Union Budget 2011: Our Wishlist

Governments come and go. But their visions outlined in the annual fiscal planning (the Union Budget) have a long lasting impact on the economy. The Budget of 1992 was one such document. It was a threshold that set India on a superior economic growth path. The first Union Budget of the current decade also comes to meet several challenges. It should not just counter risks within and outside the economy. But it needs to also fortify India's position amongst global heavyweights.

Here is Equitymaster's wishlist for the upcoming Budget, which we hope will be announced keeping in mind the country's social and economic pitfalls.

• Higher short term capital gains tax for FIIs: The volatility in Indian stock markets over the past six to nine months can to a large extent be attributed to fickle mindedness of the FIIs. Loose monetary policies in developed markets have not helped either. Hence, a stricter policy to curb short term capital gains earned with the hot money is in order. While the DTC has proposed to tax all FIIs, the current budget should lay a foundation for the same by hiking the taxes on short term gains.
  
  
• Incentivise low income housing: The construction sector is unlikely to have a very peaceful fiscal ahead. Low bank funding and high interest rates could stall projects and build up inventory in the sector. Allowing higher fiscal incentives on low income housing loans could address the problem of high cost for the houses as well as offer a solution to builders to increase sales.
  
  
• Incentivise long term investment in equities: Institutional investors such as insurance companies, PFs and mutual funds should be offered fiscal incentives on their schemes wherein investments are locked in domestic equities for 5 years and above. This could help draw more retail savings into equities for a longer term.
  
  
• Pool in private sector funds for infrastructure investments: Floating SPVs that can pool in private funds for meeting the 12th and 13th Five year plan targets may be an ideal way to meet the funding gap. Especially given that the contribution from the private sector is seen going up from 30% in the Eleventh 5-Year Plan to 50% in the Twelfth Plan.
  
  
• Deepen India's corporate debt market: Developing a vibrant corporate debt market is paramount to serving the long term funding needs of corporates. The Budget should initiate policies in this direction so that retail participation in corporate debt issuances becomes easier and more transparent . The debt papers also need to be rated to suit investors' risk profiles.
  
  
• Rejig subsidies and off balance sheet items: An increase of 245%! This is exactly how much the cost of major subsidies has gone up in India in the last five years. And mind you, this does not even include oil. In CAGR terms, it amounts to a huge 28%. When one considers India's nominal GDP growth rate of 14%-15%, it quickly becomes clear that such a growth in subsidy is not sustainable at all. Fortunately, the Government seems to have woken up to this fact. Hence, rather than trying to increase subsidies further, it is now looking to reduce pilferage in the system. As a big step towards the same, it has set up a task force to create a way to directly transfer cash to the ultimate beneficiaries of various subsidy schemes. We believe in addition to reducing indirect subsidies, investing more in warehouses and logistics could help keep the food prices in India under control to an extent.

While this wishlist may not be all encompassing, policies in these directions will certainly help the government make better use of Indian tax payers' money. At the same time, these may address some of the issues threatening to thwart India's long term economic potential.

Over to the Finance Minister!

Budget 2011: Would it be a double-edged sword

The Indian economy has sailed well in the past years and has also recovered well from the recession of 2008 and early 2009 as revealed by the resilient GDP number posted. This is largely because main economic activities such as manufacturing, mining & quarrying, trade, hotels, transport and communications, along with finance and insurance, have continued to fuel and manage growth, amongst the other economic activities as they were focal area of the previous budget (Union Budget 2010). Hence, the recovery so far for the Indian economy has been quite robust and broad based.

(Source: CSO, PersonalFN Research)

Moreover, the Government of India (GoI) now expects an 8.6% economic growth this fiscal year backed by robust agriculture growth from 0.4% (a year before) to 5.4%.

But these growth estimates in our opinion belie the fears of a slowdown in the economy, caused by factors such as high inflation (8.23% in January 2011) and widening fiscal deficit. We think that WPI inflation would continue to be high, fuelled by food inflation remaining in double-digit terrain and crude-oil prices remaining above the U.S. $ 100 per barrel mark. Moreover, any Egypt like unrest in countries such as Algeria and Yemen may threaten the oil-rich Gulf region, which would impact oil consuming nations like ours (as Oil prices are sensitive to the supply disruptions) by ballooning the current account deficit.

To control spiralling inflation, the RBI would adopt calibrated exit stance (by increasing policy rates at each step, thereby attempting to unhurt growth), but that would again elevate borrowing cost and result in slowdown in credit off-take. Moreover, the hike in interest rates would also lead to increase in input cost and slowing demand.

Also with the Government in power at present being confronted with various scams (especially the 2G spectrum scam and the Adarsh Housing Society Scam), and the opposition parties (especially the NDA - National Democratic Alliance) being opportunistic about such issues, they may pressurise the Congress at every point - in fact the NDA has already demanded a JPC (Joint Parliamentary Committee) to be set up on the 2G spectrum scam (as its cost to the Government is 1.76 lakh crore). Moreover, the NDA is already doing its best to tarnish the image of the Congress Government by tagging it as "corrupt" and pressurising the Prime Minister - Dr. Manmohan Singh to quit.

Hence in order to retain their power, the Congress Government may declare a populist budget despite the economic atrocities faced by it (as seen above). Moreover, with elections coming up in major states the prospects of the budget 2011 being "populist" strengthens. Tax revenue growth in 2011-12 can soar as inflation would act as an "indirect positive" as wage bills go up. But again that may not be sufficient to match the expenditure bill.

DIRECT TAXES:

INDIVIDUALS

• Base exemption
  
  On the direct tax front, the Government is likely to move a step closer to the DTC (Direct Tax Code) where we expect the base exemption limit to be extended to Rs. 1.80 lakh, but keeping the current tax slabs unchanged.
  
  

  Income-tax rates as per inance Act, 2010		Expected Income-tax rates in Budget 2011
  Taxable Income	Tax Rate	Taxable Income	Tax Rate
  Upto Rs. 160,000	Nil	Upto Rs. 180,000	Nil
  160,001 to Rs. 500,000	10%	Rs. 180,001 to Rs. 500,000	10%
  Rs. 500,001 to Rs. 800,000	20%	Rs. 500,001 to Rs. 800,000	20%
  800,001 & above	0%	Rs. 800,001 & above	0%

  
  
  So, let say if you are a male individual having a net taxable income of Rs. 10,00,000; and if the base exemption limit is increased to Rs. 1.80 lakh, then your income tax liability will be Rs. 1,56,560 - thereby resulting in a tax saving of Rs. 2,060.
  
  

  2010-11 Taxable Income 10,00,000 Upto Rs. 160,000 Nil - Rs. 160,001 toRs. 500,000 10% 34,000 Rs. 500,001 toRs. 800,000 20% 60,000 Rs. 800,001 & above 30% 60,000 Tax payable 154,000 Education Cess 3% 4,620 Total Tax (Rs) 158,620

  2011-12 Taxable Income 10,00,000 Upto Rs. 180,000 Nil - Rs. 180,001 to Rs. 500,000 10% 32,000 Rs. 500,001 to Rs. 800,000 20% 60,000 Rs. 800,001 & above 30% 60,000 Tax payable 152,000 Education Cess 3% 4,560 Total Tax (Rs) 156,560

  
  For senior citizens and women, the basic exemption limit is also likely to increase by Rs. 20,000 each to Rs. 2.10 lakh and Rs. 2.60 lakh respectively.
  
  
• Deduction from Income Tax
  
  Investment limit in section 80C and 80CCF:
  Displaying its populist emotions, the Government may also expand the Section 80C limit to Rs. 1.5 lakh (from the present Rs. 1.0 lakh) thereby attempting to move closer to the Rs. 3 lakh limit proposed in the DTC, and boost investments in the country. Also in an attempt to fuel infrastructure growth in the country (thereby making its attempts to match international standards) the Government is expected to raise the limit for investment in long-term infrastructure bonds from Rs. 20,000 to Rs. 30,000; which provide a tax benefit under section 80CCF of the Income Tax Act, 1961. The Government may also consider banks in the list of issuers of long-term infrastructure bonds, which is currently limited to only infrastructure financing companies.
  
  Premium paid for medical insurance:
  Similarly healthcare cost today are on a rise; hence in such a case if prudence prevails medical claim exemption limit may also be increased to Rs. 20,000 (from the present Rs. 15,000), and in case of senior citizens to Rs. 30,000 (from the present Rs. 20,000). Because the present limits are inadequate for an individual to cater to the medical expenses of his entire family.
  
  Interest on housing loan:
  In a measure to provide a relief to the housing sector, which is at present suffering the pain of the housing loan scam as well as the brunt of rising interest rates (thereby affecting their sales), the Government may also increase the maximum limit for deducting interest paid on housing loans (available under section 24(b) of the Income Tax Act, 1961) from the present Rs. 1.50 lakh (in case of Self Occupied Property) to Rs. 1.80 lakh, thereby attempting to infuse renewed energy in the real estate and housing loan market.
  
  CORPORATES
  
  
• Surcharge
  
  Again on the corporate taxation side the Government is expected to refrain from taking any hawkish measures which would hurt the sentiments of the industries. And with the IIP number (1.6% in December 2010) reflecting dismay along with the borrowing cost going up (which would lead to increase in input cost and may affect profitability); the surcharge is unlike to be increased from the present levels of 7.5%.
  
  
• Minimum Alternate Tax (MAT)
  
  With the present nervousness in the economy due to increase in borrowing cost (which would lead to increase in input cost and may affect profitability) and dismaying IIP number of November 2010, the Government in order to maintain its agenda of growth, may reduce the MAT to 15% (earlier rate as was applicable in the year FY 2009-10) from 18% at present.
  
  Hence, overall in our opinion there are unlikely to be any major changes in the direct tax segment in Budget 2011, as the DTC is anyways going to implemented from next year (with effect from April 1, 2012).
  
  INDIRECT TAXES:
  
  
• Service Tax
  
  While this would be one way the Government can meet its requirement for the expenditure bill, the Government may again avoid increasing the tax rate (at present 10%) here, because any increase towards this would again add to cost of living for the citizens, thereby infusing inflationary pressures in the economy. (This is because the service tax is passed on by the service provider to the customers, who bear it).
  
  
• Central Excise
  
  With slowing IIP numbers and increase in borrowing cost we don't think the Government would dare to increase the rate of excise from the present 10% level. Because this would lead consumption being getting negatively impacted, thereby hurting the overall economic sentiments. Moreover, just last year anyways central excise rate was rolled-up from 8%.
  
  Also last year in budget 2010, the Government had increased the excise on the petrol and diesel by Rs. 1 per litre for both fuels and since the time they (petrol prices) were decontrolled they have gone up by about 13% and about 22% in the current financial year. Prices of cars off late (since December 2010) have already seen an increase of about 20% - 25% on account of rise in input cost.
  
  
• Custom Duty
  
  As far as the custom duty is concerned the Government may display its move smartly by opting to go product / sector specific. With we (India) being heavily dependent on foreign oil imports, the chances of custom duty increased for this product is unlikely, as Brent crude oil prices are already hovering at U.S. $ 100 per barrel mark. So, would be the case of imported machinery, fertilizers and chemicals. However, foreign gems may see an upward revision in rates.
  
  Hence overall in our opinion we believe that on the direct tax front the Government may move a step closer to the DTC (which will be effective from April 1, 2012). However, on the indirect tax front major tinkering is not expected as anyways the Goods and Services Tax (GST) would be implemented with effect from April 1, 2012. Moreover, with the Government facing manifold macroeconomic challenges as well as the political turmoil caused by scams stories unfolding; to save their political image of being "reform pro", the Congress Government may take populist steps in Budget 2011, which may instil a challenge to the Government of managing ballooning fiscal deficit.


This article has been sourced from personalFN has been providing independent research since 1999 on mutual funds, insurance, fixed income instruments and gold. It also provides research based advice on investments and financial planning to individual clients. To know about our financial planning services, simply write to info@personalfn.com.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Will India Glitter

With theUnion Budget 2011, just around the corner, there is a lot of speculation about the announcements that will be made by the Finance Minister. Although during the previous budget, the government went vocal with its intent to curb inflation, it has received flak for its inability to control prices. Let's have a look at whether gold will glitter through this year's budget or not.

In a recap to last year: India's gold consumption reached peak levels of an estimated 800 tonnes even though prices surged to an all-time high last year. This spike in demand was influenced mainly by expectations that gold prices would continue to rise. Hence, there were those who thought that it would be the right time to purchase when price levels were relatively cheaper and earn profits as the price increases.

However, for such buyers, the recent fall in price has been quite disappointing. Short term markets are influenced by liquidity and sentiment values and are not based on long term fundamentals, hence it's quite difficult to understand and predict what might actually happen in the short term.

A breather for investors comes in the form of an increasing probability that the price of gold in Indian Rupees may move higher in the short term under the influence of the policy changes that may be brought up during the 2011-2012 annual budget where the Finance Minister is likely to announce an increase in customs duty for the third time in a row.

To provide a little more insight on the upcoming budget, here is a brief analysis created using extracts from the previous 2 Budget Speeches where there was an increase on the customs levied on gold

• 2009-2010: "Gold bars currently attract customs duty at the specific rate of Rs.100 per ten grams while other forms of gold (excluding jewellery) are chargeable to a duty of Rs.250 per ten grams. These rates were fixed in 2004 and have not been reviewed even as the price of gold has increased manifold. I propose to partially restore the incidence by increasing these rates to Rs.200 per ten grams and Rs.500 per ten grams respectively."
  
  
• 2010-11: "The prices of precious metals continue to rise. Since the customs duty is levied on these at specific rates, I propose to index the rates as follows: On gold and platinum from Rs.200 per 10 grams to Rs.300 per 10 grams."

The increase in gold rates, the rise in customs as well as the record level gold purchase and consumption in 2010 will provide the Finance Minister a window to further hike the customs duty on gold.

Gold Prices and Customs Duty

As estimated in the below table, there is a high possibility that the customs duty will be increased further by Rs. 100 to Rs. 400 per 10 grams of gold. This would adjust the customs duty expressed in percentage of gold price to be around 1.8 - 1.9% to match the levels of the hike in customs duty during last budgets. Also, going by the Finance Minister's speech on the rise of prices of precious metals, "Since the customs duty is levied on these (precious metals) at specific rates, I propose to index the rates on gold and platinum, from Rs.200 per 10 gm to Rs 300 per 10 gm." This indicates that a specific level of customs duty expressed as a percentage of gold price would be maintained.

Table: Gold prices and customs duty

Source: LBMA, RBI, Quantum AMC and http://indiabudget.nic.in/

Can the increase be any higher?

Based on the revisions made in the customs duty over the last 2 budget sessions and considering the above table, there is a high chance that there could be an increase of 32% in the customs duty slab when expressed as a percentage of gold price. A 32% increase in slab rate would mean a customs duty rate of 2.4% in terms of percentage of gold price. This in turn could translate in a customs duty of nearly Rs. 500 per 10 grams in the coming budget.

Looking at the previous budgets, it looks increasingly probable that the hike in customs duty would be at least to the tune of Rs. 100, hence raising the customs duty from Rs.300 per 10 grams in 2010 to Rs. 400 per 10 grams in 2011. However, given that the attitude of the consumer towards gold purchase was not affected even with the price escalation, there is a high chance that there could be a much higher increase in customs duty for 2011-2012. In such a case, the increase could also be close toRs. 200 per 100grams, thus raising the customs duty level to Rs. 500 per 10 grams.

With the Indian consumer's fascination towards gold and inflation on a rise, only time will tell how the budget will actually deal with this glittering spectacle that is one of the best keepers of value.

This is first of a 2 part series on customs duty on gold and government polices and reforms required for gold markets.

Disclaimer:
The Golden Truth is authored by Chirag Mehta. Chirag is Fund Manager - Commodities at Quantum Mutual Fund. Views expressed in this article are entirely those of the author and should not be regarded as views of Quantum Mutual Fund, Quantum Asset Management Company Private Limited and Equitymaster. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Equitymaster has not verified the facts contained in this column and it does not accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

Economic Survey: Growth is good, but then...

The Economic Survey for 2010-11 (FY11) was tabled in the Parliament today. It highlighted the progress made by the Indian economy in FY11 and some big challenges it faces in the future. Let us have a look at the key takeaways from the same.

Painting a rosy picture for economic growth
The Survey talks about how the Indian economy braved the global slowdown and emerged stronger in FY11. It puts out an estimated figure of 8.6% for GDP growth during the year, and also forecasts an 8.75-9.25% growth in the next fiscal (FY12). The Survey has also taken note of the deceleration in industrial growth in recent times. However, it counters it by adding that this is a short term phenomenon and that the long-term growth story remains intact. The FY12 growth estimates are backed by rising savings and investments in the country.

Overall, notwithstanding the challenges on the inflation part, the Survey has painted a rosy picture of high growth for the Indian economy going forward.

Inflation remains the bugbear
The Survey has mentioned high inflation in India as one of the key policy challenges for the government over the next few quarters. It has blamed the rise in food and global commodity prices as the key reasons for the surge in inflation since the end of 2009. The blame has also been put on the easy money policy of the western nations that are trying to jump-start their economies.

The Survey suggests that the government and the RBI are aware of the fact that there is a need to provide ample liquidity to the system so that economic growth is not hampered. However, it is also aware of the potential negative consequences of the same in the form of an even higher inflationary threat in the future.

Short and medium term prospects
As mentioned above, the Survey has projected the Indian economy to grow by 8.75-9.25% in the next year (FY12). This is expected to happen on the back of the government's push towards increased infrastructure investment and consumption. Also, given that both savings and investments are on the rise, it has indicated that the government will soon implement a gradual exit from the stimulus package.

All said, the Survey has added a caveat at the end. It suggests, "Growth forecasts, and for that matter, all forecasts in life, however carefully made, are subject to error. A sharp deterioration in weather conditions or a disproportionate spike in the price of crude petroleum can lead to slower growth." It also warns that deepening of the Euro-zone crisis can also have an adverse impact on the growth prospects of the Indian economy.

As for the long term prospects of the Indian economy, the Survey sounds a bullish tone. And it backs up this view with the usual suspects - rising savings and investment rates, and India's demographic dividend. Overall, it suggests that ‘the next two decades should see the Indian economy growing faster than it has done any time in the past and also faster than the growth in the next two years'.

Now that's like sticking the neck out. It's another thing that the neck risks getting caught in a thunderstorm of global economic crisis, rising fuel prices, and surging inflation.

budget 2011,

The Economy in pictures

Note: Data pertains to the economy and not to the Central Govt. alone

Budget 2011: FMCG

FY11 started off very well for the FMCG sector with companies showing solid growth and firm margins. However, as the year progressed inflation played spoilsport. As input costs continued to climb, margins of FMCG companies came under pressure. As a result of strong competition and the fear that high product prices would either trigger down trading or demand destruction, FMCG companies took judicial price increases. While this resulted in strong top line growth, margins of companies witnessed downward pressure. Sharp increase in advertisement expenses also put pressure on margins of these companies.

Budget Expectations

	Continued thrust and higher allocation to social and developmental programs – especially MGNREGA.
	No change in Cenvat rate, considering the high inflation and rising input prices
	No change in excise rate on tobacco products
	Reduction of MAT rate - currently applicable at 18%
	Roadmap for implementation of DTC and GST
	Dropping all surcharges on income tax
	Reduction of dividend distribution tax rate to around 10%
	Excise exemption to encourage value-addition in rice bran oil processing
	Exemption or reduction of excise duty on Food grade hexane
	Exemption of oil refining industry from excise duty
	Waiver of excise duty on sanitary napkins
	Complete exemption from the present level of import duty of 10% on import of filter paper for tea bags.
	Expand limits for income tax exemptions

Budget Measures

	Increase in tax exemption limit from Rs 160,000 to Rs 180,000 for individual tax payers.
	Lowering of qualifying age of senior citizen from 65 to 60.
	Enhancing the tax exemption limit of senior citizen from Rs 240,000 to Rs 250,000.
	Focus on road and infrastructure development.
	Raising the corpus of Rural Infrastructure Development Fund from Rs 160 bn to Rs 180 bn, with the additional allocation dedicated to the creation of warehousing facilities.
	Removal of production and distribution bottlenecks for key agriculture items under the Rashtriya Krishi Vikas Yojana (RKVY). Increase in allocation to RKVY increased from Rs 67.5 bn to Rs 78.6 bn.
	Providing Rs 3 bn to promote 60,000 pulses villages in rainfed areas for increasing crop productivity and strengthening market linkages.
	Allocating Rs 3 bn to bring 60,000 hectares under oil palm plantation, by integrating the farmers with the markets.
	Providing Rs 3 bn for implementation of vegetable initiative to improve production and incomes for the farmers
	Provision of Rs 3 bn to promote higher production of cereals, upgrade their processing technologies and create awareness regarding their health benefits.
	Launch of The National Mission for Protein Supplements in 2011-12 with an allocation of Rs 3 bn to promote animal based protein production through livestock development, dairy farming, piggery, goat rearing and fisheries in selected blocks.
	Allocation of Rs 3 bn for Accelerated Fodder Development Programme.
	Raising of target of credit flow to the farmers from Rs 3.75 tn to Rs 4.75 tn in 2011-12.
	Setting up of 15 mega food parks.
	Indexation of wage rates under MGNREGA to the Consumer Price Index for Agricultural Labour.
	Increase in MAT from 18% to 18.5%.
	Reduction in excise duty on sanitary napkins and diapers.
	Withdrawal of excise exemption on writing or printing paper for printing of educational text books, notebooks & exercise note books, tooth powder, medicaments (including those used in Ayurvedic), coffee or tea pre mixes, sauces, ketchup and the like, soups and broths and preparations, all kinds of food mixes, including instant food mixes, ready to eat packaged food, milk containing edible nuts. These items would now attract 1% duty without CENVAT credit facility
	Full Central Excise duty exemption for air conditioning equipment & panels of 3 Tonne air-conditioning capacity and above, and refrigeration panels required for the installation of a cold storage, cold room or refrigerated vehicle for the preservation, storage, transport or processing of agricultural, apiary, horticultural, dairy, poultry, aquatic & marine produce.
	Reduction of basic customs duty on Crude Palm Stearin imported for the manufacture of laundry soap, from 20% to nil.

Budget Impact

	Focus on rural lending and increase in capital of rural banks will help farmers access cheap loans. Further, extension of repayment of loan and concession for timely repayment helps reduce the burden on farmers.
	Various schemes for rural development will help improve the living standards in the rural area and help provide better access to the rural heartlands.
	Readjustment of tax slabs will help increase the disposable income in the hands of consumers.
	Concessional duties and exemption of service tax will help boost setting up of cold storages, cold units and refrigeration units.
	Reduction of excise duty on sanitary napkins and diapers will help reduce prices on these items.
	Withdrawal of exemption on excise duty on various ayurvedic, paper and food items will increase their prices.

Company Impact

Focus on rural spending is a big positive for most company as they have started targeting the rural sector. These include HUL, ITC, Marico, Godrej, Dabur, etc Spending on setting up warehousing and cold storages is a big positive as it helps provide better logistics and lowering of wastes. The companies which would benefit are Nestle, HUL, ITC, Britannia etc Fall in duty for sanitary napkins is a positive for P&G as it will reduce the price of its sanitary napkin. Similarly, fall in duty for diapers is a positive for Godrej as it will reduce the price of its diapers. Imposition of 1% excise duty on ayurvedic medicines is a negative for companies making ayurvedic products like Dabur. Similarly imposition of 1% excise duty on various food products is a negative for companies like HUL, ITC, Nestle, Tata Tea, Tata Coffee etc.

Budget 2011: Energy

2010 has been a crucial year for Indian energy sector as oil and gas industry witnessed long awaited reforms likederegulation of petrol prices and substitution of oil bonds with cash subsidies.

However, the sector is still in dire need of further policies like diesel price deregulation and a clear subsidy and royalty sharing mechanism. The lack of the same has led to the delay in disinvestment plans of oil marketing companies and has brought Cairn Vedanta deal to a deadlock. While India still imports more than 70% of crude oil, it is oversupplied market in downstream segment. The OMCs are already incurring huge under recoveries. If crude prices remain high, the situation will only get worse as new refineries start commissioning. On the other hand, there is a huge scope for investment and consumption in the gas sector and India’s venture into shale gas exploration has further boosted its prospects. With so many issues waiting to be resolved and Indian energy sector’s future hinging on them, there are a lot of expectations from the energy sector budget as outlined below

Budget Expectations

Upstream
	The oil and gas sector expects that ‘mineral oils’ be redefined to include natural gas and coal bed methane (CBM). This will extend to them the benefit of tax holiday for past and future rounds of production. This will also boost interest and participation in NELP rounds.
	There is also a proposal to exempt all Exploration and Production (E&P) income from Minimum Alternate tax.
Downstream
	It is unlikely that Government will deregulate diesel prices due to high inflation levels and forthcoming state elections. Rather, it may slash taxes and duties on refined petroleum products and crude oil to ease the under recoveries burden for OMCs.
	For the first 9 months, the Government has borne 45% share in the under recoveries. This is more than seven times the budgeted amount and up 68% YoY. The rest of the under recoveries were shared by OMCs and upstream companies in the ratio of 22% to 33%. It is expected that the subsidies will be continued. However, the Government may choose to offer a fixed subsidy on a litre of diesel. Beyond this limit, the costs will be passed on to customers by OMCs. We also expect some clarity on sharing of subsidies between different stakeholders as this will be a key consideration for valuations on proposed share sales of IOC and ONGC.

Budget Measures

	The Government will stop issuing oil bonds in lieu of subsidies. All subsidies related to oil would be directly brought into the fiscal accounting.
	Surcharge on domestic companies reduced to 5% from 7.5%
	Increase in the rate of Minimum Alternate Tax from 18% to 18.5% of book profits.

Budget Impact

	The upstream segment still does not have clarity in the subsidy sharing structure. With the government opting to switch to cash subsidies instead of the oil bonds earlier, it will not be surprising to see a higher share of subsidy burden on the upstream companies.
	Reduction of surcharge will aid the profitability of domestic oil companies.
	The downstream segment would be disappointed as there was no clear announcement on the deregulation of diesel prices.

Company Impact

Upstream energy companies such as ONGC, Oil India and GAIL will be weary at the prospect of sharing a higher subsidy burden if the under recoveries of downstream companies are not reimbursed by the government. Higher Minimum Alternate Tax on book profits will impactReliance Industries

Budget 2011: Telecom

The Indian telecom industry has continued with its strong subscriber additions during the current year. At the end of December 2010, the total subscriber base stood at nearly 747 m, of which wireless subscribers contributed to nearly 94%. During March 2010, this figure had stood at about 578 m. The key reason for such a growth in subscriber base has been the affordability factor. With almost 15 operators competing for subscriber share, tariffs have been declining. Therefore while companies have added subscribers to their base, the benefits of the same have not really reflected in their financial performances. Added to this has been the burden of the interest costs related to the huge amounts of debt that most companies have taken on to fund the 3G spectrum fee. This has led most companies to operate on very thin margins.

Budget Expectations

	Clarity on the tax treatment for the 3G spectrum fee outflow. Operators want this to be classified as an intangible asset and that the interest cost on the loans taken on them can be capitalized up to the date of commencement of services.
	Extension of tax holiday for operators who have launched their services after March 2005.
	Tax holiday benefits in case of M&A deals to be continued in order to aid consolidation in the sector that is suffering from hyper competition
	Telecom to be given the status of infrastructure.

Budget Measures

	The wages under the National Rural Employment Guarantee Scheme (NREGS) have been indexed to the consumer price index for agricultural labour. This would result in significant enhancement of wages for the beneficiaries of the scheme.
	Plan to provide rural broadband connectivity to 2.5 m Panchayats in the country in the next three years.
	Plan to provide optical fiber connectivity to all 1,500 institutions of Higher Learning and Research through the National Knowledge Network (NKN) programme.
	Full exemption of the countervailing duty (CVD) of 4% on accessories, parts and components imported for the manufacture of mobile phones has been extended for the full year.
	Increase in the rate of Minimum Alternate Tax (MAT) from 18% to 18.5% of book profits
	Surcharge on domestic companies reduced to 5.0% from 7.5%.

Budget Impact

	Increase in wages under the NREGS will help in improved spending by the customers in the rural areas.
	Lower CVD on accessories, parts and components will help in keeping the cost of handsets low.
	The increased MAT rate would impact the bottomline of telecom operators.
	The expansion of rural broadband connectivity would help boost broadband penetration in the country.

Company Impact

Considering many new players have launched mobile services in India, the incumbents are looking at targeting smaller towns and villages for maintaining their leadership position in terms of revenues and subscriber growth. Companies such asBharti Airtel, Reliance Communication and Idea Cellular, which are present across India with a good distribution network, would be the key beneficiaries. With the government aiming at improving the amount of disposable income in the hands of the people, especially for the rural population, it would help the telcos. Telecom companies would be able to enjoy the benefits of low cost handsets as it would help in keeping the strong pace of subscriber additions buoyant. This would hold strong for rural markets. Increase in MAT to impact profits of Bharti Airtel and Reliance Communications. However, the impact would be marginal. The foreign dividend tax has been brought down to 15%. This would benefit Bharti Airtel's repatriation of profits from its foreign operations especially those from the Africa. The optical fiber connectivity through the NKN programme would help companies like BSNL, Tata Communication and others in the fixed line segment.

Budget 2011: Media

The media sector has emerged as one of the fastest growing sectors of India. The Indian Print and Media industry offers attractive growth potential on account of mass urbanization and an increase in disposable income has brought a multifold increase in the potential customers. This along with the structural changes in the industry like a rapid adoption of satellite based television services via DTH and digital cable, and the improving spending trend of the urban and rural Indians augurs well for the growth of the sector in the coming years. For the Print industry, regional print has remained strong on back of increasing regional demand .However, rising newsprint prices could play a spoiler going forward. FY11 so far has been marked by consolidation and increase in deals and investments in the media industry. The trends that will define the industry in FY12 year will hinge a lot on budget policies for the sector. Here is a summary of the key expectations from the forthcoming budget for the media industry.

Budget Expectations

	The sector is overburdened with multiple tax duties along with different tax treatments for companies falling under different sub segments. It is expected that the tax duties for the sector will be simplified and rationalized.
	As the dynamics are changing in the media industry, a lot of program content is taken from foreign players. As per the current policy, in most of such contracts, if the recipient of income doesn’t have a Permanent Account Number, the withholding taxes at 20% are borne by payer (Indian companies). We expect that this rate will be relaxed so that Indian players don’t get penalized for payee’s failure to apply for PAN.
	The Indian advertising industry expects the withholding tax rate on advertising contracts to be rolled back as it already operates on thin margins and high taxes subject it to aggravated cash flow issues.
	In 2010-11 Budget, the digital headend equipment by Multi system operators was granted a project import status at a concessional rate of five per cent with full exemption from special additional duty. However, this has not helped industry since the basic customs duty for imported digital headend equipment still varies from 7.5 per cent to 10 per cent. The Government is expected to bring it down to zero percent to boost digitization in the country. For the same cause, the Government is expected to exempt Set top boxes from various duties for three years.
	Considering the tremendous growth potential in the country, there is also a demand for tax concessions to animation, gaming and VFX industry.
	For the print sector, duty exemption is expected in standard and glazed newsprint Light Weight Coated (LWC) paper that serves as a key raw material for magazines and accounts for 60% of the production costs. The Government is also expected to exempt the cover paper used by magazines from custom duty.

Budget Measures

	Countervailing duty (CVD) and excise duty exemption on jumbo rolls of 400 feet and 1000 feet colour, unexposed cinematographic film.
	Excise duty on LED is reduced to 5% and the special CVD is fully exempted.
	Excise duty reduced from 10% to 5% on parts of ink-jet and laser-jet printers.
	Minimum Alternate Tax (MAT) on book profits has been marginally increased from 18% to 18.5%.
	Surcharge on domestic companies reduced to 5% from 7.5%.

Budget Impact

	The CVD exemption on cinematographic film will be helpful for the Indian film industry which imports this film.
	The change in taxes on LED is not likely to affect the end consumers much.
	Reduced prices of printers will bring down the cost of production for the companies in print media.
	Increase in MAT is very nominal and is offset by a reduction in surcharge.

Company Impact

Production houses likeBalaji Telefilms will benefit out of the announcement of duty exemption on cinematographic film. Reduction in the price of printers is a positive for companies like Jagran Prakashan and HT Media.

Budget 2011: Cement

The year 2010 was quite challenging for the entire cement industry. On the one hand, demand off-take was weaker than expected due to lower realty and infrastructure spending. Prolonged monsoons and logistical constraints further dampened the construction activity. On the supply front, overcapacity continued to plague the industry. Cement prices remained under pressure and caused margins to contract severely. The industry is expected to end the current fiscal at about 75% capacity utilisation. And this does not seem to be the end yet. The demand-supply mismatch is here to stay for quite some time as the total industry cement capacity is expected to increase even further over the next 18-24 months. Excess supply would reach its highest level (about 126 mtpa) in FY13 with capacity going up to 393 mtpa. On the cost front, key raw material costs, especially prices of coal show no signs of abating. Going forward, rising interest costs remain a challenge for the construction industry. Much will depend on government’s housing and infrastructure initiatives. Given this backdrop, over the next couple of years, the margins of the cement companies will continue to remain under strain.

Budget Expectations

	The value-added tax (VAT) on cement should be brought on par with other building materials like steel. While steel attracts 4 % VAT, for cement it is as high as 12.5%.
	A uniform rate of excise duty should be levied on cement. Currently, different rates of Excise Duty are levied for bagged Cement
	An abatement of 55% if the duty is based on retail sale price, as recommended by NCAER (National Council for Applied Economic Research) in their Report of 2005, should be given to the cement industry on excise duty.
	Import duty on coal, pet coke, gypsum and other fuels should be scrapped. All the three inputs attract 5% duty if imported, while there is no duty on cement import. So this is contrary to the established principle that import duty on inputs should not be higher than on the finished product.
	The cement industry should be granted "declared goods" status like steel, which would enable the sector to reduce expenditure on taxes. The State governments are restricted to levy sales tax of maximum 4% on these goods. If “declared goods” are sold inter-State, tax paid within the State is reimbursed to seller.

Budget Measures

	Incentives have been doled out for end users of cement such as the housing sector and development of infrastructure.
	To replace excise with ad valorem duties on cement: - In case of packaged cement, retail price per 50 kg bag not exceeding Rs 190 per bag (equivalent to Rs 3,800 per tonne) would entail 10% ad valorem duty plus Rs 80 per tonne from Rs 290 per tonne earlier. In case of retail price per 50 kg bag exceeding Rs 190 per bag, there would be an ad valorem duty of 10% plus Rs 160 per tonne from just 10% of retail sales price earlier. -10% ad valorem duty for all goods other than those cleared in packaged form. -For cement clinker, there would be an ad valorem duty of 10% plus Rs 200 per tonne from flat Rs 375 per tonne earlier.
	To reduce basic custom duty on two critical raw materials of the cement industry viz. petcoke and gypsum to 2.5%
	Rate of minimum alternate tax (MAT) on book profits has been increased from 18% to 18.5%.

Budget Impact

	Increased budgetary allocation towards infrastructural development and housing is likely to boost demand for cement. Thus, cement manufacturers will continue to benefit owing to increase in volumes.
	Impact of cut on customs duty on key raw materials such as petcoke and gypsum would bring some relief to cement manufacturers who have been facing margin pressures due to rising input costs.
	The new excise duty structure will increase the tax incidence on the cement industry.

Company Impact

With more incentives being spelled out for the infrastructure and housing sector, cement manufacturers will continue to benefit. This is beneficial to all cement companies, specifically the top layers catering to eastern region such as ACC and Ultratech Cement. Lower duties on key materials will aid the profitability of large players like ACC, Ambuja Cement and Ultratech Cement.