Budget Expectations 2013-14

promises to keep, And miles to go before I sleep*

*Courtesy Robert Frost

Nandan Chakraborty Managing Director - Institutional Equity Research nandan.chakraborty@axiscap.in 91 22 4325 1107

Sachchidanand Shukla Sr VP & Economist sachchidanand.shukla@axiscap.in 91 22 4325 1108

11 Feb 2013

Key things to watch in this Budget

11 Feb 2013
STRATEGY

BUDGET EXPECTATION 2013-14

PRE-BUDGET REPORT

The FM has already stolen his own thunder by announcing a slew of measures outside the budget. Focus will now be on Stability, Credibility on fiscal consolidation and Reform intent in order to reposition India as an attractive investment destination: Stable policy regime to encourage normal business expectations and capital inflows Fiscal deficits cannot be tackled in one year. It is the trajectory that matters. Thus the budget should stress:

Revenue increases without hurting growth: A roadmap for implementing GST and DTC Expenditure control: Roadmap for reining in subsidies through Direct Cash Transfers etc

Quality of fiscal adjustment: i.e. in April-December, non-plan expenditure rose 12% (budgeted ~9%) while plan expenditure rose <7% (budgeted 22%). Thus there are drastic capex cuts to make the fiscal deficit look better; but this may endanger economic recovery. The FM should be cutting wasteful expenditure instead

Roadmap for key bills: GST, DTC, Land Acquisition, Mining and the Insurance Bill Propping Savings: Planned reduction in fiscal deficit, higher tax breaks and regulatory tweaks to channelize household savings into financial savings (ie MFs and Insurance) And Investments: Deepening the corporate bond market and steps to improve the regime for foreign capital flows. Specific proposals include investment tax credit, depreciation benefits, a cut in the withholding tax rate for debt instruments and a holistic policy for foreign investments

Tax measures

11 Feb 2013
STRATEGY

BUDGET EXPECTATION 2013-14

PRE-BUDGET REPORT

Rates may remain broadly unchanged though there could be some selective duty rejig and pruning of exemptions:
Indirect taxes Customs duty: Expect reinstatement on Petro products, to provide ~Rs 490 bn in revenues Excise duty: Selective hikes, lowering threshold for SMEs to Rs 10 mn. Also expect diesel price hikes to be front ended, given bunching of state elections

Despite a clamour for higher tax rates for the rich, the budget may soften the blow by:
Direct Taxes Raising Income tax exemption limits for the middle class Incentivizing investments into Financial assets : Offering tax incentives for Pension products/MFs or include Rajiv Gandhi Equity Savings scheme & Tinkering with LT capital gains tax on Infrastructure/ Corporate bonds

Has the FM made his own budget a non event already?

11 Feb 2013
STRATEGY

BUDGET EXPECTATION 2013-14

PRE-BUDGET REPORT

The FM has announced a slew of measures since mid-Sep to soothe investor nerves
22000
Cabinet approves 49% FDI in insurance, 26% FDI in pension funds Govt approves FDI in multibrand retail, aviation, power exchanges and broadcast services, Disinvestment in 5 PSUs FM clears 49% FDI in insurance, pension sectors RBI cuts CRR by 25 bps Cabinet approves 10% divestment proposal in NMDC
Banking Laws (Amendment) Bill, 2011; Companies Bill cleared in LS

20000

GAAR introduced

Sensex

18000

Rail fare hike RBI cuts Repo & CRR by 25bps PM formally announced launch of Direct Cash Transfer Scheme from Jan 1, 2013

16000

Govt hikes diesel prices by Rs 5/ltr, subsidised LPG cylinders capped

RBI cuts CRR by 25 bps

UPA Wins Vote on FDI in Retail in LS & RS

14000

Mar-12

Apr-12

Jul-12

Dec-12

May-12

Oct-12

Feb-12

Jan-13

Jan-12

Jun-12

Aug-12

Source: Bloomberg, Axis Capital

Nov-12

Sep-12

Feb-13

Policy Reforms pipeline To do list

11 Feb 2013
STRATEGY

BUDGET EXPECTATION 2013-14

PRE-BUDGET REPORT

Government Reforms Under Consideration Increasing FDI in insurance to 49% Allowing FDI in pension at 49% Land Acquisition Bill Direct Tax Code(DTC) Comments Parliament approval pending, opposition from BJP and Left Parliament approval pending Yet to be ratified by the Parliament post changes The DTC, touted as a big facelift of the Income Tax law, has seen a number of its provisions get diluted. The govt is yet to give any firm indication on the new law Govt. has appointed two committees to prepare a report on implementation of GST. These committees will examine the issue of compensation to states for loss of revenue and the design of GST

Preparation for implementation of Goods & Service Tax (GST)

Sectoral expectations: Summary...

11 Feb 2013
STRATEGY

BUDGET EXPECTATION 2013-14

PRE-BUDGET REPORT

Sector

Key budget expectations

Impact
Positive for Tata Power/ Steel/ Motors, Hindalco, Sterlite, Sun Pharma, Godrej Consr, etc.

General

Lower dividend distribution tax from foreign subsidiaries (current 15%)

Autos

Increase in excise duties, esp on large diesel passenger vehicles

Negative: M&M

Banks & Fin Serv

Elevated govt borrowing program to pressurise yields/ liquidity (-). Industry lobbying for full tax deductability on NPA provns (+). Pub Sr banks: Recapitalisation (+)/ Agri loan target growth>15% (-)

Positive for Insurance: HDFC, ABNL

Insurance: Increase in FDI limit to 49%

Import duty hike on power eqpt by 5-10% from current 20-27% Higher depreciation rate on capex from 15% to 25% Restoration of subsidy for wind power Outlays: decrease in Defence by 5%, Watch Railways (50% jump to Rs 300 bn) & JNNURM (urban devt: maintain at Rs 150 bn) Positive: L&T, Suzlon Negative: BEL

Capital goods

Sectoral expectations: Summary...

11 Feb 2013
STRATEGY

BUDGET EXPECTATION 2013-14

PRE-BUDGET REPORT

Sector

Key budget expectations

Impact
Negative: Cos may not be able to pass on the hike due to weak demand

Cement

Reshuffle in excise duty structure leading to increase in net duty

FMCG

GST can reduce cascading taxes and decrease price differential with unorganised players
Increase in excise duty for cigarettes (mkt expectn~10% increase) Clarity on FY14 NBS subsidy: current DAP subsidy at Rs 14.5K/ te Industry lobbying for regulation on DAP imports due to high inventory Increase in limits in tax free bonds (Rs 600 bn, Rs 20K per individual) Freight hike for coal in Railway budget (-) Decrease debt cost: Refinancing of INR debt thru ECBs. IIFCL to guarantee pvt infra bonds Lower dividend distribution tax from SPV if re-invested in capex

Positive for all (GST) , ? ITC

Fertilisers

Positive: Coromandel, Zuari if DAP imports regulated

Infrastructure and Power

Positive for all pvt infra developers and pvt power gencos

Media

Lower excise and customs duty on set top box

Positive for Dish TV and Hathway Cable

Sectoral expectations: Summary

11 Feb 2013
STRATEGY

BUDGET EXPECTATION 2013-14

PRE-BUDGET REPORT

Sector

Key budget expectations

Impact

Metals

Hike in import duty for steel to 10% vs. 7.5% currently

Positive for all steel cos

Re-introduction of 5% customs duty on crude oil Clarity on FY13 subsidy sharing formula (US$56/bl for upstream cos) Clarity on domestic natural gas pricing

Oil n Gas

Positive: Cairn, RIL Negative: BPCL, HPCL, IOC

Increase in limit for income tax deduction on interest on home loans Extension of 1% interest subvention on home loans by 1 yr Industry lobbying for infra status for affordable housing Positive

Realty

Infra status to Tower companies Reduction in multiple taxes/ levies Auction mobilisation amt and timeline? (-) Positive

Telecom

Many proposals may be addressed separately through the National Telecom Policy/ Spectrum Enactment Act

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