Kredent Consensus Budget Expectations

25th February 2009

Summary
 This report will provide you with details regarding the expectations form the Budget 2009. In
this we have not tried to showcase the expectations we have from the budget but have
provided the consensus expectations of different brokerage houses/institutions

 The budget will be important from the perspective of the industry and the individuals because
it is being touted as the beginning of the end for the fiscal stimulus which was provided last
year to drag the economy out of the fears of recession

 What will be important when the Finance Minister delivers the speech this time around is
what he has in store for the country. From an industrial point of view it would be expected
that the stimulus measures are allowed to continue while hard run economists would want a
roll back of stimulus to make the long term growth story sustainable and reducing the risk of
an increased deficit

 We believe that as most of the budgets the MEDIA has hyped this budget too as a game
changer for the markets and industry. However, in reality is that the government should
present a stringent budget as it is not under any pressure from any allies in presenting an
“economically unviable, politically favorable, aam aadmi budget”
Agenda

• Highlights
• Fiscal deficit
• Rising Subsidy bill
• Stimulus measures provided by the Government
•Can the stimulus be rolled back
•Pre/Post budget movements
• Sectoral Consensus Expectations
Budget 2010 - Tightrope Walk
- Business Standard
 Highlights
•The focus of the Finance Minister would be on improving the fiscal deficit situation
which is being touted as the catalyst for the withdrawal of the stimulus
•The street is expecting the FY11 deficit to be around 5.5% of GDP, and hence any
figure above that could highly disappoint the market and can lead to a selling pressure
•While issues like FDI relaxations/allowance, and implementation of GST may be
addressed, other critical issues like labor reforms, pension reforms may need broader
political consensus. Direct Tax code is also an issue which might be addressed and
clarification on the framework might be given
•The Government is expected to bring down the fiscal deficit by measures such as
revenues from auction of 3G auction, disinvestment and increasing excise duties and
service tax. While disinvestment and spectrum sale will bring in one time revenue, we
expect it certainly to be of much help to a Government which is serious on bringing
fiscal prudence back after the year of low duty structure
•The Government is set to continue with its expenditure on social benefit schemes
which act as a measure in improving rural income and bridging the divide between the
rich and the poor. However reforms rolled out to industry are expected to be withdrawn
because demand seems to be back rolling as evident from the fast growng IIP numbers
•We expect no major change to come in the tax structure considering GST and Direct
tax Code are being drafted for FY11. The Govt. Stance on MAT will also be under
review but there are no major changes expected in the indirect tax structure
Fiscal Deficit
•The FM is faced with the task of bringing
back the fiscal deficit to sustainable levels. Additional Revenue estimated in the FY10-
This arduous task would require the FM to 11
cut down on expenditure given on subsidies Source Revenue in Rs. Crore
and as fiscal stimulus 3G Auction 35000
•If the finmin does not roll back the excise NMDC FPO 15300
cuts and stimulus packages, then the deficit SAIL FPO 18000
position could worsen Coal India IPO 10000
• The budgetary expenditure will be relived
from the burden of the Sixth Pay
Fis cal d e ficit as a % o f GDp
Commission Arrears and the farm loan
waiver which because of being a one time 8
expenditure wont reflect this time around 7
6
• However we believe that any decline in the 5
expenditure will be offset by the increased 4
spending on public infrastructure specially 3
roads and highways 2
1
• The government is also expected to 0
reduce the fiscal deficit by disinvestment and FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
revenues from the 3G auction RE BE
Rising subsidy bill over the years…..
• The subsidy bill of the Government has been steadily rising every year

• The subsidies given away last year were almost double of its preceding year and it can be clearly
gauged that such an increase is not sustainable every year and thus we expect that fiscal prudence should
reside over a populous budget and the subsidy burden be reduced gradually from this fiscal year
Mounting debt burden of the government
• The government has been increasing its debt constantly thus increasing its fiscal deficit to
around more than 6%
• Internal debt has increased by around 70% over the five years while external debt has
increased by around 46% over the same period
• The government has been randomly taking debt from IMF, World Bank and other big foreign
financial institutions, which is directly putting pressure at the budget-deficit and thus on the
economy’s growth and prosperity

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

(in Rs.’00 crore)

Public Debt 14840.01 16476.90 19203.90 21360.85 24946.20

Internal debt 13897.58 15449.75 18083.59 20144.51 23569.39

External debt 942.43 1027.15 1120.30 1216.34 1376.80

Other Liabilities 7761.43 8909.05 9170.35 9999.90 10008.31

Stimulus measures provided by the
Government
 Excise Duty reduction from 12-14% to 8%

 Interest subvention of 2% for labour-intensive export sectors like textiles, leather, gems &
jewellery, marine products and SMEs

 Additional funds/incentives provided to support exports

 Government authorizes India Infrastructure Finance Company (IIFCL) to raise Rs10,000cr

through tax-free bonds to refinance long gestation infrastructure projects, particularly under the
PPP route

 Borrowing limit for State Governments raised by 0.5% (Rs30,000cr) of their gross state domestic
product

 Service Tax reduced from 12% to 10%. This had an impact to over half of the country’s GDP as
Service sector accounts for more than 50% of the Indian GDP
Market movement post/pre budget month
Market movements one month before and after the budget

50
44.5
45
40
35
27.9
30
25 21.3
Where
20 16.8 will it
15 head this
8.4 7.9 7.82 8.77 8.12 time??
10 5.7
3.6 4.6 4.54
5 1.9 2.1 1.02 2.41 1.04
0.42 -0.02
0
-5 -1.9 -0.40 -0.62
-3.3 -3 -3.29
-10 -6.3 -7.15
-8 -9.1 -8.18
-15 -11.9 -11 -11.3 -10.8 -11.00
-20
-19.1
-25
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Pre-Budget Post-Budget
Can the stimulus be rolled back???

 IIP growth in FY09 over FY08 as seen in the chart below shows that industry has grown and the
stimulus has been successful
 The stronger IIP numbers are an evidence of the fact that growth has picked up and now is the time
when the measures infused to provide liquidity will be withdrawn slowly to cushion any expected
downfall and also bridge the deficit
 Inflation has also started creeping its head up again with Food price Inflation at 17.43% in January and
Wholesale Price Index (WPI) creeping to 8.56% in January
 The Government is also bearing the burden of increasing fuel subsidies, fertilizer subsidies and other
non plan expenditure which are rising to astronomical levels and a parity needs to be drawn in the
revenue and expenditure structure to sustain long term growth which the Finance Minister would also
know better

Particulars August September October November December

FY09-10 10.40% 9.10% 10.30% 11.70% 16.80%
FY08-09 1.70% 6% 0.10% 2.50% -2%
Sectoral Consensus View
 Automobile

Issues Industry wish list Expectations Rationale Impact

Increase in excise duty No increase in excise Likely, Hike in excise duty Auto sales have been Negative
duty for automobiles strong during FY10

Allocation of funds under Increase in JNNURM Likely Government thrust on Positive for players in
JNNURM funding for urban and rural improving public transport commercial vehicle
transport segment

Extension of depreciation For CV's and trucks this is Unlikely Sales of Cvs have started Negative for truck makers
benefits expected to end in FY10E to revive
Research House Consensus
10
10
9
8
7 6
6
5
4
3 2
2
1
0
Hike in excise duty for Increase in JNNURMfunding No extension of depreciation
automobiles for urban and rural transport benefits: For CV's and trucks
this is expected to end in FY10E

Stocks
 Banking & NBFC’s
Issues Industry Wish list Expectations Rationale Impact
To extend the Prepayment period to Unikely To reduce the agri Positive, as it
prepayment period be extended further NPAs would reduce
for 'agricultural debt from December 31, (especially PSU the recognition
waiver and debt 2009 banks) of agri NPAs
relief scheme'
Liberalizing FDI norms Increase the FDI limit Likely To provide capital to Positive, it will provide
for insurance sector in insurance sector the insurance capital to fund their
form 26% to 49% companies insurance businesses
Capitalisation of PSB's Capitalisation of PSB's Likely Enable capital Positive for small
starved PSU banks to banks
meet their
growth requirements
Tax breaks for housing Increasing tax breaks for Unlikely To improve profitability Negative
companies housing companies from of the companies
20% to 40%

Tax free bonds To allow power finance Unlikely To make it easier for Positive
companies to float tax finance companies to
free bonds raise money
Research House Consensus
10
9
8 7
7 6
6
5 4 4
4 3
3
2
1
0
Pre payment To allow power Capitalisation of Hike in FDI Increasing tax
period to be finance companies PSB's insurance limit breaks for housing
extended from 31st to float tax free from 26% to 49% companies from
Dec, 09 bonds 20% to 40%

Stocks
Cement
Issues Wish list Expectations Rationale Impact
Excise duty No increase in excise Excise duty Hike in excise duty will Negative , it is difficult
duty concessions to be boost government for manufacturers to
removed revenue collection and pass the hike to
reduce the fiscal consumers due to
deficit poor monsoons as
well as impending
oversupply
Import duty on coal Remove import duty of Expected to be Enhance the Results in saving the
and coke 5% on gypsum, pet abolished efficiencies of the power cost for the
coke & coal cement companies cement companies.
Marginally positive
 Research House Consensus
10
9
8 7
7
6
5
4
3
3
2
1
0
Exciseduty concessions toberemoved Removeimport duty of 5%ongypsum,Pet coke&
coal

Stocks
Construction
Issues Wish list Expectations Rationale Impact
Roads and social Increase in outlay under Unlikely To facilitate investment Positive
infrastructure JNNURM for funding of in the roads sector and
roads and social improve connectivity in
infrastructure the country

Section 80IA Extension of Section Unlikely To maintain Positive

80IA benefits for attractiveness of the
another 15 years sector
Research House Consensus

Stocks
 Capital Goods & Engineering
Issues Wish List Expectation Rationale Impact

Import Duty on Chinese Increase in import duty on Unlikely This will help domestic Positive
Equipment Chinese Equipment companies against
invasion of cheap Chinese
Equipment

Allocation for RGGVY and Increase in allocation for Likely This will accelerate the Positive
APDRP RGGVY and APDRP investment into the sector;
scheme to achieve UPA’s implementation will be the
objective of Power for All key issue
by 2012

Increase in excise duty No increase in excise duty Likely, Hike in excise duty To shore up indirect tax Negative
from 8% to 10% revenues
Research House Consensus
10
9
8
7
6 5
5 4 4
4
3
2
1
0
Increaseinim port dutyon Increaseinallocationfor Hikeinexcisedutyfrom8%to
ChineseE quipm ent RGG VYandAP D R Pschem e 10%
toachieveUP A’sobjectiveof
P ower for All by2012

Stocks
Media
Issues Wish list Expectation Rationale Impact
FDI limit FDI liberalized for Likely Higher FDI Positive
DTH services investment will lead
companies to access
low cost of capital

Customs duty on Set Reduction of Unlikely To bring broadcasting Positive

Top Boxes Customs Duty of 5%- equipment like set
Nil levied on Set Top top
Boxes boxes on par with
rates applicable on
telecom
equipment and
provide a fillip to
platforms like DTH
that use set top
boxes
Research House Consensus
10
9
8 7
7
6
5
4
3
2 1
1
0
FDI liberalised for DTH services Reduction of Customs Duty of 5%-Nil levied on
Set Top Boxes

Stocks
Metals & Minings
Issues Wish list Expectation Rationale Impact
Excise duty increase Industry wishes that there Likely ,Excise duty on Marginal impact expected Negative
is no roll back on the steel may be raised from as domestic steel demand
reduction in excise duties 8% to 10% or 12% remains very strong on
account of revival in auto
sales and thrust on
infrastructure
development
Export duty on iron ore 5% increase in export duty Unlikely Government just 2 months Positive for steel
lumps and fines on both iron ore lumps back increased export companies not having
and iron ore fines duty on iron ore lumps to backward iron ore
10% and iron ore fines to integration as input cost
5%. Exports have will go down
moderated post that so Negative for Iron
further hike in near term ore exporters as they can
looks unlikely not pass on the hike
Research House Consensus
10
8
6
6 5

4
2
0
Likely increase in excise duty on steel from 8% to 10% 5% increase in export duty on both iron ore lumps and
or to 12% iron ore fines

Stocks
 Oil & Gas
Issues Wish list Expectation Rationale Impact
Tax benefits Clarity on tax benefits Unlikely To facilitate in Positive
to the natural gas vestment in the sector
production from NELP and provide more
& CBM blocks clarity to the
companies

Service Tax Removal of Service Unlikely Long pending demand Positive

Tax being charged on of the industry since
E&P activities levy of service tax is
against the spirit of
NELP regime
Research House Consensus
10
9
8
7
6
5
4
3 3
3
2
1
0
C
larityontaxbenefitstothenaturalgas R
emovalof ServiceTaxbeingchargedon
productionfromN ELP&C BMblocks E& Pactivities

Stocks
Pharmaceuticals
Issues Wish list Expectation Rationale Impact

Tax exemption for Increase in weighted Unlikely To encourage Positive

R&D expenses average exemption companies to focus on
R&D
from 150% of R&D
spend to 200%

Life saving drugs Concessional rates or Unlikely To increase Positive

removal of duties for investment in the
categories of life sector
saving drugs

Infrastructure Status Infrastructure status Unlikely Increase the pace of Positive

for Healthcare investment into the
Industry industry by existing as
well as new players
Research House Consensus
10
9
8
7
6
5 4 4
4 3
3
2
1
0
Increaseinweighted Infrastructurestatusfor C oncessionalratesor
averageforR & Ddeduction HealthcareIndustry removalof dutiesfor
categoriesof lifesaving
drugs

Stocks
Power
Issues Wish List Expectation Rationale Impact

Extension of benefits Extension of benefits Unlikely To facilitate Positive

given to the sector investment in the
beyond 2011 sector
Research House Consensus
10
9
8
7
6
5
4
4
3
2
1
0
E
xte
n sio
nofbenefitsgiventothese
ctorbeyon
d2011

Stocks
• NTPC
• PowerGrid
Real Estate
Issues Wish List Expectation Rationale Impact

Exemption on loan Increase in Unlikely To improve demand Positive

& interest payments exemption limit for for real estate
interest payments &
loan repayments
Low cost housing Restoration of Likely Improve Positive
projects exemptions under infrastructure in Tier2
Section 80 IB (10) for & Tier 3 estate
lower and mid-
housing projects
Housing for the Focus on affordable Likely To garner funds for Positive
economically housing for weaker infrs sector
weaker section sections of the
society
Research House Consensus

Stocks
Hotels
Issues Wish List Expectation Rationale Impact

Infrastructure Construction to be Likely To increase Positive

given infrastructure investment in the
status sectoe
Research House Consensus

Stocks
Telecom
Issues Wish List Expectation Rationale Impact

Licence free Implementation of a Unlikely To improve Positive

uniform free licence profitability of the
free regime already hurt
companies
Research House Consensus

Stocks
FMCG
Issues Wish List Expectation Rationale Impact

Improvement in Expenditure in Likely To increase the Positive

rural demand for flagship rural income of the rural
goods schemes for social households
uplifment of the rural
people
Excise duty for Excise duty hike in Likely Increasing the Negative if over 5%
cigarettes cigarettes revenue of the
exchequer

Increasing the Hike in excise duty Likely Increasing revenue Negative

excise on FMCG on FMCG products for the exchequer
Research House Consensus

Stocks
Information Technology
Issues Wish List Expectation Rationale Impact
Extension of tax Extension of tax Likely To improve Positive
benefits benefits under profitability of the IT
Section 10A/10B companies
(STPI Tax
Exemption beyond
FY11)
Research House Consensus

Stocks
Disclaimer

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