading to capacity under-utilization.
The power sector is facing acute coal shortage as domestic coal production grew only at 4.6%CAGR during FY09-11, vis-a-vis a demand growth of 6.6%. The 12th Plan capacity addition is
expected to be 76GW, with ~60GW as coal based. However, the existing and upcoming power
plants are likely to face acute coal shortage due to Coal Indias inability to ramp up coal
production