Budget expectation 2013 14 - enam

Nandan Chakraborty Managing Director - Institutional Equity Research [email protected] 91 22 4325 1107

Sachchidanand Shukla Sr VP & Economist [email protected] 91 22 4325 1108

… promises to keep, And miles to go before I sleep*…

Budget Expectations 2013-14

*Courtesy Robert Frost

11 Feb 2013

2

Key things to watch in this Budget

The FM has already stolen his own thunder by announcing a slew of measures outside the budget. Focus will now be on Stability, Credibility on fiscal consolidation and Reform intent in order to reposition India as an attractive investment destination:

♦ Stable policy regime to encourage normal business expectations and capital inflows

♦ Fiscal deficits cannot be tackled in one year. It is the trajectory that matters. Thus the budget should stress:

● Revenue increases without hurting growth: A roadmap for implementing GST and DTC

● Expenditure control: Roadmap for reining in subsidies through Direct Cash Transfers etc

● Quality of fiscal adjustment: i.e. in April-December, non-plan expenditure rose 12% (budgeted ~9%) while plan expenditure rose <7% (budgeted 22%). Thus there are drastic capex cuts to make the fiscal deficit look better; but this may endanger economic recovery. The FM should be cutting wasteful expenditure instead

♦ Roadmap for key bills: GST, DTC, Land Acquisition, Mining and the Insurance Bill

♦ Propping Savings: Planned reduction in fiscal deficit, higher tax breaks and regulatory tweaks to channelize household savings into financial savings (ie MFs and Insurance)

♦ And Investments: Deepening the corporate bond market and steps to improve the regime for foreign capital flows. Specific proposals include investment tax credit, depreciation benefits, a cut in the withholding tax rate for debt instruments and a holistic policy for foreign investments

11 Feb 2013 PRE-BUDGET REPORT

BUDGET EXPECTATION 2013-14 STRATEGY

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Tax measures

Direct Taxes Direct Taxes

Indirect taxes Indirect taxes

Rates may remain broadly unchanged though there could be some selective duty rejig and pruning of exemptions:

♦ Customs duty: Expect reinstatement on Petro products, to provide ~Rs 490 bn in revenues

♦ Excise duty: Selective hikes, lowering threshold for SMEs to Rs 10 mn. Also expect diesel price hikes to be front ended, given bunching of state elections

Rates may remain broadly unchanged though there could be some selective duty rejig and pruning of exemptions:

♦ Customs duty: Expect reinstatement on Petro products, to provide ~Rs 490 bn in revenues

♦ Excise duty: Selective hikes, lowering threshold for SMEs to Rs 10 mn. Also expect diesel price hikes to be front ended, given bunching of state elections

Despite a clamour for higher tax rates for the rich, the budget may soften the blow by:

♦ Raising Income tax exemption limits for the middle class

♦ Incentivizing investments into Financial assets : Offering tax incentives for Pension products/MFs or include Rajiv Gandhi Equity Savings scheme & Tinkering with LT capital gains tax on Infrastructure/ Corporate bonds

Despite a clamour for higher tax rates for the rich, the budget may soften the blow by:

♦ Raising Income tax exemption limits for the middle class

♦ Incentivizing investments into Financial assets : Offering tax incentives for Pension products/MFs or include Rajiv Gandhi Equity Savings scheme & Tinkering with LT capital gains tax on Infrastructure/ Corporate bonds



4

Has the FM made his own budget a non event already?

The FM has announced a slew of measures since mid-Sep to soothe investor nerves

Source: Bloomberg, Axis Capital

GAAR introduced

Rail fare hike

RBI cuts Repo & CRR by 25bps

FM clears 49% FDI in insurance, pension sectors

Govt hikes diesel prices by Rs 5/ltr, subsidised LPG

cylinders capped

Govt approves FDI in multibrand retail, aviation,

power exchanges and broadcast services, Disinvestment in 5 PSUs

RBI cuts CRR by 25 bps

Cabinet approves 49% FDI in insurance, 26% FDI in pension funds

Cabinet approves 10%divestment proposal in

NMDC

RBI cuts CRR by 25 bps

UPA Wins Vote on FDI in Retail

in LS & RS

Banking Laws (Amendment) Bill, 2011; Companies

Bill cleared in LS

PM formally announced launch of Direct Cash Transfer Scheme from

Jan 1, 2013

14000

16000

18000

20000

22000

Jan-

12

Feb-

12

Mar-1

2

Apr-1

2

May-

12

Jun-

12

Jul-1

2

Aug

-12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Sen

sex



5

Policy Reforms pipeline – To do list

Government Reforms

Under Consideration Comments

Increasing FDI in insurance to 49% Parliament approval pending, opposition from BJP and Left

Allowing FDI in pension at 49% Parliament approval pending

Land Acquisition Bill Yet to be ratified by the Parliament post changes

Direct Tax Code(DTC) The DTC, touted as a big facelift of the Income Tax law, has seen a number of its provisions get diluted. The govt is yet to give any firm indication on the new law

Preparation for implementation of Goods & Service Tax (GST)

Govt. has appointed two committees to prepare a report on implementation of GST. These committees will examine the issue of compensation to states for loss of revenue and the design of GST



6

Sectoral expectations: Summary...

Sector Sector Key budget expectations Key budget expectations Impact Impact

Autos Autos ♦ Increase in excise duties, esp on large diesel passenger vehicles ♦ Increase in excise duties, esp on large diesel passenger vehicles Negative: M&M Negative: M&M

Banks & Fin Serv Banks & Fin Serv

♦ Elevated govt borrowing program to pressurise yields/ liquidity (-). Industry lobbying for full tax deductability on NPA provns (+).

♦ Pub Sr banks: Recapitalisation (+)/ Agri loan target growth>15% (-)

♦ Insurance: Increase in FDI limit to 49%

♦ Elevated govt borrowing program to pressurise yields/ liquidity (-). Industry lobbying for full tax deductability on NPA provns (+).

♦ Pub Sr banks: Recapitalisation (+)/ Agri loan target growth>15% (-)

♦ Insurance: Increase in FDI limit to 49%

Positive for Insurance: HDFC, ABNL Positive for Insurance: HDFC, ABNL

Capital goods Capital goods

♦ Import duty hike on power eqpt by 5-10% from current 20-27%

♦ Higher depreciation rate on capex from 15% to 25%

♦ Restoration of subsidy for wind power

♦ Outlays: decrease in Defence by 5%, Watch Railways (50% jump to Rs 300 bn) & JNNURM (urban devt: maintain at Rs 150 bn)

♦ Import duty hike on power eqpt by 5-10% from current 20-27%

♦ Higher depreciation rate on capex from 15% to 25%

♦ Restoration of subsidy for wind power

♦ Outlays: decrease in Defence by 5%, Watch Railways (50% jump to Rs 300 bn) & JNNURM (urban devt: maintain at Rs 150 bn)

Positive: L&T, Suzlon

Negative: BEL

Positive: L&T, Suzlon

Negative: BEL

General General ♦ Lower dividend distribution tax from foreign subsidiaries (current 15%) ♦ Lower dividend distribution tax from foreign subsidiaries (current 15%)

Positive for Tata Power/ Steel/ Motors, Hindalco, Sterlite, Sun Pharma, Godrej Consr, etc.

Positive for Tata Power/ Steel/ Motors, Hindalco, Sterlite, Sun Pharma, Godrej Consr, etc.



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…Sectoral expectations: Summary...


Media Media ♦ Lower excise and customs duty on set top box ♦ Lower excise and customs duty on set top box Positive for Dish TV and Hathway Cable Positive for Dish TV and Hathway Cable

Infrastructure and Power Infrastructure and Power

♦ Increase in limits in tax free bonds (Rs 600 bn, Rs 20K per individual)

♦ Freight hike for coal in Railway budget (-)

♦ Decrease debt cost: Refinancing of INR debt thru ECBs. IIFCL to guarantee pvt infra bonds

♦ Lower dividend distribution tax from SPV if re-invested in capex

♦ Increase in limits in tax free bonds (Rs 600 bn, Rs 20K per individual)

♦ Freight hike for coal in Railway budget (-)

♦ Decrease debt cost: Refinancing of INR debt thru ECBs. IIFCL to guarantee pvt infra bonds

♦ Lower dividend distribution tax from SPV if re-invested in capex

Positive for all pvt infra developers and pvt power gencos

Positive for all pvt infra developers and pvt power gencos

Fertilisers Fertilisers ♦ Clarity on FY14 NBS subsidy: current DAP subsidy at Rs 14.5K/ te

♦ Industry lobbying for regulation on DAP imports due to high inventory

♦ Clarity on FY14 NBS subsidy: current DAP subsidy at Rs 14.5K/ te

♦ Industry lobbying for regulation on DAP imports due to high inventory

Positive: Coromandel, Zuari if DAP imports regulated Positive: Coromandel, Zuari if DAP imports regulated

FMCG FMCG

♦ GST can reduce cascading taxes and decrease price differential with unorganised players

♦ Increase in excise duty for cigarettes (mkt expectn~10% increase)

♦ GST can reduce cascading taxes and decrease price differential with unorganised players

♦ Increase in excise duty for cigarettes (mkt expectn~10% increase)

Positive for all (GST) , ? ITC Positive for all (GST) , ? ITC

Cement Cement ♦ Reshuffle in excise duty structure leading to increase in net duty ♦ Reshuffle in excise duty structure leading to increase in net duty Negative: Cos may not be able to pass on the hike due to weak demand

Negative: Cos may not be able to pass on the hike due to weak demand



8

…Sectoral expectations: Summary


Telecom Telecom

♦ Infra status to Tower companies

♦ Reduction in multiple taxes/ levies

♦ Auction mobilisation – amt and timeline? (-)

♦ Many proposals may be addressed separately through the National Telecom Policy/ Spectrum Enactment Act

♦ Infra status to Tower companies

♦ Reduction in multiple taxes/ levies

♦ Auction mobilisation – amt and timeline? (-)

♦ Many proposals may be addressed separately through the National Telecom Policy/ Spectrum Enactment Act

Positive Positive

Realty Realty

♦ Increase in limit for income tax deduction on interest on home loans

♦ Extension of 1% interest subvention on home loans by 1 yr

♦ Industry lobbying for infra status for affordable housing

♦ Increase in limit for income tax deduction on interest on home loans

♦ Extension of 1% interest subvention on home loans by 1 yr

♦ Industry lobbying for infra status for affordable housing

Positive Positive

Oil n Gas Oil n Gas

♦ Re-introduction of 5% customs duty on crude oil

♦ Clarity on FY13 subsidy sharing formula (US$56/bl for upstream cos)

♦ Clarity on domestic natural gas pricing

♦ Re-introduction of 5% customs duty on crude oil

♦ Clarity on FY13 subsidy sharing formula (US$56/bl for upstream cos)

♦ Clarity on domestic natural gas pricing

Positive: Cairn, RIL

Negative: BPCL, HPCL, IOC

Positive: Cairn, RIL

Negative: BPCL, HPCL, IOC

Metals Metals ♦ Hike in import duty for steel to 10% vs. 7.5% currently ♦ Hike in import duty for steel to 10% vs. 7.5% currently Positive for all steel cos Positive for all steel cos



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Budget expectation 2013 14 - enam