INDIA BUDGET 2010-11 -- AN ANALYSIS OF ITS IMPACT ON INDIVIDUALS AND CORPORATE SECTOR
Rama Krishna Vadlamudi February 28, 2010
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CONTENTS PAGE
1. Executive Summary 2
2. What are the Key Features of the Budget 2010-11? 4
3. What is the Big Picture? 5
4. How does FM seek to contain fiscal deficit? 6
5. How is the fiscal deficit financed? 7
6. What are the new and refreshing policy measures? 8
7. Strange silence of the Government! 9
8. What are the Noble Intentions of the Government? 9
9. What are the new Income Tax Slabs for 2010-11 for individuals, HUFs 10
10. What are the usual suspects in the budget? 11
11. Transition to Debt Management Office 11
12. Budget announcements vs. achievements 11
13. Changes in the use of National Investment Fund 12
14. What is the budget impact on bond markets? 13
15. What is its impact on stock markets? 14
What is the impact of MAT on companies?
What is the impact of different sectors of the stock market – like,
Auto, Banking, Cement, Consumer Durables, FMCG, InfoTech,
Oil & Gas, Pharma, Power, Real Estate, Telecom and Others
16. What is Financial Stability and Development Council? 18
17. Abbreviations Used 18
1. EXECUTIVE SUMMARY
India’s Finance Minister, Pranab Mukherjee, had presented the Union Budget for the year 2010-11 in Parliament on February 26, 2010. In the last 48 hours or so, reams and reams have been written about the budget documents and different people have described it in different hues. What is very refreshing about him is his candour and transparency unlike the previous finance minister, P Chidambaram, who has got an uncanny ability to please people while being opaque about fiscal deficit numbers and showing petroleum, oil and food subsidy as off-budget items by keeping them out of the purview of the budget.
Like a gentleman, Pranab Mukherjee has included all subsidies – petroleum and fertiliser – in the fiscal deficit in an open and transparent manner. He does not want to pull wool over the eyes of stakeholders by showing the subsidies as off-balance sheet items. He wants to pay all the subsidies through the budget in the form of cash and has included them in fiscal deficit numbers. He has made conscious decision to avoid issuing any further bonds toward subsidy for oil and fertilizer subsidy, as had been the practice followed by the previous incumbent.
In keeping with the endeavour of the Government of India to promote transparency and accountability, a brochure containing the status of implementation of announcements made in the Budget for 2009-2010 has been compiled. This is released along with budget documents.
Budget 2010 has tried to please the middle class with reduction of tax slabs giving much needed relief to them, who have been bearing the brunt of inflation, especially of the food prices. The FM expects that this will put more money in the pockets of middle class and they will spend this extra money more liberally thus paving the way for higher tax revenues for the Government. By giving out tax incentives to middle class, the Finance Minister has tried to tax the corporate sector with increasing MAT (Minimum Alternative Tax) from 15 per cent to 18 per cent; though he has reduced the surcharge (tax on income tax) from 10 per cent to 7.5 per cent for the domestic companies.
When asked why India is lagging behind China in terms of development, in his refreshing candour and openness he said that we had started the reforms late and as such we are behind. He also said that we were not able to achieve much progress with regard to long-pending reform bills in pension, banking, insurance and land acquisition sectors due to lack of consensus from coalition partners in the UPA Government.
Both petrol and diesel prices have been increased even though the Government is silent on Kirit Parikh Committee recommendations on phasing out oil subsidy. Opposition parties had staged a walkout in Parliament over price hike in petrol and diesel prices. The FM has given a big thrust to long-term infrastructure by increase the allocation to the sector. He has restored the Cenvat (central excise duty) from 8 per cent to 10 per cent, as was the case before the global financial meltdown. While increasing the Cenvat, he has not increased the service tax from the present 10 per cent (during the crisis period, Service Tax was reduced to 10 per cent from 12 per cent wef February 24, 2009) – bringing it on a par with Cenvat. This is seen as aligning both the Cenvat and Service Tax into one combined Goods and Service Tax (GST) rate of 10 percent. GST is expected to subsume all indirect taxes – like, Cenvat, Service Tax, entertainment tax, etc – into a unified tax. He has expressed his intention to introduce GST from April 1, 2011, even though it was postponed from the original date of April 1, 2010. He is confident of introducing the Direct Taxes Code (DTC), which would be replacing the Income Tax Act and aims at simplifying the IT Act, from April 1, 2011. The draft act of DTC was released in August 2009 and much discussion has already taken place on it. He has also tried to reduce the fiscal deficit to 5.5 per cent of GDP for 2010-11, while controlling non-plan expenditure to bare minimum, with a view to bringing the Union Government on the path of fiscal consolidation.
The budget maintains a stony silence about several pending bills, like, pension reforms, banking reforms, insurance and land acquisition bill. The key partners in the UPA Government seem to have raised some reservations about these bills.
Government wants to further divest its stake in public sector enterprises and mop up Rs 40,000 crore in 2010-11. This is in addition to around Rs 25,000 crore it raised during the current financial year by selling its stake in various government companies, like, NTPC, REC and Oil India.
Overall, he seems to have earned bouquets from several quarters even though the budget does not contain any bold reforms.
One important event that is missed, amid the din and noise of the budget, by the investors, economists, media and businessmen is the modest GDP figure of 6 per cent growth for the third quarter of 2009-10 announced by the CSO after the closure of markets hours on February 26, 2010. No one seems to have been perturbed by the low third quarter GDP figure of 6 per cent. For the second quarter of 2009-10, India clocked a growth rate of 7.9 per cent. For India to achieve a stated growth rate of 7.2 per cent for the entire year of 2009-10, it has to achieve a growth rate of 8.8 per cent in the fourth quarter, which may be a tall order at this juncture.
As such, on Tuesday, the 2nd of March, Indian stock market may witness some sell-off from equity investors. So, be prepared for a bumpy ride going ahead!
2. What are the Key Features of the Budget 2010?
Personal income tax has been reduced substantially with big increases in tax slabs for individuals, salaried class and HUFs
A new section 80CCF has been introduced to give tax exemption of Rs 20,000 exclusively for investment in long-term infrastructure bonds (to be notified by Central Government) made by individuals and salaried class
The limit of Rs 20,000 under section 80CCF is over and above the Rs one lakh tax exemption being provided under section 80C of the Income Tax Act for certain investments
Minimum Alternative Tax (MAT) has been raised to 18 per cent from 15 per cent of book profits for domestic and foreign companies even as surcharge on domestic companies is reduced from 10 per cent to 7.5 per cent
Government and RBI may give more licenses to new banks and NBFCs
Government will infuse Rs 16,500 crore in order to augment the Tier I capital of pubic sector banks in 2010-11
Cenvat (central excise) is increased to 10 per cent from 8 per cent on all non-petroleum products as part of the partial rollback of fiscal stimulus
Service tax has been retained at 10 per cent bringing it on a par with Cenvat, paving the way for introduction of GST with effect from 1.4.2011
FM has expressed his intention to introduce DTC wef 1.4.2011
Petrol and diesel have become costlier by Rs 2.70 and Rs 2.55 per litre respectively – the actual increase at the pump depends on the city you live
On the path to fiscal consolidation, FM has budgeted that fiscal deficit would come down to 5.5 per cent of GDP for 2010-11
Items like toy balloons, microwave ovens, LED lamps, domestic battery chargers, hands-free headphones, imported mobile sets, imported readymade garments, imported watches and supari (betel nut product) will become cheaper due to reduction of Cenvat
Products like cars, sport utility vehicles, cigarettes, tobacco, mosquito nets, hard disk drive, CD/DVD drive, baby diapers, cement, gold, silver, platinum jewellery, TV, refrigerators, washing machines, etc, will become more expensive
Central Government will contribute Rs 1,000 every year to your NPS (New Pension System) account if you open it in 2010-11. The amount of Rs 1,000 will be given by the Government for a total of three years, provided the annual contribution is between Rs 1,000 and Rs 12,000.
Health insurance premia are likely to go up
An apex level Financial Stability and Development Council to be set up with a view to strengthen and institutionalise the mechanism for maintaining financial stability
Rs 1,73,552 crore is provided for infrastructure development which accounts for over 46 per cent of the total plan allocation
Government expects to mop up Rs 40,000 crore in 2010-11 through divestment of its stake in public sector enterprises
National Clean Energy Fund for funding research and innovative projects in clean energy technologies to be established
To build the corpus of the National Clean Energy Fund, clean energy cess on coal produced in India at a nominal rate of Rs.50 per tonne to be levied. This cess will also apply on imported coal.
Plan allocation for school education increased by 16 per cent from Rs.26,800 crore in 2009-10 to Rs.31,036 crore in 2010-11
Appropriate Banking facilities to be provided to habitations having population in excess of 2000 by March, 2012
Scheme of one per cent interest subvention on housing loan upto Rs.10 lakh, where the cost of the house does not exceed Rs.20 lakh — announced in the last Budget — extended up to March 31, 2011
Limits for turnover over which accounts need to be audited enhanced to Rs. 60 lakh (from Rs 40 lakh) for businesses and to Rs. 15 lakh (from Rs 10 lakh) for professions
Limit of turnover for the purpose of presumptive taxation of small businesses enhanced to Rs. 60 lakh (from Rs 40 lakh)
3. What is the BIG Picture?
The macro picture from the Budget 2010 indicates that the Government is serious about returning to the path of fiscal consolidation. There has been an unprecedented increase in both fiscal deficit and revenue deficits in the last three years due to a variety of reasons – like, farm loan waiver, Sixth Pay Commission recommendations, some sort of fiscal profligacy and fiscal stimulus given following the global financial meltdown in 2008/09. For the next year, the Government has budgeted a fiscal deficit of 5.5 per cent of GDP. It remains to be seen whether the Government’s intentions will be fulfilled in terms of control of non-plan expenditure and achieving revenue targets as budgeted.
The Government has pleased the middle class by raising the income tax slabs for individuals and salaried class with a view to giving relief from the steep rise in prices, especially food inflation. This is expected to put more money in the hands of middle class and they are expected to spend this extra money, which in turn will boost the economy. The revenue foregone on this front will be more than offset by increasing revenues from Cenvat hike to 10 per cent from 8 per cent on non-petroleum products. Government has also increased the petrol and diesel fuel prices by Rs 2.70 and Rs 2.55, including taxes, a litre respectively.
The country’s GDP is expected to grow by 7.2 per cent during the current financial year. Fiscal deficit for the years 2008-09 (actuals), 2009-10 (RE) and 2010-11 (BE) is put at 7.8, 6.9 and 5.5 per cent respectively. (These deficit figures include expenditure toward oil and fertilizer bonds and are based on the revised GDP numbers, with base year being revised to 2004-05 from 1999-2000 – published by the Central Statistical Organisation.)
Total Tax-GDP ratio had reached a peak of 12 per cent at the end of 2007-08. However, this has come down to 10.27 per cent (RE 2009-10). During the same period, the direct taxes as a percentage of total taxes have gone up from 33.8 per cent to 55.5 per cent. The tax-GDP ratio is expected to go up to 10.77 per cent by March 2011. Direct Taxes-GDP ratio improved from 2.97 per cent in 1999-2000 to 6.36 per cent in 2008-09. For 2009-10, this is projected at 6.3 per cent (RE).
Interest payments as a percentage of total revenue receipts (net) have gone down from 47 per cent in 2003-04 to 31.6 per cent in 2007-08. However, due to the Centre’s fiscal indiscipline, this has worsened to 38 per cent in 2009-10 (RE).
4. How has the FM sought to reduce fiscal deficit?
The Finance Minister has projected that the fiscal deficit would be 5.5 per cent of GDP or Rs 3,81,408 crore for 2010-11. But, how has he managed to portray such a good picture about the macro economy? This is being done through a combination of marginal increase in non-plan expenditure (cutting various subsidies) and projecting higher tax revenues and non-tax revenues. He has shown a modest increase of 4.15 per cent in non-plan expenditure from Rs 7,06,371 crore (RE: 2009-10) to Rs 7,35,657 crore (BE: 2010-11). Significantly, the same had increased by 16 per cent from Rs 6,08,721 crore in 2008-09 to Rs 7,06,371 crore in 2009-10. Subsidies, like, food, fertilizer, petroleum and interest form part of non-plan expenditure. For the year 2010-11, it is budgeted that the total subsidies will come down to Rs 116,224 crore (BE 2010-11) from Rs 131,025 crore (RE 2009-10), a negative growth of 11.3 per cent. Any significant jump in international crude oil prices from the present USD 80-a barrel level to over and above USD 100 a barrel is likely to upset the calculations of the FM.
Another assumption made by FM to reduce fiscal deficit is buoyant revenues from tax as well as non-tax nature. The table is given below:
2008-09 2009-10 2010-11
Actuals RE BE
Gross tax revenues 6 05 298 6 33 095 7 46 651
Out of which: Corporation tax 2 13 395 2 55 076 3 01 331
Income tax 1 20 593 1 31 421 1 28 066
Customs duty 99 879 84 477 1 15 000
Excise duty 1 08 613 1 02 000 1 32 000
As can be seen from the above table, gross tax revenues have grown by just 4.6 per cent during 2009-10 over the previous year. But for 2010-11, they are projected to grow by 17.94, which is much higher than the growth rate in 2009-10. While the direct tax collections projections seem to be okay considering the fact that the corporates are expected to make good profits next year; the challenge for the FM remains on the indirect tax front. Customs duty collections have slumped to Rs 84,477 crore, a steep decline of 15.42 per cent. And excise duty has come down to Rs 102,000 crore, a fall of 6 per cent over the previous year. However, the combined customs and excise duties are expected to grow from Rs 1,86,477 crore (RE 2009-10) to Rs 2,47,000 crore (BE 2010-11), a steep rise of 32.5 per cent. This may be extremely ambitious and even daunting even though the excise duties on various products have been raised from 8 per cent to 10 per cent in the Budget. From non-tax revenues, the Government hopes to garner Rs 35,000 crore through the auction of 3G spectrum from telecom companies. Buoyed by the success achieved in the current financial year an amount of Rs 40,000 crore is proposed to be raised in 2010-11 through divestment of stake in public sector enterprises by the Government.
It remains to be seen whether the Government would be able to contain the fiscal deficit at this projected level of 5.5 per cent by the end of 2010-11. If you go by the experience with the former finance minister, P Chidambaram, it is a matter of conjecture. For the first two years of his tenure between 2004 and 2008, he seemed to have had better control on fiscal deficit and revenue deficit. But, suddenly, in 2008-09, he spoiled all fiscal discipline and resorted to some massive fiscal deficit keeping an eye on the 2009 General Elections. This has put the Government’s own FRBM targets in tatters. As per the FRBM targets, Central Government should have wiped out revenue deficit completely by 2008-09 and kept the fiscal deficit at 3 per cent of GDP. But what we have achieved is something horrible. As at the end of the 2008-09, revenue deficit stood at 4.4 per cent (1.1% in 2007-08); while fiscal deficit stood at 5.9 per cent (2.6% in 2007- 08) of GDP. These figures are as the revised GDP estimates with base year at 2004-05 and exclusive of oil and fertilizer bonds (Economic Survey 2009-10). In just one single year, P Chidambaram frittered away all the gains of fiscal consolidation and put India on the dangerous path of a massive debt trap, the likes of which has rattled Greece recently.
5. How is the fiscal deficit financed?
The gross and net market borrowings (dated securities) of the Central Government during 2010-11 are estimated at Rs.4,57,143 crore and Rs.3,45,010 crore (4.98 per cent of GDP) respectively as against Rs.4,51,000 crore and Rs.3,98,411 crore (6.46 per cent of GDP) during 2009-10.
During the year 2010-11, the financing of fiscal deficit is estimated to be done without taking recourse to short-term borrowings through Treasury Bills or cash draw down. The share of market borrowings, external debt and NSSF in the financing of deficit for 2010-11 is estimated at 90.5 per cent, 5.9 per cent and 3.5 per cent respectively. However, to take care of temporary mismatch between receipts and expenditure, the Government may have to take recourse to ways and means advances from RBI.
6. New and Refreshing Policy Measures
1) The Government has expressed its intention to issue more licenses to banks and NBFCs provided they are eligible as per the criteria set by RBI, the central bank of the country. However, several experts have expressed their skepticism about this as RBI has not issued any new bank licenses in the last six years or so. It has brought all sorts of reforms and measures in the banking sector, but it is wary of issuing new banking licenses for reason unknown in the public domain.
2) The Government has raised the petrol and diesel prices and has taken a bold initiative. Even though the price hike in petro products is inflationary, this is a good step by the Government from fiscal discipline standpoint. However, the Government has postponed its decision on the recommendations of the Kirit Parikh Committee, which has recommended a slew of measures to phase out the oil subsidy which has become unsustainable due to steep rise in international crude oil prices.
If you want to read more about the Kirit Parikh Committee recommendations, just click:
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3) Green Policy initiative: The Government wants to give primacy to energy conservation and clean energy policies. A new Clean Energy Fund is being set up. To augment this Fund, the Government has imposed a cess of Rs 50 per tonne on coal. An amount of Rs 3,000 crore is expected to be raised through this measure. Customs duty on imports of critical components used in the electric vehicles is abolished.
4) Another bolder step taken by the Government just before presenting the budget is the freedom given to fertilizer companies to increase non-urea fertilizer prices according to market forces. However, urea prices are still under Government control.
All these measures indicate that the Government is serious about economic reforms in the country though it is treading a cautious path and trying to build consensus in the matter.
7. The “strange silence” of the Government!
Budget 2010 is silent about several issues. The important ones being reform bills in banking, insurance and pension sectors. The PFRDA, the pension regulator, still has no statutory backing. Land Acquisition bill is hanging fire due to difference among coalition partners in the UPA Government. These key legislations have been kept in “cold storage” for too long.
It is also silent about the implementation of Kirit Parikh Committee recommendations on phasing out oil subsidy. There is some skepticism about the Government’s seriousness about introducing Direct Taxes Code (DTC) next year because the industry has been crying foul over 2%-MAT based on gross assets. Individuals and salaried class have been doubtful about the EET regime (Exempt, Exempt and Tax – whereby tax exemption would be allowed on certain investments at the time of their investment and during the currency of the investment; but, the withdrawals will be included under one’s income and are taxed charged according to one’s tax slab). The debate on these issues has been still on.
Logically, EET system is sound and good for the economy. In India, we lack a social security system and as such, some concessions are required for the needy. The lobbying power of insurance industry, pension funds, mutual funds, small savings, etc, is very high. As such, it is very doubtful whether the provisions of DTC relating to EET regime will be implemented at all.
8. What are the “Noble Intentions” of the Government?
In every budget, it is customary on the part of the finance ministers to express their noble intentions about the economy in general and giving relief to common man (or the so-called “aam admi”) in particular. Surprisingly, no one reviews whether these righteous promises of the past budgets have been fulfilled by the finance ministers. The following are some intentions expressed by Pranab Mukherjee in Budget 2010:
The Government wants to return to the high GDP growth rate of nine per cent in order to achieve “double-digit” growth trajectory
The Government wishes to consolidate the recent gains in making development more inclusive, meaning ameliorating the conditions of the underprivileged
The Government tries hard to remove the bottlenecks in our public delivery mechanisms, namely, PDS and others
We endeavour to roll out GST by April 1, 2011
We want to introduce DTC by April 1, 2011
We have increased the thrust for Agriculture development and want to increase Agricultural productivity
We need a second Green Revolution
Achieving 10-per cent GDP growth for the next 10 years is a must for eradicating poverty
9. What are the new income tax slabs for 2010-11?
MATRIX SHOWING PERSONAL INCOME TAX SLABS
(FY 2010-11)
For Women below age of 65 years # For resident individuals, HUFs, etc #
Total Annual Income (Rs.) Rate of Income Tax Total Annual Income (Rs.) Rate of Income Tax
Up to 1,90,000 NIL Up to 1,60,000 NIL
1,90,001 to 5,00,000 10% 1,60,001 to 5,00,000 10%
5,00,001 to 8,00,000 20% 5,00,001 to 8,00,000 20%
8,00,001 and above 30% 5,00,001 and above 30%
# For senior citizens of 65 years and above, the exemption limit is Rs 2.40 lakh
Cess for Education: At three per cent on income tax payable
NEW SECTION 80CCF INTRODUCED IN BUDGET 2010-11
(as per FM’s announcement on February 26, 2010)
SEC. DETAILS OF THE SECTION DEDUCTION Rs
80CCF Investment made by individuals and HUFs in long-term infrastructure 20,000
bonds as notified by Government of India
(Details are yet to be announced)
(This Rs 20,000 deduction is over and above the Rs one lakh permitted under Section 80C.
This new section 80CCF was introduced for the first time in Budget 2010-11.)
For a complete analysis of Income Tax Slabs for 2010-11 for Individuals, salaried class and HUFs; and for details of Section 80C investments, JUST CLICK:
www.scribd.com/doc/27601595
10. What are the usual suspects in the Budget?
Finance Ministers love to tax smokers heavily year after year. This time is no exception. The usual suspects are cigarettes and tobacco and heavy taxes are imposed on them. While retaining Service Tax at 10%, the Government has widened the Service Tax net by including eight more services under the tax net. Service tax of 10% on flats that are sold before completion has been imposed. Domestic air travel is also being brought under Service Tax making air travel prohibitive. Goods transport through Railways is brought under service tax net.
11. Transition to Debt Management Office
In order to have prudent management of debt and greater focus on carrying cost as well as meeting secondary market liquidity, the government has set up a Middle Office which in due course will transit into the proposed Debt Management Office. The Middle Office is now being strengthened appropriately.
12. Budget announcements vs achievements
An interesting feature of the present budget is a new table which seeks to explain the budget announcements made by FM while presenting the 2009-10 Budget and the level of achievement of each announcement. This is done with a view to bringing about more transparency and accountability in budget making.
One shocking example of a wide chasm between promise and performance is the issue of infrastructure financing in the country. It was announced in the last budget that the newly-setup IIFCL would refinance PPP projects worth Rs 1,00,000 crore in the country in the next 15 to 18 months. Towards this goal, IIFCL raised Rs 10,000 crore by March 31, 2009 and it is astonishing to note that the full amount of Rs 10,000 crore remains unutilized as of now. This is the degree of seriousness the Government bestows on all-important and woeful infrastructure in India. This is just one pathetic example.
The following table depicts a few details about them:
BUDGET ANNOUNCEMENT 2009-10 IMPLEMENTATION status as on 15.01.2010
1. The newly-setup IIFCL would implement, IIFCL raised tax-free bonds worth Rs 10,000 crore
along with banks, infrastructure projects worth by 31.3.09, which would enable it to
Rs one lakh crore in the next 15 to 18 months. refinance projects worth Rs 25,000 crore.
IIFCL would provide refinancing to 60% of the The money it raised is yet to be spent.
commercial loans in the PPP projects.
2. All efforts will be made to remove policy, Five meetings have been held. This is a
regulatory & institutional bottlenecks in order continuing process. (This effectively means,
to ensure that infrastructure projects are given not much is achieved under this.)
top priority for implemention.
3. The Government wants to move towards a The nuturient-based subsidy regime is being
fertiliser subsidy regime based on nutrients implemented wef April 1, 2010.
rather than on products. The unshackling of
the fertiliser sector will lead to higher invest-
ments in future.
4. The Government will set up a committee to Kirit Parikh Committee was set up and it has
free the prices of petrol and diesel and link since submitted its report. The recommen-
them to international oil prices to reduce the dations are yet to be approved and imple-
buden of huge oil subsidy. mented.
5. DTC draft would be announced The draft was issued in August 2009. It is
Expected to be implemented by 1.4.2011.
6. GST would be introduced wef 1.4.2010 As consensus among states and the Centre
remains elusive, GST implementation is
postponed to 1.4.2011
7. No significant target was given for A pleasant surprise was that the Govt
divestment programme raised Rs 25,000 crore through this
13. Changes in the use of National Investment Fund
There is a shift in policy on the uses of disinvestment proceeds from Central PSUs received under the National Investment Fund (NIF). The disinvestment proceeds received during 2009-12 period will be reckoned as resources for the purpose of financing the social sector programmes which are creating capital assets.
However, the income from investments made from proceeds received upto 2008-09 under NIF would continue to be used to finance social infrastructure and provide capital to viable public sector enterprises without depleting the corpus of NIF – meaning only the interest received on the NIF corpus will be used as was originally envisaged under the NIF scheme.
DISINVESTMENT PROCEEDS: The Government total receipts under disinvestment programme is Rs 25,000 crore during 2009-10 through selling of its stake in state owned enterprises, like, NTPC, NHPC, REC and Oil India. For the next financial year, it has upped the target to Rs 40,000 crore through stake sale in NMDC, Satlej Jal Vidyut Nigam and others. The following table shows the divestment proceeds:
20005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Actuals Actuals Actuals Actuals RE BE
Divestment Proceeds 1 581 534 38 795 566 25 598 40 000
14. What is the budget’s impact on Bond Markets?
The rise in excise duties and petroleum prices is expected to contribute to 0.4 per cent increase in WPI inflation, according to government sources. The gross market borrowings are more than Rs 4.50 lakh crore next year. After the budget proposals were announced, government bond prices fell, with the yield on 6.35% 10-year paper (maturity 2020) hardening to 7.86 per cent at close.
Inflation may not moderate till the middle of next April. The Annual Policy announcement from RBI is due in the third week of next April. However, if the RBI decides to hike the Repo rate under LAF before the Policy, the yields on the 10-year paper may harden further to 8.50 per cent in the next seven to eight weeks. During the current fortnight, the full impact of CRR rise from 5 per cent to 5.75 per cent will be felt in the banking system. In addition, advance tax outflow by March 15th will adversely impact liquidity in the system which will have a negative bearing on bond markets. Overall, these are challenging times for banks in managing their bond portfolios.
Table showing gross markets borrowings of the Government:
20005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Actuals Actuals Actuals Actuals RE BE
Gross market
borrowings 131 000 146 000 168 101 273 000 451 000 457 143
Repayments 35 626 35 554 36 333 39 370 52 589 112 133
15. Impact of the budget measures on stock markets
One great relief for stock market is that the FM has not tinkered with dividend distribution tax (DDT), long-term capital gains (LTCG), short-term capital tax (STCG), or NIL tax on dividends in the hands of investors. The DTC draft code, announced in August 2009, envisages a radical shift and calls for abolition of DDT and STT (securities transaction tax), removing the distinction between LTCG and STCG and taxing dividends in the hands of investors. That the FM has not touched any of these proposals is a great relief to stock market investors.
IMPACT OF MAT ON COMPANIES: The Finance Bill, 2010, seeks to increase MAT (minimum alternative tax) from 15 per cent to 18 per cent of book profits for domestic as well as foreign companies. However, it seeks to reduce the surcharge on corporation tax to 7.5 per cent from 10 per cent for domestic companies. The increase of MAT is a big negative for capital-intensive industries, like, those in oil and gas, steel, metals, IT, pharma, telecom, infrastructure, etc.. Players, like, RIL, Infosys, TCS, Ideal Cellular, Reliance Infrastructure, Cipla, Bharti Airtel, Glenmark Pharma, GMR Infrastructure, GVK Power and Infra, and Reliance Communications would be adversely affected with this. It may be noted that MAT was increased from 10 per cent to 15 per cent during the budget 2009-10. Effectively, it means in a matter of 13 months, these companies’ tax liability has gone up from 11 per cent to 19.35 per cent (including surcharge), which is quite substantial. However, the Government justifies higher MAT saying that currently the effective tax rate of corporate sector is only 22 per cent against the normal rate of 33.99 per cent.
Another set of companies, that are likely to be impacted negatively by the higher incidence of MAT are holding companies, like, Tata Investment Corporation, Sundaram Finance and others.
Even as the FM was reading out the budget proposals, the stock market reacted in a wild manner and the Sensex jumped by more than three per cent at one point of time. But, as it assimilated the full ramifications of the budget, it started to slide and at the end closed at 16,430, up by around 1%; while the Nifty closed at 4,922. Let us examine the impact of budget proposals on certain sectors:
AUTOMOBILE: Excise duty has been increased from 8 per cent to 10 per cent. Excise duty on sports utility vehicles increased from 20 per cent to 22 per cent. Going forward, the sector will witness tough times due to rising interest rates.
Companies to watch are: Maruti Suzuki, Exide Industries, etc
BANKING: New banking licenses are likely to be considered by RBI, as per the Finance Minister in his budget speech. Many players, like, Aditya Vikram Birla Group, Reliance Capital, Bajaj Group, Shriram Group, Religare Group and Indiabulls Group have been waiting in the wings for new banking licenses. The new banks may hot up competition in the sector. However, considering the RBI’s extremely conservative approach, one may not bet for starting of new banks for another one year.
The Government proposes to re-capitalize public sector banks to the tune of Rs 16,500 crore in 2010-11. These measures are expected to fire up interest in banking stocks. Repayment of agricultural loans, under the Debt Relief Scheme, is postponed up to the end of June 2010. This will push the incidence of NPAs in Agri loans up to June 2010 quarter. For the next two quarters, big banks, like, SBI, will get a big relief. Hardening bond yields will put pressure on banks’ treasury profits in the next two to three months.
Banking/Finance stocks worth considering: Axis Bank, Federal Bank, Corporation Bank and IDFC.
CEMENT: Excise duty hike and clean energy cess of Rs 50 a tonne on coal are negatives for the sector. Overall, the sector is likely to underperform in the next six months, especially the players in South India. However, Government’s thrust on infrastructure will boost the demand for cement going forward.
CONSUMER DURABLES: The excise duty on consumer durables has gone up from 8 per cent to 10 per cent. However, relief is provided on special additional duty on compressors imported for air-conditioners. Makers of air-conditioners will be benefited in this regard. The excise duty cut on LED lights is expected to benefit manufacturers in this segment. And thrust is given in the budget for refrigeration business with full customs duty exemption on refrigeration units. Also, there is service tax exemption on the setting up of cold storage units for agricultural produce.
Companies to watch out for: Blue Star Ltd, Voltas, Havells and Bajaj Electricals.
FMCG: Due to rise in excise duties, the cost of raw material and packaging will go up for most of the FMCG players. They are likely to mitigate the impact with increase in consumer prices of their products. But, individuals and salaries class will spend more next year is good news for the sector. Outlays for Bharat Nirman and NREGS projects have been increased substantially giving a significant boost to the purchasing power of rural masses. As taxes on tobacco and cigarettes have gone up, ITC may underperform the market for the next two to three months as cigarettes volumes will come down.
Companies to watch are: HUL and Marico.
INFORMATION TECHNOLOGY: MAT increase to 18 per cent will negatively impact the companies in this sector. The impact of MAT will be higher for Tier II companies as compared to Tier I companies. There are some indications at this point of time that income tax exemption limit granted under STPI and EOU schemes may not continue beyond March 31, 2011.
INFRASTRUCTURE and CAPITAL GOODS: Outlay for the sector has gone up to Rs 1,73,000 crore for 2010-11, constituting about 46 per cent of the total plan allocation. Daily targets for execution of highways are revised upwards. A target of 20 km of road a day has been set. Budget also provides for duty-free import of road machinery. This is expected to benefit the companies in infrastructure sector, especially road construction, with increased orders and revenues. Financing the infrastructure will get a boost with increased targets for IIFCL and creation a new section 80CCF providing tax exemption of Rs 20,000 for investment in long-term infrastructure bonds. IIFCL is expected to double refinance to banks for infrastructure in FY 2010-11. IIFCL’s disbursement is seen at Rs 20,000 crore rupee by Mar 2011.
Companies to watch out for: Larsen & Toubro, Thermax, Maharashtra Seamless, Nagarjuna Constructions, Unity Infrarojects and Tantia Constructions.
OIL & GAS: There were high hopes in the stock market that the Government would implement the Kirit Parikh Committee recommendations on phasing out oil subsidy burden and free the prices of petrol and diesel from virtual administered price mechanism. But, the budget is silent about the implementation of the committee’s proposals and compensation formula. This has disappointed the oil marketing companies (OMCs), whose prices of fuels will continue to be subjected to Government control. Moreover, the excise duties on petrol and diesel have been increased making the fuels costlier for the consumers. One positive could be that the Government wants to pay oil subsidy in cash and decided not to issue any oil bonds in future. This may bring down the interest cost of the OMCs, who have been resorting to massive working capital loans.
PHARMA: The increase in MAT and excise duty is a double whammy for the pharma sector. One silver lining, however, for the sector is the increase in weighted deduction from 150 to 200 per cent of in-house R&D expenditure. The companies may try to mitigate these losses with passing on the excise duty hikes to the consumers.
Companies worth considering for investment: Sun Pharma, Divi’s Labs and Unichem Laboratories
POWER: The Government has doubled the outlay on power sector, from Rs 2,130 crore in 2009-10 to Rs 5,130 crore in 2010-11, which may boost up the capacity creation in the sector. Government’s intention in setting up a coal regulator and launch competitive bidding for captive coal mining augurs well for the sector. The sector is highly capital-intensive and as such the decision to raise MAT to 18 per cent is negative for the power players, like, Reliance Power and Adani Power. One more dampener for the sector could be introduction of Rs 50 per tonne tax on coal to augment the newly created National Clean Energy Fund.
Companies worth buying: ABB Ltd, Torrent Power, Kalpataru Power Transmission and Jyoti Structures (but, watch the debt levels of Kalpataru Power and Jyoti Structures in a rising interest rate scenario).
REAL ESTATE: The Government has decided to continue the interest rate subvention of one per cent on housing loans of up to Rs 10 lakh (with the total housing costing not above Rs 20 lakh per unit) for one more year, that is, till end of 2010-11. As income tax rates for individuals have come down drastically, the extra money in the hands of taxpayers is expected to boost demand for housing sector. Increased government spending on rural and urban housing are also positives for the real estate sector. One negative for the sector could be imposition of 10-per cent service tax on ‘additional services’ provided by a builder to prospective buyers. This will increase the cost of luxury flats especially. If a contractor builds the property for a developer, 10-per cent service tax would be levied by him if payments are received in instalments. Overall, this is a big boost to the ailing real estate sector.
Companies to look out for: Unitech Ltd and Puravankara Projects. (But, watch their debt levels closely)
TELECOM: The increase of MAT from 15 per cent to 18 per cent is a big negative for telecom companies, which are capital-intensive. Players, like, Bharti Airtel and Reliance Communications would be adversely affected with this. It may be noted that MAT was increased from 10 per cent to 15 per cent during the budget 2009-10. Effectively, it means in a matter of 13 months, these companies’ tax liability would go up from 11 per cent to 19.35 per cent, which is quite substantial.
The competition has been surging with new players and ARPUs falling sharply. Having said that it may be noted that the rationalization of tax slabs will give a fillip to the demand for telecom services. If and when the service tax rates are raised, the sector may undergo a deceleration in demand.
OTHERS: Other stocks that are expected to benefit going forward include Jain Irrigation Systems, Mundra Port & SEZ, Sun TV, etc.
16. Financial Stability and Development Council
One important feature of the Budget 2010 has been the proposal to set up a separate body for macro supervision of the economy and deal with inter-regulatory issues of coordination. The name of the new body is Financial Stability and Development Council (FSDC). The FSDC will be set up on the basis of the existing High-Level Coordination Committee on financial markets, which is headed by the RBI Governor. The new body is expected to monitor systemic risks in the financial markets. The FSDC may oversee the regulatory functions of RBI, SEBI, IRDA and PFRDA. Large financial conglomerates and holding companies – encompassing areas of banking, insurance and stock broking – are posing problems for regulators leading to turf war among the regulators. Some analysts are dubbing the FSDC as some sort of a super regulator. Recently, a dispute has arisen between SEBI and IRDA over the supervision of unit linked insurance plans (ULIPs). The FSDC may sort out such matters in future without affecting the autonomy of the regulators.
17. Abbreviations Used
BE : Budget Estimates
CRR : Cash Reserve Ratio
DTC : Direct Taxes Code
EOU : Export Oriented Unit
FM : Finance Minister
FMCG : Fast Moving Consumer Goods
GDP : Gross Domestic Produce
GST : Goods and Services Tax
HUF : Hindu Undivided Family
IIFCL : Indian Infrastructure Finance Company Limited
IRDA : Insurance Regulatory and Development Authority
LAF : Liquidity Adjustment Facility of the RBI
NPS : New Pension System
PDS : Public Distribution System
PFRDA : Pension Fund Regulatory and Development Authority
PPP : Public Private Partnership
RBI : Reserve Bank of India
RE : Revised Estimates
SEBI : Securities and Exchange Board of India
STPI : Software Technology Park of India
WPI : Wholesale Price Index
Sources: Budget 2010-11 documents, www.indiabudget.nic.in, and Finance Bill, 2010
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