kbsl_consensus budget expectation

8/14/2019 KBSL_Consensus Budget Expectation

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Summary

This report will provide you with details regarding the expectations form the Budget 2009. Inthis we have not tried to showcase the expectations we have from the budget but haveprovided the consensus expectations of different brokerage houses/institutions

The budget will be important from the perspective of the industry and the individuals becauseit is being touted as the beginning of the end for the fiscal stimulus which was provided last

year to drag the economy out of the fears of recession

What will be important when the Finance Minister delivers the speech this time around iswhat he has in store for the country. From an industrial point of view it would be expectedthat the stimulus measures are allowed to continue while hard run economists would want aroll back of stimulus to make the long term growth story sustainable and reducing the risk of

an increased deficit

We believe that as most of the budgets the MEDIA has hyped this budget too as a gamechanger for the markets and industry. However, in reality is that the government shouldpresent a stringent budget as it is not under any pressure from any allies in presenting aneconomically unviable, politically favorable, aam aadmi budget


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Agenda

Highlights

Fiscal deficit

Rising Subsidy bill

Stimulus measures provided by the Government

Can the stimulus be rolled backPre/Post budget movements

Sectoral Consensus Expectations


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Budget 2010 - Tightrope Walk

- Business Standard


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Highlights

The focus of the Finance Minister would be on improving the fiscal deficit situation

which is being touted as the catalyst for the withdrawal of the stimulusThe street is expecting the FY11 deficit to be around 5.5% of GDP, and hence any

figure above that could highly disappoint the market and can lead to a selling pressure

While issues like FDI relaxations/allowance, and implementation of GST may be

addressed, other critical issues like labor reforms, pension reforms may need broader

political consensus. Direct Tax code is also an issue which might be addressed and

clarification on the framework might be given

The Government is expected to bring down the fiscal deficit by measures such as

revenues from auction of 3G auction, disinvestment and increasing excise duties and

service tax. While disinvestment and spectrum sale will bring in one time revenue, we

expect it certainly to be of much help to a Government which is serious on bringing

fiscal prudence back after the year of low duty structure

The Government is set to continue with its expenditure on social benefit schemes

which act as a measure in improving rural income and bridging the divide between the

rich and the poor. However reforms rolled out to industry are expected to be withdrawn

because demand seems to be back rolling as evident from the fast growng IIP numbers

We expect no major change to come in the tax structure considering GST and Direct

tax Code are being drafted for FY11. The Govt. Stance on MAT will also be underreview but there are no major changes expected in the indirect tax structure


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The FM is faced with the task of bringing

back the fiscal deficit to sustainable levels.

This arduous task would require the FM tocut down on expenditure given on subsidies

and as fiscal stimulus

If the finmin does not roll back the excise

cuts and stimulus packages, then the deficit

position could worsen

The budgetary expenditure will be relived

from the burden of the Sixth Pay

Commission Arrears and the farm loan

waiver which because of being a one time

expenditure wont reflect this time around

However we believe that any decline in theexpenditure will be offset by the increased

spending on public infrastructure specially

roads and highways

The government is also expected to

reduce the fiscal deficit by disinvestment and

revenues from the 3G auction

Fiscal Deficit

Fiscal de ficit as a % of G

0

1

2

3

4

5

6

7

8

FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10

RE

FY11

BE

Source Revenue in Rs. Crore3G Auction 35000NMDC FPO 15300SAIL FPO 18000Coa In ia IPO 10000

Additional Revenue estimated in the FY10

11


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Mounting debt burden of the government

The government has been increasing its debt constantly thus increasing its fiscal deficit toaround more than 6%

Internal debt has increased by around 70% over the five years while external debt hasincreased by around 46% over the same period

The government has been randomly taking debt from IMF, World Bank and other big foreignfinancial institutions, which is directly putting pressure at the budget-deficit and thus on the

economys growth and prosperity

Particulars

(in Rs.00 crore)

2005-06 2006-07 2007-08 2008-09 2009-10

Public Debt 14840.01 16476.90 19203.90 21360.85 24946.20

Internal debt 13897.58 15449.75 18083.59 20144.51 23569.39

External debt 942.43 1027.15 1120.30 1216.34 1376.80

Other Liabilities 7761.43 8909.05 9170.35 9999.90 10008.31


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Stimulus measures provided by the

Government

Excise Duty reduction from 12-14% to 8%

Interest subvention of 2% for labour-intensive export sectors like textiles, leather, gems &

jewellery, marine products and SMEs

Additional funds/incentives provided to support exports

Government authorizes India Infrastructure Finance Company (IIFCL) to raise Rs10,000cr

through tax-free bonds to refinance long gestation infrastructure projects, particularly under the

PPP route

Borrowing limit for State Governments raised by 0.5% (Rs30,000cr) of their gross state domestic

product

Service Tax reduced from 12% to 10%. This had an impact to over half of the countrys GDP as

Service sector accounts for more than 50% of the Indian GDP


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Can the stimulus be rolled back???

IIP growth in FY09 over FY08 as seen in the chart below shows that industry has grown and thestimulus has been successful

Thestronger IIP numbers are an evidence of the fact that growth has picked up and now is the timewhen the measures infused to provide liquidity will be withdrawn slowly to cushion any expected

downfall and also bridge the deficit

Inflation has also started creeping its head up again with Food price Inflation at 17.43% in January and

Wholesale Price Index (WPI) creeping to 8.56% in January

The Government is also bearing the burden of increasing fuel subsidies, fertilizer subsidies and other

non plan expenditure which are rising to astronomical levels and a parity needs to be drawn in the

revenue and expenditure structure to sustain long term growth which the Finance Minister would also

know better

Particulars August September October November December

FY09-10 1 0 .4 0 % 9 .1 0 % 1 0 .3 0 % 1 1 .7 0 % 1 6 .8 0 %

FY08-09 1 .7 0 % 6 % 0 .1 0 % 2 .5 0 % -2 %


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Sectoral Consensus View


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Automobile

Issues Industry wish list Expectations Rationale Impact

Increase in excise duty No increase in exciseduty

Likely, Hike in excise dutyfor automobiles

Auto sales have beenstrong during FY10

Negative

Allocation of funds underJNNURM

Increase in JNNURMfunding for urban and ruraltransport

Likely Government thrust onimproving public transport

Positive for players incommercial vehicle

segment

Extension of depreciationbenefits

For CV's and trucks this isexpected to end in FY10E

Unlikely Sales of Cvs have startedto revive

Negative for truck makers


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Research House Consensus

Stocks

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Hike in excise duty forautomobiles

Increase in JNNURMfundingfor urban and rural transport

No extension of depreciationbenefits: For CV's and trucks

this is expected to end in FY10E


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Banking & NBFCs

Issues Industry Wish list Expectations Rationale Impact

To extend theprepayment periodfor 'agricultural debt

waiver and debtrelief scheme'

Prepayment period tobe extended furtherfrom December 31,

2009

Unikely To reduce the agriNPAs

(especially PSUbanks)

Positive, as itwould reduce

the recognitionof agri NPAs

Liberalizing FDI normsfor insurance sector

Increase the FDI limitin insurance sectorform 26% to 49%

Likely To provide capital tothe insurance

companies

Positive, it will providecapital to fund their

insurance businesses

Capitalisation of PSB's Capitalisation of PSB's Likely Enable capitalstarved PSU banks to

meet theirgrowth requirements

Positive for smallbanks

Tax free bonds To allow power financecompanies to float tax

free bonds

Unlikely To make it easier for finance companies to

raise money

Positive

Tax breaks for housing

companies

Increasing tax breaks forhousing companies from20% to 40%

Unlikely To improve profitability

of the companies

Negative


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Stocks

4 4

76

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3

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6

78

9

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Pre payment

period to be

extended from 31st

Dec, 09

To allow power

finance companies

to float tax free

bonds

Capitalisation of

PSB's

Hike in FDI

insurance limit

from 26% to 49%

Increasing tax

breaks for housing

companies from

20% to 40%


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Cement

Issues Wish list Expectations Rationale Impact

Excise duty No increase in exciseduty

Excise dutyconcessions to beremoved

Hike in excise duty willboost government

revenue collection andreduce the fiscal

deficit

Negative , it is difficultfor manufacturers to

pass the hike toconsumers due topoor monsoons aswell as impending

oversupply

Import duty on coaland coke

Remove import duty of5% on gypsum, petcoke & coal

Expected to beabolished

Enhance theefficiencies of the

cement companies

Results in saving thepower cost for the

cement companies.Marginally positive


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Stocks


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Excise duty concessions to be removed Remove import duty of 5%on gypsum, Pet coke &

coal


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Construction

Issues Wish list Expectations Rationale Impact

Roads and social

infrastructure

Increase in outlay under

JNNURM for funding ofroads and social

infrastructure

Unlikely To facilitate investment

in the roads sector andimprove connectivity in

the country

Positive

Section 80IA Extension of Section80IA benefits foranother 15 years

Unlikely To maintainattractiveness of thesector

Positive


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Stocks


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Capital Goods & EngineeringIssues Wish List Expectation Rationale Impact

Import Duty on ChineseEquipment Increase in import duty onChinese Equipment Unlikely This will help domesticcompanies againstinvasion of cheap Chinese

Equipment

Positive

Allocation for RGGVY andAPDRP Increase in allocation forRGGVY and APDRPscheme to achieve UPAsobjective of Power for All

by 2012

Likely This will accelerate theinvestment into the sector;implementation will be the

key issue

Positive

Increase in excise duty No increase in excise duty Likely, Hike in excise dutyfrom 8% to 10%

To shore up indirect taxrevenues

Negative


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Stocks

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Increaseinimport duty on

ChineseEquipment

Increaseinallocationfor

RGGVYandAPDRPschemetoachieveUPAs objectiveof

Power for All by 2012

Hikeinexciseduty from8%to

10%


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Issues Wish list Expectation Rationale Impact

FDI limit FDI liberalized for DTH services Likely Higher FDIinvestment will leadcompanies to access

low cost of capital

Positive

Customs duty on SetTop Boxes

Reduction ofCustoms Duty of 5%-

Nil levied on Set TopBoxes

Unlikely To bring broadcastingequipment like set

topboxes on par withrates applicable on

telecomequipment and

provide a fillip toplatforms like DTH

that use set topboxes

Positive

Media


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Stocks


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FDI liberalised for DTH services Reduction of Customs Duty of 5%-Nil levied on

Set Top Boxes


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Metals & Minings


Excise duty increase Industry wishes that thereis no roll back on the

reduction in excise duties

Likely ,Excise duty onsteel may be raised from

8% to 10% or 12%

Marginal impact expectedas domestic steel demand

remains very strong onaccount of revival in auto

sales and thrust oninfrastructuredevelopment

Negative

Export duty on iron ore

lumps and fines

5% increase in export duty

on both iron ore lumpsand iron ore fines

Unlikely Government just 2 months

back increased exportduty on iron ore lumps to10% and iron ore fines to

5%. Exports havemoderated post that sofurther hike in near term

looks unlikely

Positive for steel

companies not havingbackward iron ore

integration as input costwill go down

Negative for Ironore exporters as they can

not pass on the hike


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Stocks

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Likely increase in excise duty on steel from 8% to 10%

or to 12%

5% increase in export duty on both iron ore lumps and

iron ore fines


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Oil & Gas


Tax benefits Clarity on tax benefitsto the natural gas

production from NELP& CBM blocks

Unlikely To facilitate investment in the sector

and provide moreclarity to thecompanies

Positive

Service Tax Removal of Service

Tax being charged onE&P activities

Unlikely Long pending demand

of the industry sincelevy of service tax isagainst the spirit of

NELP regime

Positive


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Stocks


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Clarity ontax benefits tothenatural gasproductionfromNELP&CBMblocks

Removal of ServiceTax beingchargedonE&Pactivities


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PharmaceuticalsIssues Wish list Expectation Rationale Impact

Tax exemption for

R&D expenses

Increase in weighted

average exemption

from 150% of R&D

spend to 200%

Unlikely To encouragecompanies to focus on

R&D

Positive

Infrastructure Status Infrastructure statusfor Healthcare

Industry

Unlikely Increase the pace of investment into the

industry by existing aswell as new players

Positive

Life saving drugs Concessional rates or

removal of duties forcategories of lifesaving drugs

Unlikely To increase

investment in thesector

Positive


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Stocks

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Increaseinweighted

averagefor R&Ddeduction

Infrastructurestatus for

HealthcareIndustry

Concessional rates or

removal of duties for

categories of lifesavingdrugs


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Power

Issues Wish List Expectation Rationale ImpactExtension of benefits Extension of benefits

given to the sectorbeyond 2011

Unlikely To facilitateinvestment in the

sector

Positive


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NTPC

PowerGrid

Stocks


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Extensionof benefits giventothesector beyond2011


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Real Estate

Issues Wish List Expectation Rationale ImpactExemption on loan& interest payments

Increase inexemption limit for

interest payments &loan repayments

Unlikely To improve demandfor real estate

Positive

Low cost housing

projects

Restoration of

exemptions underSection 80 IB (10) for

lower and mid-housing projects

Likely Improve

infrastructure in Tier2& Tier 3 estate

Positive

Housing for theeconomically

weaker section

Focus on affordablehousing for weaker

sections of the

society

Likely To garner funds for infrs sector

Positive


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Stocks


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Hotels

Issues Wish List Expectation Rationale ImpactInfrastructure Construction to be

given infrastructurestatus

Likely To increaseinvestment in the

sectoe

Positive


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Stocks


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Telecom

Issues Wish List Expectation Rationale ImpactLicence free Implementation of a

uniform free licencefree regime

Unlikely To improveprofitability of the

already hurtcompanies

Positive


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Stocks


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FMCG

Issues Wish List Expectation Rationale Impact

Improvement inrural demand for

goods

Expenditure inflagship rural

schemes for socialuplifment of the rural

people

Likely To increase theincome of the rural

households

Positive

Excise duty forcigarettes Excise duty hike incigarettes Likely Increasing therevenue of theexchequer

Negative if over 5%

Increasing theexcise on FMCG

Hike in excise dutyon FMCG products

Likely Increasing revenuefor the exchequer

Negative


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Stocks


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Information Technology

Issues Wish List Expectation Rationale Impact

Extension of taxbenefits

Extension of taxbenefits under

Section 10A/10B(STPI Tax

Exemption beyondFY11)

Likely To improveprofitability of the IT

companies

Positive


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Stocks


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