ICRA Comment

Union Budget, 2012-13: Realistic Assessment of Fiscal Situation and an absence of Big-Ticket Announcements
There was near unanimity amongst most observers and analysts about what the Union Budget for 2012-13 needed to address: lay down a credible road map for fiscal consolidation; ensure the revival of the investment cycle that has virtually ground to a halt; and spell out the key priority areas in terms of policy action and reforms. Equally, the expectations were muted, given the magnitude of challenges involved as well as the lack of political space to introduce reforms, as highlighted by the extraordinary drama surrounding a modest hike in rail fare after several years. Of particular interest was also what the Governments approach to the populist entitlement programmes would be, given the series of electoral reversals in the recent past. Eventually, as anticipated, the Budget was devoid of any big-bang announcements and stuck to achieving fiscal consolidation that was realistically possible under the prevailing circumstances, though there are some doubts about the growth estimates made in the Budget. There are a number of directionally positive statements on the need to rein in subsidy and effect cash transfers in areas like fuel and fertilisers, although the ability to stick to the subsidy cap of 2% remains to be seen. As further proof of realism, the disinvestment targets have been kept at a modest Rs. 30,000 crore. Lack of a definite timeframe for the introduction of the relatively less controversial Direct Tax Code (DTC) is a disappointment, even as the introduction of the Goods and Services Tax (GST) still requires considerable consensus to be achieved with the States. A number of small steps have been introduced in the area of infrastructure, such as the extension of the Viability Gap Funding mechanism to support PPP initiatives, doubling of the amount proposed to be raised through tax free bonds and wider use of ECBs in sectors like Road, Power and Civil Aviation. Measures like allowing Qualified Foreign Investors (QFI) in the Corporate bond market, and withdrawal of Dividend Distribution Tax would also be expected to impact some companies positively. Overall, there are no major gains for the Corporate sector and given the magnitude of the fiscal deficit, chances of a meaningful reduction in interest rates in H1FY13 appear uncertain. In fact, the yields may harden following the announcement of a higher than expected net market borrowing of Rs. 4.7 lakh crore. Some sectors would be adversely affected because of the increase in excise duty, though the same was on expected lines. There has been some minor relief provided to some of the stressed infrastructure sectors in terms of reduction in withholding taxes; also reduction in import duty on steam coal would provide some benefits to the power sector. The increase in investment linked deduction of capital expenditure to 150% for select sectors and increase in weighted deduction of 200% for R&D expenditure is also somewhat positive. Going forward, the key challenge would be the Governments ability to jumpstart the investment cycle and revive investor confidence; it is hoped that steps designed to achieve the same are being contemplated through administrative actions through the year. Moreover, it is unlikely that investor sentiments would be substantially boosted by the retrospective amendment to Income Tax provisions that the Budget seems to have attempted. The Budget has introduced a few steps with regard to indirect tax collections, including a calibrated increase in tax rates and expanding the tax base to boost collections. Moreover, the introduction of a negative list for service tax; input tax credit for various services; and measures to enhance the alignment between excise and service tax would aid in the transition to the Goods and Services Tax. The changes regarding personal income tax were largely along expected lines, and would only provide a limited boost to consumption growth. The allocation for food subsidies would likely need to be enhanced upon the introduction of the National Food Security Act. Whether the allocation for fuel subsidies is adequate would critically depend on the global prices of crude oil and ability to increase fuel prices. The 22% increase in plan expenditure is welcome, as is the provision of funds for recapitalisation of Banks The budgeted fiscal deficit of 5.1% of GDP in 2012-13 is substantially higher than the rolling target of 4.1% of GDP set previously. However, the former represents a reasonably realistic assessment of the fiscal situation given the changing dynamics. Nevertheless, the main challenges to achieving even the targeted fiscal deficit remain economic growth falling short of the optimistic 7.6% forecast made by the Government of India (GoI) and fuel and food subsidies exceeding the budgeted levels. Additionally, the magnitude of receipts from disinvestment and telecom auctions would remain subject to market conditions.

March 2012

ICRA Comment

ASSESSMENT OF GOVERNMENT OF INDIAS FISCAL SITUATION

The Union Budget for 2012-13 has placed the fiscal deficit for the coming fiscal year at 5.1% of GDP, a decline relative to substantial fiscal deficit of 5.9% in 2011-12 (according to Revised Estimates or RE). As anticipated, corporation tax and union excise duty collections are expected to fall short of the Budget Estimates (BE) for 2011-12, by Rs. 32,300 crore and Rs. 13,400 crore, respectively. However, this would be partially offset to by higher service tax collections, which are expected to exceed the BE for 2011-12 by Rs. 13,000 crore. Moreover, disinvestment proceeds are estimated at Rs. 15,493 crore, considerably smaller than the budgeted Rs. 40,000 crore. In contrast, Revised Estimates for 2011-12 indicate that expenditure commitments overshot the budgeted levels substantially, particularly in the case of subsidies (Rs. 72,700 crore), defence services (Rs. 9,600 crore) and interest payments (Rs. 7,600 crore). As a result, the revenue and fiscal deficit for 2011-12 are forecast to exceed the Budget Estimates by a substantial margin of Rs. 88,000 crore and Rs. 1.1 lakh crore, respectively, in 2011-12. The tax revenues of GoI are estimated to expand by 20% in 2012-13, following an increase in excise duty and service tax rates; a widening of the service tax base; and factoring in GoIs expectation that real economic growth would be 7.6% +/- 0.25%. ICRA however expects economic growth to be lower at 6.97.0% in 2012-13. In line with our expectations, the peak rates of excise duty and service tax have been increased by 2%, to further rollback the stimulus measures that had been provided previously. At the same time, the lower 1% increase in excise duty (from 5% to 6% and from 1% to 2%) would limit the additional burden on merit goods. Excise duty on cars was enhanced from 22% to 24%. Additionally, an ad valorem rate of 27% would be imposed on cars that were being taxed at the rate of 22% +Rs. 15,000 per vehicle. Duty on refined gold has been increased to 3% from 1.5%. On balance, GoI has estimated that its excise collections would expand by 29% in 2012-13 relative to the RE for 2010-11. In addition to the increase in the rate of service tax to 12%, a negative list has been introduced , thereby substantially widening the service tax net. Accordingly, GoI has forecast its service tax collections to expand by 31% in 2012-13. GoI has forecast customs duty collections to expand by 22% in 2012-13, considerably higher than the growth of 13% in 2011-12 (RE). While no change has been proposed in the peak rate of customs duty (10 %) on non-agricultural goods, basic customs duty on standard gold bars, gold coins (purity exceeding 99.5 %) and platinum has been raised to 4% from 2% while duty on non-standard gold has been hiked to 10% from 5% to dampen the pace of gold imports. Additionally, the rate of customs duty has been brought down to 2.5% from 7.5% for certain agriculture-related items while various fuels such as steam coal, natural gas, liquefied natural gas etc. have been exempted from basic customs duty to reduce input costs for power generation. The exemption limit for individual tax payers has been increased to Rs. 200,000 from Rs. 180,000, which would provide some benefit to the taxpayers. Moreover, the upper limit of the 20% tax slab has been raised to Rs. 10 lakh from Rs. 8 lakh. Individual taxpayers have been permitted a deduction of up to Rs. 10,000 on interest earned on savings bank accounts. No major changes have been introduced with respect to corporation tax. However, withholding tax on interest payments on external commercial borrowings (ECBs) is to be reduced to 5% from 20% for a period of three years for sectors such as power, airlines, roads and bridges, ports, etc. GoI has estimated the proposals regarding direct taxes to result in a net revenue loss of Rs. 4,500 crore and direct tax collections to expand by 14% in 2012-13. BE for 2012-13 forecast inflows of Rs. 40,000 crore from the proposed auction of telecom spectrum. Additionally, the target for disinvestment proceeds has been set at Rs. 30,000 crore, nearly twice the receipts of Rs. 15,493 crore in 2010-11 RE. Notwithstanding the budgeted figures, the magnitude of inflows from these sources would depend crucially on market conditions, timing of sale, valuations etc. Rs. Crore 2011-12 BE (1) 2011-12 RE (2) 901,664 327,680 171,879 153,000 150,696 95,000 2012-13 BE (3) 1,077,612 373,227 195,786 186,694 194,350 124,000 Variation in 2011-12 (2)/(1) -3% -9% 0% 1% -8% 16% Growth in 2012-13 BE (3)/(2) 20% 14% 14% 22% 29% 31%

Gross Tax Revenues 932,440 - Corporation Tax 359,990 - Income Tax 172,026 - Customs Duty 151,700 - Union Excise Duty 164,116 - Service Tax 82,000 Note: BE: Budget Estimate; RE: Revised Estimate Source: Union Budget 2012-13, ICRA Estimates ICRA Rating Services

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ICRA Comment Revenue expenditure is budgeted to increase by a moderate 11% in 2012-13, aided by a 12% reduction in the allocation for subsidies relative to the RE for 2011-12. In the Budget Speech for 2012-13, the Government has committed that from 2012-13 onwards, subsidies related to food and funding for administering the National Food Security Act would be fully provided for. In spite of the impending enactment of the National Food Security Bill, the allocation for food subsidies has been increased by a relatively small amount to Rs. 75,000 crore for 2012-13 from Rs. 72,800 crore in 2011-12 RE. While the identification of beneficiaries through the Socio Economic and Caste Census is yet to be completed, the introduction of enhanced entitlements during 2012-13 may necessitate an upward revision in food subsidies. The Budget further clarified that subsidy expenditure would be limited to 2% of GDP in 2012-13, and be reduced to 1.75% of GDP over a three-year period by curtailing subsidies other than those related to food. This is proposed to be achieved through a combination of improvements in targeting, reduction of leakages as well as reforms in the delivery mechanism including provision of direct cash transfers using the unique identification system. Given the elevated global crude oil prices, the provision of Rs. 43,580 crore for fuel subsidy for 2012-13 suggests that GoI is likely to revise the administered prices of various fuel items over the course of the coming fiscal year. Some of the sectors with substantially higher outlays in 2012-13 relative to the RE for 2011-12 include education, health & family welfare, water supply & sanitation, in line with the Governments inclusive growth agenda. At the same time, the outlay for rural employment has been increased by a relatively small amount to Rs. 33,000 crore in 2012-13 from Rs. 31,000 crore in 2011-12 RE. The Budget increased allocations for various schemes related to agriculture and allied activities, which would play a role in easing supply bottlenecks. Moreover, the allocation for the Rural Infrastructure Development Fund has been augmented to Rs.20,000 crore, of which Rs. 5,000 crore has been earmarked for the creation of warehousing facilities. The Budget also announced that the interest subvention scheme for farmers would be continued in 201213. Rs. Crore 2011-12 BE (1) 2011-12 RE (2) 1,161,940 275,618 216,297 56,190 104,793 1,500 137,505 371,537 156,780 66,144 447 14,000 76,189 228,141 2012-13 BE (3) 1,286,109 319,759 190,015 63,183 113,829 0 164,672 434,651 204,816 79,579 14,346 15,888 95,004 289,909 Variation in 2011-12 (2)/(1) 6% 3% 51% 3% 10% -75% -6% -3% -2% -4% -87% 79% -5% -4% Growth in 2012-13 BE (3)/(2) 11% 16% -12% 12% 9% -100% 20% 17% 31% 20% 3107% 13% 25% 27%

Revenue Expenditure 1,097,162 - Interest 267,986 - Subsidies 143,570 - Pensions 54,521 - Defence 95,216 - Debt Waiver 6,000 - Grants for Capital Assets 146,853 - Balance 383,016 Capital Exp. Gross Loans & 160,567 Adv. - Defence 69,199 - Provision for Contribution/ 3,424 Subscription to Multilaterals - Recapitalisation of Banks 7,800 etc. - Other 80,144 Memo Item Non Defence Capital Exp + 238,221 Grants for Capital Assets Source: Union Budget 2011-12, ICRA Estimates

Inclusive of grants for creation of capital assets (which are included in revenue expenditure), and excluding capital expenditure towards defence, the total allocation for expenditure that is capital in nature is estimated to increase by a healthy 27% relative to the revised estimates for 2011-12. Grants for creation of capital assets are estimated to expand by a healthy 20%. Additionally, non-defence capital outlay and gross loans & advances are estimated to expand by a sharp 38%. This includes an allocation of Rs. 15,888 crore for capitalisation of Public-Sector Banks, Regional Rural Banks etc., as compared to a revised allocation of Rs. 14,000 crore in 2011-12. Additionally, over Rs. 14,300 crore has been allocated for contribution or subscription to various multilateral agencies such as the International Monetary Fund (IMF), Asian Development Bank (ADB), World Bank etc.

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ICRA Comment At an absolute level, the revenue deficit, effective revenue deficit and fiscal deficit are estimated to decline in 2012-13 as compared to 2011-12 (RE). In particular, the effective revenue deficit is estimated to decline appreciably to Rs. 1.86 lakh crore in 2012-13 from Rs. 2.57 lakh crore in the ongoing fiscal year. Nevertheless, the targeted revenue deficit of 3.4% of GDP and fiscal deficit of 5.1% of GDP remain considerably higher than the rolling target of 2.7% and 4.1%, respectively, that had been set previously. The Statements under the FRBM Act attribute the same to economic growth falling short of the potential rate of growth as well as lower anticipated non-debt capital receipts (0.4% of GDP) as compared to the estimate made previously by the Thirteenth Finance Commission (0.8% of GDP). Notwithstanding the improvement forecast by the BE for 2012-13, the assumed tax buoyancy is likely to be somewhat optimistic even as actual proceeds from disinvestment and telecom auctions would depend on market conditions. Moreover, the outlay for subsidies may exceed budget estimates unless a substantial upward revision in administered fuel prices is undertaken over the course of the year. Although there may be some slippages relative to the fiscal targets set in the Union Budget for 2012-13, the extent of the slippage is expected to be substantially smaller than that seen in 2011-12 (1.3% of GDP). Rs. Crore BE 2011-12 RE 2011-12 BE 2012-13 Rolling Targets 2013-14 2014-15

Revenue Deficit -307,270 -394,951 -350,424 NA NA Percentage of GDP -3.4% -4.4% -3.4% -2.8% -2.0% Effective Revenue Deficit -160,417 -257,446 -185,752 NA NA Percentage of GDP -1.8% -2.9% -1.8% -1.0% 0.0% Fiscal Deficit -412,817 -521,980 -513,590 NA NA Percentage of GDP -4.6% -5.9% -5.1% -4.5% -3.9% Total Outstanding Liabilities 44.2% 45.7% 45.5% 44.0% 41.9% as a Percentage of GDP# Source: Union Budget 2011-12, ICRA Estimates #Does not include the portion of National Small Savings Fund and Market Stabilisation Scheme that are not used to finance GoIs fiscal deficit GoI has indicated a net long term borrowing programme of Rs. 4.79 lakh crore in 2012-13 as compared to borrowings of Rs. 4.36 lakh crore in 2010-11. With the gross borrowings to be undertaken by GoI in 201213 exceeding the level in 2011-12 as well as market expectations, bond yields are likely to harden in the coming months. Moreover, if the fiscal deficit exceeds the Budget Estimates, yields may harden further over the course of the fiscal year. The rolling targets indicated by GoI for 2013-14 and 2014-15 aim to curtail the revenue and fiscal deficit to 2.0% of GDP and 3.9% of GDP, respectively, in 2014-15. This is substantially less stringent than the targets of a revenue surplus of 0.5% and fiscal deficit of 3.0% that had been indicated by the Thirteenth Finance Commission. However, outstanding liabilities are projected to decline to 41.9% of GDP in 2014-15, an improvement as compared to the target of 44.8% set by the Thirteenth Finance Commission. Additionally, GoI has indicated that by 2014-15, it would eliminate the effective revenue deficit, defined as revenue deficit less grants for creation of capital assets that GoI provides to State Government, Local Bodies etc. GoI plans to accord statutory recognition to the concept of effective revenue deficit in the proposed amendment of the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act). Eliminating the effective revenue deficit would enable GoI to continue to provide grants for asset creation, while focusing its efforts on reducing consumption expenditure, which is a positive step. Additionally, the amended Act would make a provision for a Medium-Term Expenditure Framework Statement, which would set a three-year rolling target for expenditure indicators. This is expected to improve efficacy in allocation of expenditure and impart greater certainty to multi-year budgeting.

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ICRA Comment

I C R A S E C T O R AL AN AL Y S I S B a n k i n g a n d F i n a n c i a l S e r vi c e s
Proposals
Proposal to create a financial holding company to raise resources to meet Public Sector Banks (PSBs) capital requirements Government of India (GoI) to recapitalise PSBs, Regional Rural Banks and other Financial Institutions by infusing Rs. 15,888 crore in 2012-13

Several pending legislative reforms, including Microfinance bill and Public Debt Management agency bill, to be introduced in the current parliamentary session Tax-free bonds limit doubled to Rs. 60,000 crore from Rs. 30,000 crore Establishment of a Credit Guarantee Trust Fund for financing housing and educational loans Interest subvention of 1% on housing loans upto Rs. 15 lakhs (cost of house upto Rs. 25 lakhs) for one more year Limit of indirect finance under priority sector to housing loans enhanced to Rs. 10 lakhs from Rs. 5 lakhs Increase in credit flow to farmers from Rs. 4,75,000 crore to Rs. 5,75,000 crore Additional interest subvention of 3% for farmers repaying promptly

Impact-Positive
The setting up of the proposed financial holding company could help the PSBs in meeting large capital requirement for Banks. Incremental equity allocation for PSBs demonstrates continued GoIs commitment to recapitalise PSBs. Issue of tax-free bonds would be positive for National Highway Authority of India (NHAI), IRFC, India Infrastructure Finance Company Limited (IIFCL), HUDCO, NHB and SIDBI enabling access to low-cost funds. Credit guarantee trusts for educational loans would help in the Banks in protecting their asset quality while increasing loans to priority sector education loans. Interest subventions on timely repayments could partly reverse some of the damage done by the debt waiver scheme as far as credit culture is concerned.

H o u s i n g F i na n c e C o m p a n i e s
Proposals
Credit Guarantee Trust Fund to be set up for better credit flow for housing loans Provisions under Rural Housing Fund (RFH) enhanced from Rs. 3000 crore to Rs. 4000 crore interest subvention of 1% on housing loans upto Rs. 15 lakhs (cost of house upto Rs. 25 lakhs) for one more year Limit of indirect finance under priority sector increased from Rs. 5 lakh to Rs. 10 lakh

Impact- Positive
Operationalisation of credit guarantee trust fund could help lenders mobilise long term funds and therefore reduce asset liability mismatches; diversify their funding sources and improve access to capital markets. With the increase in provision for RHF, smaller HFCs focused on rural housing would benefit with a larger share of low cost and relatively longer tenure funds. Higher limit for eligibility under priority sector borrowings could help HFCs in increasing the proportion of low cost priority sector funding.

ICRA Rating Services

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ICRA Comment

R e a l E s t a te
Proposals
Interest subvention scheme for home loans extended till March 2012. ECB allowed for low cost affordable housing projects Setting up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans Increase in provision under Rural Housing Fund to Rs. 4,000 crore from the existing Rs. 3,000 crore to provide housing finance to targeted groups in rural areas at competitive rates Priority sector lending limit increased from Rs. 5 lakh to Rs. 10 lakh Introduction of tax deduction at source (TDS) on transfer of immovable property (other than agricultural land) above a specified threshold Increase in service tax from 10% to 12%

Impact-Neutral
The budget proposals such as extension of interest subvention scheme till March 2013; increase in priority lending limit to Rs. 10 lakh from Rs. 5 lakh and increase in provision under Rural Housing Fund to Rs. 4,000 crore from the existing Rs. 3,000 crore are likely to boost the demand for rural and affordable urban housing. Further, allowing ECB in the low cost affordable housing projects and also reduction in the withholding tax on ECB interest from 20% to 5% would help the sector in assessing cheaper funding. Setting up Credit Guarantee Trust Fund would also encourage investment in the affordable housing sector. Large real estate developers may benefit from the proposal of allowing QFIs to access Indian Corporate Bond market, as it would provide an avenue to raise fund at lower cost of borrowings. On the flip side, the increase in service tax from 10% to 12% will increase the overall cost of dwellings for the buyers.

H o t e l a n d T o ur i s m
Proposals
Increase in service tax rates from 10% to 12% Increase in excise duty from 10% to 12% Utilisation of input tax credit permitted for services such as catering, restaurants and hotel accommodation Entertainment and amusement services placed on the negative list of the service tax net.

Impact- Negative
The increase in service tax rates (effectively increase ~2%, if abatement is used) is expected to make hotel stays and dining out dearer for guests, thereby impacting demand to an extent. Further the wider service tax net and the higher excise duty would translate into higher costs for hotels. However on a positive note the utilisation of input tax credit would prevent cascading impact of taxes. Despite the wider service tax net, placing of entertainment and amusement services on the negative list would continue to support demand in the entertainment/amusement/tourism industry.

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ICRA Comment

Coal
Proposals
Full exemption from basic customs duty and a concessional CVD of 1 per cent to steam coal for a period of two years till March 31, 2014 Reduction in basic customs duty on machinery and instruments for surveying and prospecting from 10% and 7.5% respectively to 2.5% Full exemption from basic customs duty for coal mining projects

Impact- Neutral
The duty exemption on steam coal is expected to reduce the operating costs of players in the power (including captive power), cement and sponge iron industries, providing a support to their margins. However, this is unlikely to affect the scale of operations or margins of domestic coal mining companies, given the huge coal shortage scenario in India, and the significant price differential between domestic and imported coal. Coal mining projects are expected to benefit from the lower duty on machinery for prospecting and surveying, and full exemption of such projects from basic customs duty.

Cement
Proposals
Unified rate of excise duty of 12% + Rs. 120 PMT for non-mini cement plants and 6% + Rs. 120 PMT for mini-cement plants Extension of scheme for interest subvention of housing loans, enhancement in provisions under Rural Housing fund, ECB for low cost affordable housing, setting up of Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans Slew of measures for improving funding of infrastructure projects (VGF, enhancement of limit for tax-free infrastructure bonds and allowing ECBs for funding power projects)

Impact-Neutral
Increase in long term funding availability for infrastructure projects will facilitate more investment in these sectors and thereby boost cement demand. Further subventions on housing and increased provision under rural housing fund will also boost urban and rural housing demand and in turn demand for cement. However, the increase in excise duty is likely to impact the margins of cement companies since they may not be able to fully pass on the hike to the customers given the overcapacities.

Iron & Steel

Proposals
Increase in basic customs duty on non-alloy flat-rolled steel from 5% to 7.5% Reduction in basic customs duty on imported machinery for iron ore pellet and beneficiation plants from 7.5% to 2.5% Exemption from basic customs duty and concessional CVD on imported steam coal till March 31, 2014 Exemption from basic customs duty on nickel ore & concentrate, and increased export duty on chromium ore from Rs. 3000 per tonne to 30 per cent ad valorem Exemption from special CVD on prime quality cold rolled grain oriented (CRGO) sheets of silicon electrical steel Increase in excise duty from 10% to 12%
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ICRA Comment

Impact- Positive
The increase in custom duty on flat steel is expected to provide a cushion to domestic flat steel prices. Reduced duty on imported equipment for iron ore pellet/beneficiation plant is likely to benefit domestic steel companies, especially the ones that purchase iron ore fines. Additionally, the 2 year duty exemption on steam coal import is expected to reduce the coal costs of sponge iron manufacturers dependent on imported coal. The stainless steel industry would also benefit from an expected drop in nickel and chromium ore prices. However, the impact of the increase in central excise duty would be adverse for steel players, as manufacturers may not be able to pass on the entire hike in the near term, given the current slowdown in demand conditions.

Oil & Gas

Proposals
Increase in cess on domestic crude oil production from Rs 2,500 per ton to Rs 4,500 per ton Increase in service tax from 10% to 12% Exemption of custom duty on import of LNG for power generation for two years Eligibility of LNG storage facilities and oil & gas pipelines for VGF Relaxation of ECB norms for gas pipelines and regassification companies Provision of subsidy for sensitive petroleum products: Rs. 68493 cr for 2011-12 (RE) and Rs. 43695 cr for 2012-13 (BE) Direct payment of subsidy to the people living below poverty line (BPL) on LPG (domestic) and SKO (PDS)

Impact- Negative
The cess on domestic crude oil has been increased from Rs 2,500 per ton (~US $ 6.7/MT) to Rs 4,500 per ton (~US $ 12/MT), which would result in lower net realisation for Public Sector Undertaking (PSU) upstream companies, while for private NELP JVs the additional cess is cost recoverable while arriving at profit petroleum, which partly mitigates the additional levy. Further, the increase in service tax from 10% to 12% will lead to higher cost of various oil field services as the same is not eligible for CENVAT credit. The provision of subsidy for 2011-12 and 2012-13 for PSU Oil Marketing Companies (OMCs) is expected to fall short of requirements and might call for additional subsidy provision or material price revisions if the OMCs profits are to be preserved. Steps with regard to LNG such as duty exemption for power sector and easing of funding will encourage more investments in the sector.

P ow e r S e c t o r
Proposals
Full exemption from basic customs duty & concessional Countervailing Duty (CVD) of 1% on steam coal for two year period till March 31, 2014. Full exemption from basic customs duty on Natural Gas & Liquefied Natural Gas (LNG) Coal India advised to sign fuel supply agreement (FSA) with power projects which have long term PPAs with discoms and are expected to be commissioned on or before March 31, 2015 Inter-ministerial group (IMG) to be formed to periodically review allocated captive mine blocks or make recommendations for de-allocation, if required Limit for tax-free infrastructure bonds to be raised by FIs, doubled to Rs. 60,000 Cr. Qualified Foreign Investors (QFIs) allowed to access corporate bond market ECB allowed for part-financing of rupee debt for power projects; Withholding tax on interest payments on ECB reduced to 5% from 20%
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ICRA Comment

Extension of tax-holiday under section 80-IA till March 31, 2013 Additional depreciation of 20% allowed in the initial year for new assets acquired by power generation companies

Impact- Positive
The exemption of customs duty on coal would result in lower cost of power generation by about 3% (~11 paise/unit) for power projects (assuming use of 100% imported coal). The provisions of doubling of tax-free bond limits, inclusion of ECB for to part financing project costs & reduction of withholding tax on ECB would improve long-term funding availability and also result in a marginal reduction in borrowing costs or power projects. Extension of tax holidays and additional depreciation will improve profitability and cash flows of power companies. Moreover, stated intent of ensuring timely signing of FSAs by Coal India Ltd & periodic review of allocated mines by IMG so as to fast-track captive mine development remains extremely crucial, given increasing coal shortages for power sector.

R o a d s a n d P o r ts
Proposal
8,800-km of highways to be covered under National Highway Development Program (NHDP) during FY2013. The allocation towards NHDP has been increased by 14% to Rs 25,360 crore in FY2013 Increase in budgetary allocation towards Pradhan Mantri Gram Sadak Yojna (PMGSY) by 20% to Rs 24,000 crore Tax free bonds of Rs. 10,000 crore to be issued each by NHAI and IIFCL ECB allowed for capital expenditure on the maintenance and operations of toll systems for roads and highways. Reduction in the withholding tax on ECB interest from 20% to 5% would further reduce the funding cost Full exemption from import duty on specified equipment for road construction; benefit extended to contracts awarded by Metropolitan Development Authorities

Impact- Positive
The increased outlay on road transport would favourably impact companies involved in road construction. Further, the tax-free bond issues by NHAI and IIFCL, and proposal to allow QFIs to invest in corporate bond market would increase the funding options for the road construction sector. The Government also seeks to increase the funding options for the infrastructure projects through takeout financing and credit enhancement schemes floated by IIFCL. Moreover, exemption provided to specific construction equipment from import duty will provide some respite.

F e r t i l i s e rs
Proposals
Direct payment of subsidy to retailers initially and farmers eventually in a phased manner Implementation of new urea pricing and investment policy to attain self sufficiency in the next 5 years Capital investments in fertiliser sector eligible for VGF Investment linked deduction on capex in fertiliser sector enhanced from 100% to 150% Exemption of import duty of 5% on capital equipments for Greenfield and substantial expansion of fertiliser plants for 3 years upto 2014-15 Budgetary provision for subsidy: Rs. 71,579 cr (RE 2011-12) and Rs. 65606 cr (BE 2012-13) Continuation of payment of subsidy in cash to the fertiliser companies rather than by way of bonds

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ICRA Comment

Impact- Positive
GoIs roadmap towards direct transfer of subsidy to farmers through transfer to retailers in the first phase has been stated in the past two budgets. Although, the same is positive for the liquidity position of fertiliser companies, the ability of retailers to manage such high working capital blockage would be a key challenge. Implementation of new investment policy of urea would be positive for the major players in the sector to implement their expansion plans, provided issues related to gas availability at the cut off prices are addressed. Measures to encourage fertiliser capital investments, such as eligibility for VGF, enhancement of investment linked tax deduction to 150%; exemption of import duty on capital equipments are expected to be positive for the players undertaking brownfield and greenfield projects. However, the subsidy provisions for both 2011-12 and 2012-13 are inadequate even after accounting for the recent reduction in nutrient subsidy rates for non urea fertilisers in 2012-13.

P h a r m a c e u ti c a l s
Proposals
Weighted deduction of 200% on R&D expenditure on in-house activities extended for five years Increase in excise duty to 12% from 10% may result in a hike in bulk drug prices No change in the MAT rates is a positive

Impact-Neutral
The impact of most proposals announced during the budget is unlikely to have a material impact on the pharmaceutical sector as the impact of increased excise duty would be passed on by domestic formulation companies. The extension of tax exemption on R&D expenditure on in-house activities for five years would continue to support higher investments by research-led companies in areas of NCE/NDDS related research programs. After two years of successive hike in MAT rates, no change in corporate taxes is a positive for the pharmaceutical industry.

Capital Goods
Proposals
Slew of measures for improving financing of power and other infrastructure projects (Viability Gap Funding (VGF), enhancement of limit for tax-free infrastructure bonds and allowing ECBs for funding power projects) and enhancing fuel security of power plants (advice to CIL for signing FSAs, exemption of coal and LNG from customs duty and review of captive mine development process).

Impact- Marginally Positive

Measures which will speed up implementation of infrastructure (including power projects and coal projects) are positive from the demand perspective. However, absence of measure regarding import duty on imported power equipments remains negative for capital goods sector, especially for BTG players, given the stiff competition from imports.

Au t o 2 W / P a s s e n g e r V e hi c l e s
Proposals
Central Excise Duty on 2W and small cars increased from 10% to 12% Central Excise Duty on large cars (engine capacity 1,200-1,499cc) increased from 22% to 24%; duty on large cars (engine capacity 1,500cc-1,999cc) increased from 22%+Rs. 15,000 to 27%; duty on large cars (engine capacity>1,999cc) increased from 22%+Rs. 20,000 to 27%

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ICRA Comment

Basic customs duty on Completely Built Units (CBUs) of large passenger vehicles having engine capacity above a prescribed threshold and value exceeding USD 40,000 enhanced from 60% to 75% Full exemption from Basic Customs Duty and concessional CVD of 6% extended to specified additional parts such as lithium ion batteries used in hybrid and electric vehicles

Impact- Negative
Increase in excise duty by 2% would result in increase in prices of automobiles in the following range: at least Rs. 700 for two-wheelers, Rs. 5,000 for small cars and Rs. 9,000 for bigger cars. Since the OEMs may be unable to fully pass on the increase in excise duty to customers, given the subdued demand environment currently prevailing in the domestic market, it may exert pressure on OEMs profitability. However, the Governments thrust on rural development remains a key positive as the proportion of automobile sales in the rural markets is steadily on the rise. Also, unlike industry apprehensions there has been no increase in tax for diesel vehicles, which is a positive for the industry, especially considering rising proportion of diesel vehicles in passenger car segment.

C o m m e rc i a l V e h i c l e s
Proposals
Central Excise Duty increased from 10% to 12% Commercial vehicle (CV) body building activity to be charged at an ad valorem rate of 3% Thrust on infrastructure spending increased through higher budgetary allocation and easing of fund raising for infrastructure.

Impact: Negative
The increase in excise duties, while on anticipated lines, is expected to increase prices of commercial vehicles as OEMs pass on the impact to the end customer. While the increased prices could have a detrimental impact on the immediate term demand, the step up in infrastructure expenditure particularly in segments such as roads will not only increase demand for CVs (for construction) but also improve connectivity enabling easier freight movement. Steps for easing fund raising in the infrastructure sector is expected to drive both public and private spending (under public-private partnerships (PPPs)) in gross capital formation. This is a positive for demand in the commercial vehicle sector. In lieu of excise duty, commercial body builders are charged a mixed rate of Rs.10,000 and the applicable ad valorem duty. This going forward has been streamlined to an ad valorem rate of 3%.

T yr e s
Proposals
Hike in Central Excise Duty from 10% to 12% Full exemption on basic and additional customs duty on new and retreated pneumatic tyres, used in aircraft; excise duty on the same reduced from 10% to nil

Impact- Neutral
Increase in excise duty rates from 10% to 12% to lead to an increase in tyre prices; also likely to marginally impact the market share of domestic players in the replacement segment. Similar duty hike on automobiles, especially large cars, could affect derived demand for tyres. Duty exemptions on pneumatic tyres (both new and retreaded), used in aircrafts is a positive.

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T r a c t or s
Proposals
Target for institutional credit flow to agriculture raised by Rs. 1,00,000 crore to Rs. 5,75,000 crore in 2012-13; interest subvention scheme for crop loans to continue in 2012-13 along with additional subvention of 3% to prompt-paying farmers Setting up of Irrigation and Water Resource Finance Company to mobilize resources to fund irrigation projects. Structural changes and increase in planned expenditure for Accelerated Irrigation Benefit Programme along with allocation of Rs. 300 crore for Vidarbha Intensified Irrigation development Programme Total plan outlay for agriculture increased by 18% to Rs 20,208 crore with allocation under Rashtriya Krishi Vikas Yojna (RKVY) increased from Rs 7,860 crore in 2011-12 to Rs 9,217 crore in 2012-13. Increase in allocation towards National Rural Livelihood Mission to Rs 3,915 crore, a growth of 34%

Impact- Positive
With strong co-relation between farm mechanisation and credit availability, increase in institutional credit flow to the agricultural sector augurs well for the tractor industry. Also focus on irrigation projects shall enable faster shift from rain-fed agriculture to irrigated farming, thus reducing exposure to the vagaries of monsoons. Further, Governments thrust on rural and agricultural development continues with increased allocations to RKVY, Rural Infrastructure Development Fund and Mahatma Gandhi National Rural Employment Guarantee Scheme, which is expected to have positive influence on demand side drivers.

Au t o An c i l l a r y
Proposals
Central Excise Duty on manufactured goods increased from 10% to 12% Weighted deduction of 200% currently available on in-house R&D expenditure extended beyond March 31, 2012 for a further period of five years Introduction of weighted deduction of 150% of expenditure incurred on skill development

Impact-Negative
Increase in excise duty by 2% would translate into increase in prices of automobiles that is likely to weigh on early demand recovery and consequently slower recovery in auto component supplies to OEMs. Continuity of benefit available from weighted deduction on in-house R&D expenditure would encourage auto ancillaries to invest in building technical capabilities. Introduction of 150% weighted deduction on skill development related expenditure should partly enable address the problem related to short-supply of skilled labour.

Av i a t i o n
Proposals
Increase in service tax Proposal for allowing foreign carriers to pick upto 49% equity stake in domestic carriers is still under consideration, no final decision yet ECB upto $1 billion for working capital requirements; withholding tax on interest payments on ECB is proposed to be reduced from 20% to 5% for three years Custom duty exemption for imports of certain aircraft parts and testing equipment for third-party maintenance, repair and overhaul (MRO Services)

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Impact-Neutral
Increase on service tax rates is a negative, while it is likely to be passed on by the carriers in the form of higher air fares. Moreover, the proposal for allowing foreign carriers to pick upto 49% equity stake in domestic carriers still remains under consideration only. However, the Government has proposed allowing ECB for working capital requirements and reducing withholding tax on interest payments, which could reduce interest costs and provide much needed liquidity for the airline industry. Besides, the custom duty exemption for imports of aircraft parts and MRO testing equipments is expected to provide some relief.

T e l e c o mm u n i c a ti o n
Proposals
Fixed network for telecommunication and telecommunication towers made eligible sectors for VGF for support to projects undertaken on PPP basis. Full exemption from customs duty on parts of memory card for mobile phones.

Impact- Positive
VGF is likely to promote laying of fixed networks, which is important for development of highbandwidth connectivity. Also, VGF could provide impetus to development of new telecom towers, which has witnessed some slowdown in recent months. The budget initiative should have greater impact on expansion of telecommunications in rural areas, which has lagged in contrast to the growth witnessed in urban areas. Nevertheless, eligibility and implementation of VGF remain to be seen. Exemption on customs duty on parts of memory card for mobile phones is a positive for domestic manufacturing of these memory cards.

Retail
Proposals
Excise duty on branded apparels increased to 12% from 10% with abatement levels increased to 70% from 55%, resulting in reduction in effective tax rate to 3.6% from 4.5% No guidance on the roll-out of Foreign Direct Investment (FDI) in Multi-Brand Retail

Impact- Neutral
During the last budget, an excise duty of 10% was imposed on branded apparels, which put pressure on sales of organised retailers, especially in the fashion segment. The proposed hike in excise duty to 12% with increase in abatement levels will effectively bring down on the net tax impact on branded apparels and allow organised retail to pass on some of the benefit to attract growth. Overall, the budget, lacked to provide any clarity on the much anticipated FDI in multi-brand retailing nonetheless increased investment allocations in supply-chain related infrastructure continue to favour the modern retail in improving efficiencies in back-end.

FMCG
Proposals
Increased allocation towards rural development and agriculture-centric schemes Marginal reduction in personal tax rates 10% ad valorem duty on 50% of the Retail Sale Price for >65mm cigarettes; Increase in excise duty on hand-rolled bidis and other tobacco products; Basic Customs duty on Cigarettes reduced Increase in central excise duty from 10% to 12%

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Impact- Positive
Increased allocation towards agriculture and rural development is a positive for the sector, since it is expected to improve farm production and rural prosperity. The marginal reduction in personal income tax rates is expected to increase disposable incomes and boost consumer spending. Besides, a moderate hike in excise duty for above 65 mm cigarettes and increase in excise duty for hand-rolled bidis is a marginal positive from branded cigarette manufacturers. However, the hike in central excise duty, if passed on to the consumers, may lead to some demand moderation.

Textiles
Proposals
Increase in standard excise duty Exemption from 5% custom duty for new automated shuttle-less looms and new automatic silk reeling and processing machinery along with parts and components; Second-hand machinery to attract basic duty of 7.5% Exemption from basic customs duty to aramid yarn and fabric used for the manufacture of bullet proof helmets Reduction of basic custom duty on wool waste and wool tops from 15% to 5% Budgetary allocation to Ministry of Textiles increased by 27% to Rs. 7,000 crore Allocation of Rs. 500 crore to a pilot scheme in the Twelfth Plan for promotion and application of Geo-textiles in the North East Region Allocation of Rs. 70 crore to set up a power loom mega cluster in Ichalkaranji in Maharashtra

Impact- Neutral
Reduction in effective excise duty on branded garments to improve the profitability of the domestic branded apparel industry. However the positive impact of reduction in excise duty would be moderated due to higher input costs on account of higher excise duty on man-made fiber. Increase in excise duty to have negative impact on the man-made fiber segment as higher levy would increase the duty disparity with respect to cotton. Exemption from custom duty for new automated shuttle-less looms is a positive for the weaving segment and would support capacity addition and modernisation. Though the budgetary allocation to the ministry has been increased by 27%, the allocation towards technology upgradation fund scheme has reduced to Rs. 2,914 crore from Rs. 3,100 crore.

H e a l t hc a r e
Proposals
Income tax deduction on capital expenditure incurred on hospitals increased to 150% from 100% Allocations under the NHRM scheme increased to Rs. 20,822 crore from Rs. 18,115 crore in 2011-12 Introduction of new schemes like National Urban Health Mission (NUHM) and increased scope of existing schemes like PMSSY Full exemption from customs duty & CVD to raw materials used in manufacture of coronary stents & artificial heart valves Concessional import duty regime on raw materials used in manufacture of medical devices like syringes, cannulae, catheters, needles, blood pressure monitors and gluco-meters Basic customs duty reduced from 10% to 5% with full exemption from excise duty on 6 life saving drugs

Impact- Moderately Positive

Contrary to industry expectations the healthcare sector has not been given infrastructure status. However increased capex deduction on hospitals is expected to provide impetus to investments in the
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sector. Further, increased allocation to existing schemes such as NHRM and PMSSY and introduction of new schemes like NUHM augur well for the healthcare sector. The concessional duty regime on raw materials of specified medical devices is expected to help medical devices manufacturing companies improving their export competitiveness.

M e d i a a n d E n te r ta i n me n t
Proposals
Film Industry exempted from service tax on copyrights related to recording of cinematographic films

Impact-Neutral
While various other copyright services are already under the service tax ambit, those related to cinematographic films have been put in the negative list which should be a positive for entities engaged in offering such services. However, since no major positive announcements have been made related to relaxation in FDI norms for print, news broadcasters, radio and DTH segments, the overall impact on the media & entertainment sector is neutral.

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