Netscribes Budget Analysis 2013 : Missing the woods for the trees

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Analysis Budget BudgetHighlights 2013

HAPPY LOT Investors The hike in income threshold to invest in Rajiv Gandhi Equity Saving Scheme (RGESS) is good news for new investors to the stock market Salaried Class Middle Income Group earning upto 5 lakhs will enjoy Income Tax credit of INR 2000 Agriculture 40% larger allocation at Rs 7,00,000 crore has been provided for farm loans with interest discounts Real Estate Affordable house for buyers willing to buy upto 25 lakhs will enjoy tax benefits Garments Apparel prices may be reduced or at least will not be increased anytime soon, say retailers, as the Budget has announced a zero excise duty on cotton and yarn at the garment stage Gems and Precious Stones Buying gems will become slightly cheaper, as the duty on precious and semi-precious stones has been cut from 10 to 2% Healthcare The Ministry of Health and Family Welfare has been allocated Rs 37,330 crore in the proposed Budget UNHAPPY LOT Automobiles High end automobiles will cost more because of revised excise duty/custom duty in SUVs, high end vehicles and motorcycles Cigarettes Cigarettes, the staple item for duty hikes every Budget, has not been spared this time too, with the duty raised by 2% to 18% Media New cable connection may also cost more as duty on imported settop boxes, or STBs, has been raised by 5% High Income Group Individuals with annual salary of more than INR 1 crore will have to pay 10 percent additional surcharge

Budget

Analysis 2013

Missing the woods for the trees With probably the worst on SUVs or mobile phones were possible economic backdrop mysterious considering these in recent years and an were two robust growth sectors election round the corner, one could – and they affected domestic possibly argue that Chidambaram’s manufacturers and the middle hands were a bit tied. But that is class too. why he is Chidambaram, and the • Given the high interest environment expectations were growth-oriented, if and the fact that banks have not Big Bang. actually been extending tenors of home loans to individuals to keep Did he deliver? Maybe, when it came EMIs low, what was the harm of to micro changes here and there, but extending the Rs 25 lacs limit to all there was really no big picture, no home loans? big impetus or intent towards growth • How could the FM ignore things or big relief to citizens reeling under like the medical allowance limit of inflationary pressures. Yes, one can Rs 15,000 per month or the travel argue that a lot is left to the Reserve allowance of Rs 800 per month in Bank of India, but a lot more could such inflationary healthcare and have been done to lift the sentiment transport environments? (Not to – one of the biggest drivers to mention the oil price hike again investments and growth. The oil price after the Budget). hike that followed could not have been • In short, what did he really take worse timed. away from the rich and what did he really give to the middle class, With GDP dipping below 5% in several or, for that matter, the markets quarters, people were looking out for or industry? the growth signal. They were probably looking out for some relief too. But Chidambaram says, “the key to start then came a series of delicate jokes: the growth engine is to attract more investment both from domestic • A meagre 10% surcharge on the investors and foreign investors”. Yes, super rich earning more than Rs understood, but how? This cannot 1 crore a year was really more happen by throwing numbers or symbolic rather than impactful planning Budgets, it can only happen considering if the government with real policy measures and an was really serious, they could impetus for growth. Has he missed the have easily introduced another woods for the trees?

40% slab.

• A paltry Rs 2,000 tax rebate to those earning up to Rs 5 lacs and more in the current inflationary environment was probably more of an insult than a gift.

• And what was the message to those sectors doing well during the downturn? The higher duties

Budget Analysis 2013

Islands of happiness Despite the lack of a big picture, Chidambaram has sent small signals with respect to different avenues to invite greater investments in these areas and depict a healthier India. A lot, however, will depend on the goals versus the achievements.

Fiscal deficit The biggest concern for foreign investors looking at India apart from the pace of policy reforms was the country’s fiscal deficit. With credit rating agencies closely watching countries following the European crisis, India had the task of reigning in its fiscal deficit to remain an attractive investment destination. The Budget proposal to contain the FY’14 fiscal deficit to below 5% of the GDP (target is 4.8% of GDP) against 5.2% of GDP in 2012-13 is a very brave and positive goal. This will involve a reduction in non-plan expenditure from 12.3% to 10.8% while increasing the tax revenues from 16.7% to 19.1%.

Chidambaram expects a large portion of the revenues to come from the spectrum auctions (Rs 40,000 crore) and disinvestments (Rs 58,000 crore) with a similar amount of Rs 100,000 crore coming from an increase in tax revenues.

However, with no major taxation proposed in the Budget, to increase the tax revenue by Rs 100000 crore, the growth should be in the range of 6.5% to 7%. Considering this fiscal’s growth would not exceed 5.5%, it may be a major challenge to achieve 6.57% growth in the next fiscal to earn the additional tax revenue and thereby reduce the fiscal deficit.

Infrastructure Under the current fiscal condition, considering the subdued demand for manufacturing goods as reflected by sluggish growth in IIP data recently, the next major growth area should be the Infrastructure Sector. This Budget

offers the Look East policy to provide connectivity for the North Eastern states to Myanmar. This will provide an impetus in economic growth of the North Eastern states in view of the easy accessibility to the mainland. The present proposal is to connect North Eastern states to Myanmar, which is a part of the grand India – Myanmar – Thailand highway connectivity plan for East Asia integration. This will require assistance of the World Bank and the Asian Development Bank which may encourage fund flow in the Infrastructure Sector.

Haldia Port to the Farakka Powerplant.

Taxation

There have been no major changes in Direct or Indirect taxes in the Budget proposal, however, much awaited tax reform measures like the Direct Tax Code (DTC) and Goods and Service Tax (GST) has received an impetus.

The Finance Minister has proposed to introduce DTC and GST in this fiscal itself which will be a major boost to industrial growth. In view of the continuous opposition by some of the states for introduction of GST, the Finance Minister has agreed The Budget also proposes the to compensate the affected states development of two new ports – one in adequately for revised rate of Central Andhra Pradesh and the other in West Sales Tax (CST).

Bengal, with capacity of 100 million ton cargo handling per annum. Further, a With regard to Income Tax, there new outer harbour will be developed has been no change in Tax slabs in Tamil Nadu. This development will and rates. For taxing the super rich, involve Public-Private-Partnership 10% surcharge has been proposed (PPP) with an estimated investment for income above Rs 1 crore. For the of Rs 7,500 crore with an estimated middle class, a token tax relief has capacity of 42 million tons. been extended in the form of tax credit of Rs 2,000 for income up to Rs 5 lacs.

Five inland waterways have been The FY’14 estimates peg income tax declared as national waterways. The growth at 16.9% as against 11.2% in Haldia to Farakka stretch in West FY’13. The Service Tax revenue growth Bengal has been awarded the first has been assumed at 36% of the gross transport contract. This will help in tax revenue as against 13% in the transportation of imported coal from last fiscal.

Budget Analysis 2013

Agriculture The agricultural community constitutes a major part of our population. To cater to the requirements of this sector, a 40% larger allocation at Rs 7,00,000 crore has been provided for farm loans with interest discounts.

The growth in the agricultural sector is of prime importance considering the fact that to achieve 9% growth; the farming sector needs to grow by 4%.

Therefore, it may be considered as a move in the right direction.

Encouraged by the robust production in cereal crops in the eastern states, the Budget proposes a Second Green Revolution in these states to encourage cash crops as alternatives to traditional crops like rice, wheat etc .

Moreover, two National level institutes will be established at Chattishgarh and Jharkhand which will serve as centers for excellence in agricultural bio-technology.

Manufacturing and Construction For an economy to be truly developed, one of the prerequisites is a robust manufacturing sector. However, a sluggish manufacturing sector has been weighing on the country’s growth, as reflected by recent IIP data.

To provide a boost to the sector, the Union Budget 2013-14 has proposed a number of development measures for the manufacturing industry.

Semiconductor wafer fab plays an important role in the eco-system of electronics manufacturing. In order to promote the manufacturing of electronic goods, incentives will be provided to semiconductor wafer fab manufacturing facilities which include zero customs duty for plant and machinery. A reduction in duty on specified machinery for manufacture of leather and leather goods, including footwear, from 7.5% to 5% has been announced in the Budget.

textile manufacturing include the establishment of textile parks under Scheme for ‘Integrated Textile Parks’ (SITP) which will house apparel manufacturing units. An amount of Rs 50 crore has been allocated to the Ministry of textiles in order to provide supplementary funding of Rs 10 crore for each textile park.

FY13 (RE) FY14 (BE)

Budget size Gross tax-GDP ratio (%)

14,308

16,653

10.4

10.9

14.3

14.6

4,674

4,840

5.2

4.8

Receipt/expenditure growth (%) Net govt. borrowing (Rs bn)

Healthcare

Fiscal deficit-GDP

India is steadily gaining importance as a medical tourism hub and is attracting patients from all over the world for inexpensive and effective treatments.

Also, with higher disposable incomes and the higher occurrence of lifestyle diseases the healthcare market in India is witnessing tremendous potential.

This year, the Budget allocated Rs 66,165 crore to the Indian healthcare space. The Ministry of Health and Family Welfare has been allocated Rs 37,330 crore in the proposed Budget; out of which the new National Health Mission that combines the rural mission and proposed urban mission will be allocated Rs 21,239 crore. Medical education, training and research have been considered for a proposed provision of Rs 4,727 crore.

The National Programme for Health Care of Elderly is set to be executed in 100 selected districts of 21 states. The government has also shown interest to mainstream Ayurveda, Unani, Siddha and Homoeopathy through National Health Mission for which Rs 1,069 crore is being allotted to the Department of AYUSH. The Budget also declared allocation of Rs 1,650

ratio (%)

RE-Revised estimates, BE-Budget estimates Source: Government of India

crore for the 6 AIIMS-like institutions that have already commenced their academic session and are expected to initiate operations of the attached hospitals by 2013-14.

Education A greater expenditure on education will have a positive impact on companies providing education and IT related services such as Educomp, NIIT, Aptech etc.

The Budget proposes a 7% increase in the allocation of Rs 27,258 crore for education under the Right to Education Act and the Sarva Shikshya Abhiyaan (RTE-SSA). It also provides Rs 3,924 crore for Rashtriya Madhyamik Shikshya Abhiyaan (RMSA). A sum of Rs 1,000 crore has been allocated for Nation Skill Development Corporation (NSDC) for attracting youth to job based vocational trainings.

Non-Plan Expenditure Estimates

Rs Crores

Non-Plan Expenditure 2012-13 RE

2013-14 BE*

Growth %

Interest Payments and Debt Servicing

319759

360000

13%

Defense and service

193407

206000

7%

Fertilizer Subsidy

100974

85000

-16%

Food Subsidy

100000

125000

25%

72260

40000

-45%

Petroleum Subsidy

Under the Budget for FY’14, the concession period has been extended for the manufacturers of environment friendly vehicles.

Also, proposed measures to boost

Key budget figures

Total Non Plan Expenditure

1063580 1111000

4%

*Estimated

Sources: MOF

Budget Analysis 2013

Real Estate

Key Economic Indicators India Economic Data Latest Month Previous Month on Month Month change %

IIP growth % y-o-y

-0.10%

Nov-12

8.20%

-2.22%

Manufacturing % y-o-y

0.30%

Nov-12

9.60%

-2.14%

WPI y-o-y*

7.18%

Dec-12

7.24%

-0.30%

Exports USD billion

0.25

Dec-12

0.22

11.57%

Imports USD billion

0.43

Dec-12

0.42

2.19%

Trade Balance USD billion

-0.18

Dec-12

-0.19

-8.66%

Bank deposit growth % y-o-y

11.10%

Dec-12

12.80%

0.53%

Bank credit growth % y-o-y

15.10%

Dec-12

17.00%

1.37%

*Expected

Source: CSO, RBI, Government

Energy and Utilities Keeping a focus on encouraging alternative energy generation methods, the Union Budget has proposed incentives for green energy and quite a few tax incentives for the energy sector. The ‘generation based incentive’ for the wind energy sector has been reintroduced with a reservation of Rs 800 crore. Municipalities are encouraged to participate in the Public-Private-Partnership (PPP) model and generate power from urban waste. The Government has also removed customs duty on electrical plant and machinery and plans to shift to the revenue sharing model from the profit sharing model in all oil and gas projects.

Telecom, IT and Electronics This year, there were some significant Budget announcements in this space.

However, the telecom industry was largely disappointed due to the absence of any announcement related to tax relief. On the contrary, there will be 6% duty on all mobile phones priced above Rs 2,000 which adding to the burden of the industry as well as the consumers.

The Indian Finance Ministry has proposed some positive initiatives, especially in the hardware manufacturing segment. As proposed in the Union Budget, the government will initiate the promotion of chip manufacturing in India in order

to significantly reduce the import of electronics. Furthermore, the government has focused on the promotion of the manufacturing of set top boxes in the nation itself. In this financial year’s Budget, import duty levied on set top boxes have been increased from 5% to 10%.

The Union Budget has given the Real Estate sector and the home buyers something to look forward to.

Allocation of the rural housing fund has been raised to Rs 6,000 crore along with an Urban housing fund of Rs 2,000 crore. First time home buyers will get an increased interest deduction of Rs 1 lac for loans up to Rs 25 lacs.

The Budget has introduced TDS at 1% on the value of immovable property exceeding Rs 50 lacs. These measures are expected to boost demand for the affordable housing segment.

Automobiles While the proposed Budget has had a neutral impact on the Auto sector, manufacturers of sports utility vehicles (SUVs) and high end automobiles are not happy. A negative has been the increased excise duty levied on sports utility vehicles (SUVs) to 30% from the existing 27%, on the grounds of higher occupancy of parking and road space.

Import duty on superbikes and high end cars has also been hiked, and now stands at 100% from 75% previously for fully built cars and 75% from 60% earlier for motorcycles above 800cc.

Some of the other proposals from this year’s Budget include banking norms compliance, ATM expansion, transforming post offices and the textile sector and rolling out Aadhaar Meanwhile, the Jawaharlal Nehru enabled payments for several National Urban Renewal Mission government schemes.

(JnNURM) has been provided Rs 14,873 crore. Of this amount, a Media and Entertainment significant portion will be used for the The proposed Budget brings cheer to purchase of 10,000 buses especially the FM broadcasting sector by adding for the hilly regions. more cities under the government’s initiative for expansion of the FM Social Sector circle. The expansion of FM stations In the Social Sector, the Government in 294 cities in the country has been has proposed some bold steps to announced. As a reference to Phase III manage the fiscal deficit. The Budget expansion of FM Radio for which the aims at reduction of subsidies in the Information and Broadcasting ministry area of petroleum, food and fertilizers. is already working, the Finance As against the subsidy of 2.6% in the Minister has announced that 839 new last fiscal, the proposed subsidy for FM radio channels will be auctioned. this fiscal stands at 2%. Nonetheless, considering the political scenario in Last year witnessed full exemption the country, reduction of subsidy as of service tax on copyright and proposed in the Budget may prove to cinematography, in line with the be a major challenge. industry demands. This year, the FM gave in further to the demands In the area of National Rural by exempting sector Service Tax on Employment Guarantee Act (NREGA) copyright on cinematography for the allocation remains unchanged. movies exhibited at theaters.

Budget Analysis 2013

During FY’14, the ministry will focus on controlling food inflation and augmenting the supply side to meet the growing demand for food items.

An amount of Rs 10,000 crore has been allocated as incremental cost for National Food Security Bill. In order to attract investment and enhance productivity of livestock base, the ‘National Livestock Mission’ will be launched for which an amount of Rs 307 crore has been allocated. In addition, a financial support of Rs 5000 crore will be provided to NABARD for construction of warehouses, godowns, silos and cold storage units for storage of agricultural produce, both in public and private sectors. Moreover, a company will receive an investment allowance of 15%, if it invests Rs 100 crore or more in plant and machinery during this period.

Potential for Growth

as a positive approach in this direction, the Budget has proposed some major reform measures to encourage investment in the country in the form of Domestic Investment (DI) and Foreign Direct Investment (FDI). Also, the advent of DTC and GST will have a very positive impact on the sentiment of investors.

As against the ruling price in the world market of around $14 per unit, the current price for Indian producers is pegged at less than $5; this is drying up investment in this crucial area both by domestic and foreign investors. The current Budget proposes to review the gas pricing and oil exploration policy.

Once that is done, it is expected to attract more investment in areas like In the past, the General Anti shale gas.

Avoidance Rule (GAAR) has conveyed a wrong message to the international All in all, the Union Budget for FY’14 investor community. In this Budget, failed to receive a thumbs up from it has been proposed that GAAR will the industry, especially since the expectations were much higher from be postponed for implementation Chidambaram after his big bang to 2016. The Government has also reform announcements over the past proposed to differentiate between several months. Experts opine that it Foreign Institutional Investment (FII) kept the macro promises such as the and Foreign Direct Investment (FDI). one on fiscal deficit while some believe Holding stake of 10% or lower by a its outcome will be evident laterin the Foreign Investor will be considered as year. No matter which side we take, a FII and above 10% will be considered Budget is only as good as the last one till it delivers what it sets out to do. as FDI.

Although India is the 3rd economy in Asia, the major challenge that faces In recent times, gas price fixation the country today is to attain optimum has become a major deterrent for GDP growth of 6.5% in 2014. However, investment in the Oil and Gas sector.