India Union Budget FY2010-11

Impact Analysis

By: iFAST Research Team

 Key Highlights

 Focus on fiscal consolidation by reducing the fiscal deficit from 6.9% in FY10 to
5.5% in FY11. Aim to reduce fiscal deficit to 4.1% by FY13

 The actual net market borrowing of the Government in FY2010-11 would be around
Rs.3,45,010 crore, 13% lower than the previous fiscal

 Plans to raise about Rs. 40,000 crores in FY11 through disinvestment of stake in
government owned companies, after planning Rs. 25,000 crores in FY10

 3G spectrum auctions to raise about Rs. 35,000 crores

 Reduction in personal taxes by widening the tax slabs

 CENVAT increased by 2%, from 8% to 10%

 Increase in MAT from 15% to 18%

 Corporate surcharge to be reduced from 10% to 7.5%

 Key Highlights – Contd..

 Direct Tax Code and GST to be implemented from 1 April 2011

 Deduction of Rs. 20,000 allowed for investment in long-term infrastructure bonds ,

over and above the existing limit of Rs.1 lakh under Section 80C

 Restore the basic duty of 5% on crude petroleum; and 7.5% on diesel and petrol.
Central Excise duty on petrol and diesel enhanced by Re.1 per litre each. Price of
diesel and petrol to rise by Rs 2.58 and Rs. 2.67 respectively

 Service tax to be retained at 10% and to pave the way forward for Goods and
Services Tax (GST)

 Government to set up a Coal Regulatory Authority for pricing and competitive

bidding process for allocation of coal plus a cess on coal of Rs. 50 / tonne

 Emphasis on Renewable Energy and Green Initiatives for this budget

 Fiscal Consolidation – The Key Priority
Tax Projections
FY10 (Y-o- FY11 (Y-o-
As a % of GDP FY09 FY10BE FY10RE FY11BE Y Y
Particulars growth) growth)
Revenue Deficit 4.4% 4.6% 4.0% 4.6%
Corporate Tax 19.5% 18.1%
Fiscal Deficit 5.9% 6.5% 6.7% 5.5% Income Tax 17.9% -3.6%
Customs -15.4% 36.1%
Primary Deficit 2.5% 2.8% 1.8% 2.8%
Excise -6.1% 29.4%
BE = Budgeted Estimate, RE = Revised Estimate Service Tax -4.8% 17.2%
Other Taxes (STT
etc.) -48.1% 14.5%

 Fiscal deficit to be reduced to 5.5% in FY11, 4.8% in FY12 and 4.1% in FY13

 Tax Revenue to rise by 14.8% in FY11 and non tax revenue to rise by 32% during the fiscal

 Income tax collections projected to fall by 3.6% in FY11, due to relief given by way of widening
the tax slabs

 Revenue loss of Rs. 26,000 Crores from Direct Taxes due to personal tax relief, and revenue
gain of Rs. 46,500 Crores from Indirect Taxes due to increase in excise and customs duty
 Thrust on Infrastructure
 46% of the total planned allocation for infrastructure

 Allocation to road transport increased by over 13% from Rs.17,520 crores to

Rs.19,894 crores in this fiscal

 Increase in allocation to power projects by 34%

 Deduction of Rs. 20,000 allowed for investment in long-term infrastructure bonds ,

over and above the existing limit of Rs.1 lakh under Section 80C

 Project import status to 'Monorail projects for urban transport' at a concessional

basic duty of 5%

 Rs 16,752 crores provided for Railways, which is about Rs.950 crores more than
last year

 Full exemption from import duty applicable to specified machinery for road
construction projects on the condition that the machinery shall not be sold for a
minimum period of five years
 Infrastructure Growth Picks Up

 Growth for six core infrastructure industries picks up to 9.4% in the month of January 2009
compared to a 6.4% growth in the previous month

 Six key sectors—crude, petroleum refinery products, coal, electricity, cement and finished
steel have a combined weightage of about 27% in the Index of Industrial Production (IIP)

 Finished steel and cement sectors expanded at the fastest pace during the month, registering
a growth of 16.2% and 12.4% respectively
 Widening of Tax Slabs to Boost
Consumption and Savings
Revised (General) Earlier (General)

Income upto Rs.1.6 lakh Nil Income upto Rs.1.6 lakh Nil

From Rs. 1,60,000 – 5,00,000 10% From Rs. 1,60,000 – 300,000 10%

From Rs. 5,00,000 – 8,00,000 20% From Rs. 3,00,000 – 5,00,000 20%

Income above Rs.8,00,000 30% Income above Rs.5,00,000 30%

 The widening of personal tax slabs will help reduce the tax burden and especially benefit the
middle class

 There will be more personal disposable income in the hands of individuals, which will help
boost consumption and savings

 Consumption sectors like FMCG, Auto etc. will benefit from this move

 For women and senior citizens the initial exemption limit is upto Rs. 1.9 lakh and Rs. 2.4 lakhs
respectively.
 Focus on Clean, Green Initiatives
 Planned outlay for Ministry of New & Renewable Energy increased by 61%

 National Clean Energy Fund to be set up, which will be financed by cess on coal of Rs.
50 / tonne

 Excise duty on LED lights reduced to 4% from 8%

 Ambitious target of 20,000 MW electricity generation by solar power projects by the year
2022

 To provide a concessional customs duty of 5% to machinery, instruments, equipment

and appliances, etc., required for the initial setting up of photovoltaic and solar thermal
power generating units and also propose to exempt them from Central Excise duty

 Goa ( a popular tourist destination) will get a special package of Rs. 200 crore to
preserve its natural resources

 The annual funding for the National Ganga River Basin Authority doubled to Rs. 500
crores, to help clean the Ganges river
Key Economic Indicators
Sectoral Impact of Budget
 Sectoral Impact of Budget

Information Technology (Impact: Neutral)

 Increase in MAT from 15% to 18% a dampener

 No extension of tax holiday under section 10A/B, which will expire in FY11

Cement (Impact: Negative)

 Increase in the cost of coal due to a cess of Rs. 50 / tonne on coal. Coal is a
major input

 Increase in excise duty and rise in freight costs due to higher fuel prices

 However, increased outlay for infrastructure to benefit the cement sector

 Sectoral Impact of Budget

FMCG (Impact: Neutral)

 Sharp increase in excise duty for Tobacco

 Boost to consumption due to tax relief, as a result of widening the tax slabs

Oil & Gas (Impact: Negative)

 Restore the basic duty of 5% on crude petroleum; 7.5% on diesel and petrol
and 10% on other refined products

 Central Excise duty on petrol and diesel enhanced by Re.1 per litre each

 Price of diesel and petrol to rise by Rs 2.58 and Rs. 2.67 respectively

 Further clarity awaited on recommendations of Kirit Parikh Committee for

deregulating the sector
 Sectoral Impact of Budget

Banking & Financials (Impact: Positive)

 Rs. 16,500 Crores to be provided to PSBs to attain minimum 8% Tier One

Capital by March 2011

 Additional banking licenses to be issued to private players, including

NBFCs

 Extension of 6 months for repayment on farm loans from 31 Dec 09 to 30

June 2010

 Government borrowing lower than expected

 Extension of interest subvention of 1% by 1 year to 31 March 11 for home

loans upto Rs. 10 lakhs is positive for housing finance companies
 Sectoral Impact of Budget

Auto (Impact: Neutral)

 Hike in excise duty by 2% across the board will push up auto prices

 Increase in weighted deduction on R&D from 150% to 200%

 However, tax relief on the personal tax front help to boost consumption

Telecom (Impact: Neutral)

 Increase in MAT from 15% to 18% a negative
 Sectoral Impact of Budget

Pharma (Impact: Positive)

 Increase in weighted deduction on inhouse R&D from 150% to 200%

Infrastructure & Capital Goods (Impact: Positive)

 46% of the total planned outlay for infrastructure

 34% increased spending on power projects

 Deduction of Rs. 20,000 allowed for investment in long-term infrastructure

bonds

 Increase in MAT to affect some infrastructure companies

 Non – extension of section 80IA benefits, which allows tax exemption on

profits

 Cess on coal of Rs. 50 / tonne a negative

 Sectoral Impact of Budget

Metals & Mining (Impact: Neutral)

 Cess on coal to raise input costs.

 Freight costs to go up.

 Formation of Coal Regulatory Authority to handle pricing.

Real Estate (Impact: Negative)

 Construction of a new property intended for sale and the service of renting of
immovable property to attract service tax.

 Service tax on pre-sale of immovable property.

 Equity Market Outlook and Strategy

 We maintain overweight on Equities compared to Debt

 GDP growth is expected at 7.2% for FY10 and projected to accelerate further to
about 8.2% in the next fiscal. However , the GDP growth for Q3 FY10 came in at
lower than expected 6.0%; primarily due to the poor agriculture growth

 Industrial activity picks up strongly, surging to a 20 year high of 16.8% in the

month of December 2009

 Hike in fuel prices and excise duties may have inflationary implications, and more
hikes can be expected along the way

 Infrastructure and Banking & Financial Services were the biggest beneficiaries of
this budget. Thus we recommend an increase in allocation to Infrastructure and
Banking funds

 Markets have potential to rise, but upside for 2010 would be limited to highs seen
in the end of 2007
 Debt Market Outlook and Strategy

 Inflation is expected to rise to double digit levels, but food inflation may subside
during the latter half of the year. However, concern remains on inflation spreading
to other parts of the economy

 Net market borrowings for FY11 is lower by about 13% compared to the previous
fiscal. This will provide some ease to bond yields

 Government commitment to fiscal deficit consolidation is a positive, by reducing it

to 4.1% by FY13

 Possibility of 50 bps hike in Repo and Reverse Repo rates by the RBI in the April
Monetary Policy Review

 10 year yield has the potential to rise to levels of 8.3 – 8.4%

 We recommend investors to continue to increase allocation to floating rate funds

and short term funds
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