2014-15

Tax Rates:
-Direct Taxes

Market movements:
-Equity & Debt

Economic update:
- Budget summary
- Revenue snapshot
- Expenditure snapshot

Sector updates
Financial Sector
Mutual Funds
Equity Market: Outlook and Strategy
Debt Market: Outlook and Strategy

The finance minister has presented the
budget amidst challenges like sub 5% growth
and high level of inflation.
The budget stresses the need to revive
growth in manufacturing and infrastructure
sectors.
It also highlights the importance of
improvement in Tax to GDP ratio and Non-tax
revenues.
Tax revenues budgeted at 10.6% of GDP in
FY15.
Tax budgeted to grow at 20% in FY15
compared with 10% growth seen in FY14
Assumption of nominal FY15 GDP growth of
13.4%.
Retains fiscal deficit target at 4.1% of GDP.
Increased divestment target of Rs 634 bn
Boost to domestic manufacturing and
investments, particularly in infrastructure
and export-oriented manufacturing sectors
PPF scheme annual ceiling enhanced to Rs 1.5 Lakh p.a.
from Rs 1 Lakh at present
Personal income tax exemption limit raised by Rs 50,000/-,
to Rs 2.5 Lakh
Investment limit under section 80C of the Income tax Act
raised to Rs 1.5 lakh
Deduction limit on account of interest on loan in respect of
self-occupied house property raised from 1.5 Lakh to Rs 2
Lakh
Rate of tax on long term capital gains (LTCG) increased to
20% on transfer of units of mutual funds, other than equity
oriented funds.
Also, the period of holding in respect of such units
increased from 12 months to 36 months for the said
purpose
Personal income tax exemption limit raised
by Rs 50,000/-, from Rs 2 lakh to Rs 2.5 lakh
in the case of individual tax payers below the
age of 60 years.
Exemption limit raised from 2.5 lakh to Rs 3
lakh in the case of senior citizens.
Investment limit under section 80C of the
Income tax Act raised from Rs 1 Lakh to Rs
1.5 lakh
Deduction limit on account of interest on
loan in respect of self-occupied house
property raised from 1.5 Lakh to Rs 2 Lakh.

Positive:
The increase in the personal income tax limit in
conjunction with the increase in investment limit under
Section 80C and the increase in the allowed deduction
limit on account of home loan interest is a big positive for
investors/individuals/savers.

The benefits that will accrue on account of the tax saved
by way of the above should add a decent amount in the
hands of individuals due to a lesser tax outgo.
Equity Market:

Among the sector indices, consumer durables lost more
than 3% while Realty lost almost 5%.

In the Sensex stocks Hindalco (3.16%), Tata Power (2.72%)
& Gail India (1.54%) were the gainers while Hero Motocorp
(-3.99%), TCS (-2.06%) and Bharti Airtel (-1.59%) were
among the major losers.

The Sensex lost 72 points or 0.28% to close at 25,373 and
the Nifty lost 17 points or 0.23% to close at 7,568

Debt Market:

The market had expected the new fiscal
deficit target in the range of 4.4%-4.6%,
resulting in an additional borrowing burden
for FY15 of INR 300-400bn.

However, the status quo on fiscal deficit and
borrowing numbers was a mild positive
surprise for the bond markets.
Retains fiscal deficit target at 4.1% of GDP; but revenue
targets even more optimistic.

Budget FY15: Gross tax revenues overestimated by Rs.400-500
bn while non-tax revenues overestimated by Rs ~150 bn

Widespread overestimation:
Increased divestment target of Rs 634 bn, though
significantly higher compared to FY14 RE, looks achievable,
given disinvestment potential and market conditions.

Budget austerity relaxed a bit as expenditures likely to grow
at 14.8% YoY (over FY14 actual exp) the fastest in past 4
years; Subsidy bill credibly provided.

Quality of fiscal consolidation unlikely to improve
significantly. Estimated improvement in revenue deficit (2.9%
of GDP from 3.3%), may fall short given the extent of
overestimation.


Boost to domestic manufacturing and investments,
particularly in infrastructure and export-oriented
manufacturing sectors.

Policy implications: Meeting budget arithmetic on revenue
side would be difficult. With cash drawdown of Rs172 bn
already used for funding, shortfall in revenues have to be
met through increase in borrowing, higher divestment or
cut in expenditure. Even increasing pace of expenditure
would be inflationary in nature thus raising possibility of
further rate hikes.
Capital market measures (Positive)
ADR/GDR allowed for all instruments (earlier allowed only
for equity).
Revamp of Indian Depository Receipt (IDR) to make it more
liberal.
Clarity on tax treatment on income of foreign fund whose
fund managers are located in India.
Uniform KYC norms and inter-usability of the KYC records
across the financial sector.

Positive for Indian cos looking to raise funds abroad,
foreign cos looking to raise funds in India; Uniform KYC
positive for entire financial sector
Agriculture and Rural Development
Price stabilization fund of Rs.5 bn to mitigate
price volatility.

Impetus to farmers improve warehousing, post
harvest lending, and reorient APMC Act to
establish private markets/yards.

Agriculture credit disbursement targeted at Rs.8
tn up 15% YoY.

Allocation for rural development increased by
35% to Rs.800 bn.

Autos (Positive)
Deadline for lower excise duty was extended
pre-budget
A few indirect positives in Budget:
Increase in personal tax exemption threshold
Capex for Defense increased by 20%
Long-term Agri measures to improve farmer
productivity/income

Positive for two wheelers and tractors
Banking and Financial Services (Positive)
Infrastructure lending to be lucrative for banking system as
there will be limited regulatory pre- emption of SLR, CRR
and PSL. This will lead to redeployment of resources at
higher yields.
Insurance sector foreign investment limit increased to 49%
from 26%. This will lead to value unlocking for domestic
promoters.
No major increase in re-capitalization of PSU banks and
indication of higher retail participation in future dilution
(we expect there would be some discount for retail).
Uniform KYC norms and inter-usability of the KYC records
across the financial sector.
Positive for private and PSU banks. Increase in foreign
limit in insurance to benefit companies in this business

Capital Goods (Positive)
Banks will be permitted to raise long term funds
for infrastructure lending with minimum
regulatory pre-emption such as CRR, SLR & PSL.
This would lower the cost of funds by 100- 200
bps.
Reduced capex threshold to Rs 250 mn from Rs 1
bn earlier for availing higher depreciation rate of
15%.
FDI in Defence raised to 49% from 26%
Subsidies for wind turbine sector not restored
Outlays increased in Defence by 20%, Railways
budgetary support hiked by 25%


Cement (Positive)
Increased spending on Infrastructure such as
roads, metro rail projects and urban
infrastructure.

Cement industry would benefit from higher
volume growth
FMCG & Retail
Excise duty on cigarettes hiked by weighted
average ~21%.
No timeline for GST implementation was a
major negative
Scrapping of excise duty on Palm Fatty Acid
Distillate and Glycerine to benefit soap
manufacturers
Reduction in excise duty on footwear
Internet
Service tax to be levied on online and mobile
advertising, while print media continues to
be exempt from service tax net.
This will make online and mobile ads costlier,
which can marginally impact ad volumes in
the short run.
However, we do not expect any change to
the secular shift in offline ad spends to
online.
Power and Infrastructure (Positive)
Banks to raise long term funds for infrastructure lending with
minimum regulatory pre-emption such as CRR, SLR & PSL.

Tax on dividend from foreign subsidiaries continued at 15%
and sunset clause removed.

Investment Trusts for infrastructure to get tax pass-through
benefit similar to Real Estate Investment Trusts (REITs)

To set up 16 new ports with allocation of Rs 116 bn.

Allocation of ~Rs 380 bn to NHAI in FY15 for road building
Positive for EPC companies, private infrastructure
developers, private power gencos.
Metals (Negative)

Levy of import duty of 2.5% on coking coal.

Negative for steelmakers
Oil & Gas (Negative)
Proposed a complete overhaul of subsidy
regime. However, no concrete steps/
timelines for subsidy reduction were
announced.
Customs duties on ethylene, propylene,
butadiene and ortho-xylene cut to 2.5% from
5%.
PPP models to be employed for developing
gas pipelines infrastructure.
Negative for Oil PSUs as Street expected
roadmap for subsidy reduction.

Realty (Positive)
To provide necessary incentives and a conducive tax
regime for REITs, however, further easing of tax
essential for minimizing leakage which is a must for
REITs to succeed.

Lower minimum area and capital requirements for
FDI in real estate

Increased tax incentives on home loans (higher limits
under Sec 24b and 80C)

These measures will improve liquidity for the sector.
Telecom (Negative)
Budgeted amount from telecommunication
services at Rs 455 bn.

Imposed basic customs duty at 10% on
specified telecommunication products

Likely higher payout for 900 Mhz to increase
leverage and cost of operating business
Capital Market Uniform KYC and single
operating demat account
Introduction of uniform KYC norms and inter-
usability of the KYC records across the entire
financial sector.
Introduce one single operating demat account
Both these measures are a positive for the
capital markets. Ease of transactions from an
operational point of view for
investors/customers/clients will be enhanced.
This should also help attract more number of
investors to the financial sector as a whole.
Small Savings
Kissan Vikas Patra (KVP) to be reintroduced

A special small savings instrument to cater to the
requirements of educating and marriage of the
girl child to be introduced.

A National Savings Certificate (NSC) with
insurance cover to provide additional benefits
for the small saver

In the Public Provident Fund (PPF) scheme,
annual ceiling will be enhanced to Rs 1.5 Lakh
p.a. from Rs 1 Lakh p.a. at present.
Positive.:
The reintroduction of the KVP after its closure close to 2.5
years ago is a welcome move. Alongwith the NSC, this
could give small savers an additional attractive option
from a fixed income perspective.

The enhancement of the PPF limit is also a constructive
move since at present, the PPF is about the only
instrument which falls under the exempt- exempt-
exempt(EEE) regime.

The EEE essentially means that the investors money at the
time of investment is exempt from (income) tax (the first
E), the interest earned on PPF is also exempt from tax (the
second E) and the maturity proceeds too are exempt from
tax (the third E).
Since the beginning of this year, equity markets have
rallied on the back of expectations of a stable and pro
business friendly government at the Centre. This rally
was further strengthened by the outcome of the
General Election results. BJP led NDA won by a
comfortable majority.

FIIs pumped in $5.8 bn in the last quarter on anticipation of
turnaround in the economy with strong verdict in favour of
business friendly Govt. led by Mr Modi who has a successful
history of leading the state of Gujarat.

The steps announced in the budget can only be the beginning of a
journey towards a sustained growth of 7-8 per cent or above
within the next 3-4 years along with macro-economic stabilization
The government retained the fiscal deficit
target of 4.1% as was outlined in the interim
budget.
Markets would also keep a close eye on
inflation numbers.
RBI is unlikely to lower rates in the near
term. Any threats to inflationary trajectory
might lead RBI to even tighten the rates.
Another positive trigger could arise from any
move to increase G-Sec limits for foreign
investors.


Another positive trigger could arise from any move
to increase G-Sec limits for
foreign investors
At current levels, many negatives already seem to
be priced into G-sec yields. The
likelihood of G-Sec yields moving much higher from
current levels seems unlikely.
They are likely to be range-bound in the near term,
however they can come off in the
medium term. We continue to advise investors to use
these levels to
accumulate Long Term Income , Gilt and Dynamic
Bond Funds with a horizon
of 18 to 24 months

The budget does not provide allocation for
fresh tax-free bond issuances this year.
Due to lack of fresh issuances and continuous
demand of tax free bonds, there could be
further improvement in the yields in the
secondary market.
Investors can invest in tax free bonds at
current levels in the secondary market