The Union Budget for FY13 is to be presented in the parliament on 16th March. This will be a crucial Budget as it sets the tone for policy stance relating to not just fiscal issues but also monetary policy and economic reforms. Also, it is being announced at a time when the economy is looking for a boost from the government through appropriate policy announcements In a scenario of high inflation, liquidity crunch, high interest rates and subdued business sentiment, the Budget is expected to provide certain policy directions which will shape the course of the economy in the coming months Ideally, the response from the policymakers should be a quick reversal in less productive government spending, and at the same time initiating policy measures to boost private investments. Apart from this, the government should consider expediting the disinvestment process and ensure key reforms such as GST are implemented quickly With this, we also need to tackle the implementation risk that has often been associated with the Indian economy for many years. Particularly, on the expenditure growth target, the implementation of the promise in the budget is more important than the promise itself Industry expects the government to give policy directions to re-build investors' confidence. Yes, not all of the issues are directly addressable in a Budget, but the Budget this year can be a starting point towards such enabling policy making If the Budget assures a certain degree of fiscal prudence, without compromising on growth excessively, the sentiment should improve. Nonetheless, in order to surge ahead, industry will seek signs of at least an optimistic outlook from the FM

1. Union Budget 2012-13 Preview
Nidhi Kedia || Research Analyst || nidhi.kedia@bmastock.com
March 06, 2012

2. Topics
The year that was...
• Inflation taking a toll on growth
• Burgeoning fiscal deficit
Expectations from the Budget
Detailed sectoral preview
| 1

3. Topics
The year that was...
• Inflation taking a toll on growth
• Burgeoning fiscal deficit
Expectations from the Budget
Detailed sectoral preview
| 2

4. Inflation has been above the RBI’s comfort zone of 5-5.5%
for over two years now…
WPI YoY (%) ▪ Remained above 9% in each of
the 11 months of 2011 up to
November 2011
12%
11% ▪ Touched double digit in
10%
September 2011
9% 2009
8% 2010 ▪ Each component of inflation,
7% 2011 viz., primary, fuel and
6%
manufacturing remained above
5%
4%
RBI's comfort level at 5%
3% ▪ Though core inflation has
2%
started to come down, it needs
1%
0%
to be tracked for some more
time before we are confident it
May
Aug
Mar
Apr
Jul
Jan
Jun
Nov
Dec
Oct
Sep
Feb
-1%
will remain at lower levels
SOURCE: Bloomberg, BMA Research
| 3

5. RBI took an anti- inflationary stance to control inflation
▪ The constant increase in inflation
Policy Rates(%) has forced the Central Bank to
Repo Rate
tighten its monetary policy
10%
Reverse Repo Rate ▪ Repo Rate was hiked by 375 bps
9% Cash Reserve Ratio since Mar-10
8% ▪ In its recent monetary policy
7%
review, it cut CRR by 50 bps in
order to ease liquidity conditions
6%
▪ Though RBI has stalled with rate
5% increases and signaled that the
4% interest rate cycle has peaked, a
cut in the interest rates would
3%
depend on how the other macro-
Jan-07
Jan-08
Jan-09
Jan-10
Jan-12
Jul-07
Jul-08
Jul-09
Jul-10
Jan-11
Jul-11
economic factors shape up in
future
SOURCE: Bloomberg, BMA Research
| 4

6. Tight monetary policy took a toll on the economic growth…
GDP(%) ▪ The high inflation and tight
monetary policy maintained by
the RBI have taken a toll on
11%
growth
10%
▪ GDP slowed to its weakest
9% annual pace in almost three
8% years, as high interest rates and
rising input costs constrained
7%
investment and manufacturing
6%
▪ With GDP growth moderating
5%
after significant monetary
4% tightening by the RBI, fiscal
Sep-08
Sep-09
Sep-10
Jun-11
Dec-11
Mar-11
Sep-11
Jun-08
Jun-09
Jun-10
Dec-08
Dec-09
Dec-10
Mar-08
Mar-09
Mar-10
consolidation is the only
alternative to maintain a
sustainable growth rate
SOURCE: Bloomberg, BMA Research
| 5

7. FY12 Deficit will likely be significantly higher than budgeted
In FY11, the government was able to reduce the central fiscal deficit to 4.7% of GDP, on
account of a significant revenue from 3G license fees. However, this year (FY12) the
government has been facing several receipt gaps. We expect central government’s fiscal
deficit to overshoot to about 6% of GDP in FY12 vs. budget estimate of 4.6% of GDP.
Some of the factors that have contributed to the rise in fiscal deficit are as follows:
▪ Loss in revenue on account of cut in custom and excise duty on petroleum
products: The government had cut excise duty and custom duty on petroleum
products in June last year, which has resulted in a loss of revenue to the
government
▪ The ensuing growth slowdown has weighed heavily on tax collections: Excise
and customs duty growth which are directly related to the production levels has
already slipped below budget estimates. Further, corporate tax growth has also
slowed led by the on-going moderation in economic activity, washing off the
optimistic revenue forecasts of the government
▪ Divestment shortfall from the budgeted target: Given the volatile capital market
environment, the government found it difficult to raise sufficient revenue from the
divestment program as was planned in the budget
▪ Subsidies over-run: Higher oil prices has resulted in an increase in oil subsidies
beyond budgeted, thereby increasing the subsidy bill of the country
| 6

8. Topics
The year that was...
• Inflation taking a toll on growth
• Increasing fiscal deficit
Expectations from the Budget
Detailed sectoral review
| 7

9. Expect policy reforms to improve the growth situation
▪ The macroeconomic conditions in India have been very challenging over the last few
months. From inflationary pressures to high interest rate environment and slowdown in
growth, from sovereign debt problems in the euro zone to the domestic issues, there
were a multitude of factors that impacted sentiments negatively
▪ In the midst of decelerating economic growth, policy formation had been difficult on
account of persistently high inflation clubbed with dwindling investments. Further,
volatility in the foreign exchange market had added to the difficulties of the policy
makers
▪ Till now, RBI had taken an anti-inflationary stance through its various monetary
policies. However, in monetary policy, there is not much of a room for a further
maneuver. Any further increase in interest rates will certainly impact growth and the
consequences of a slowdown in growth can be really damaging. Therefore, fiscal
consolidation is the only alternative to improve the growth situation
▪ The Union Budget for FY13 is to be presented in the parliament on 16th March. This
will be a crucial Budget as it sets the tone for policy stance relating to not just fiscal
issues but also monetary policy and economic reforms. Also, it is being announced at a
time when the economy is looking for a boost from the government through
appropriate policy announcements
| 8

10. Fiscal Consolidation to revive the growth momentum
▪ We believe the current macro economic backdrop warrants a reduction in fiscal deficit
partly by cutting expenditure and partly by increasing tax rates. We expect a focus on
balance between fiscal consolidation and public spending. The government must
consider steps that strengthen confidence and encourage a faster recovery in growth
▪ Two major structural reforms to overhaul the direct and indirect tax system are on the
agenda, a new direct tax code (DTC) and a uniform goods and service tax (GST).
Though these tax reform measures are unlikely to be implemented in the FY13 budget,
the FM might introduce some changes in the tax structure so that the move to the new
system is staggered and non-disruptive
▪ The government can also initiate some long pending reforms such as allowing FDI in
multi brand retail. This may however, require government’s conviction to move ahead
with reforms, post assembly elections.
▪ Re-sale of 2G spectrum through auctions may also come in.
▪ The Budget may also help devise some serious strategy on selling PSU stocks that
takes into account varying market conditions to raise sufficient revenue from
divestment
▪ On the expenditure side, support to the five year plan will have to be kept to the bare
minimum. This again has to be done without hurting infrastructure investments
| 9

11. Key focus of the upcoming Budget
▪ Subsidy Rationalization: The ultimate credibility test will lie in the FM’s ability to move
on subsidies and take small but decisive steps towards pruning them.
▪ It may opt raising diesel, kerosene and LPG prices in order to control its oil
subsidy bill. This will however result in higher prices of diesel and petroleum.
▪ Partial decontrol of urea prices may also be done in order to check the rising
fertilizer subsidy bill. This will result in increasing the much needed investments
into the fertilizer sector.
▪ Food subsidy however may be raised as government introduces food security bill.
▪ Withdrawal of fiscal stimulus: Given that there is a possibility of slippages in fiscal
targets of the Government, the government might use the revenue side to drive the
fiscal consolidation. One can expect that the Finance Ministry would try and increase
revenue collections by
▪ Raising excise duty and service taxes, perhaps back to the pre-crisis levels of
12%, thereby also laying ground for a GST at 12%.
▪ Widening the service tax net by bringing more services under the tax umbrella
and increase service tax collections
| 10

12. Key focus of the upcoming Budget
▪ Socialization of personal tax structure: The FM may introduce some changes in the
personal tax structure in order to alter one’s disposable income substantially.
▪ It may raise the maximum income tax exemption limit to Rs. 2,50,000 from Rs.
1,80,000, thereby providing more disposable income into the hands of lower
earning group.
▪ It is also likely that the government may re - introduce surcharge on personal
income tax (10%) particularly for assesses with gross taxable income in the
maximum tax bracket.
▪ The budget may also raise the MAT Rate to 20% (from 18.5%) and increase the
surcharge on corporate taxes to 10% (vs. 5% currently)
▪ Deduction under section 80C may be revised to Rs. 1,50,000 from the existing
limit of Rs. 1,00,000 to provide enhanced options of investments to the
assessees.
▪ Accelerating retail investments in equity markets: Some of the key avenues that
the FM can consider in this regard include:
▪ Lowering/ eliminating short term capital gains tax on equities
▪ Increasing tax allowances for retail investment in equity mutual funds
| 11

13. Topics
The year that was...
• Inflation taking a toll on growth
• Increasing fiscal deficit
Expectations from the Budget
Detailed sectoral preview
| 12

14. Automobile sector Negative
Budget ▪ We expect a potential increase in excise duties by 200 bp for the
Expectations sector, particularly for diesel powered vehicles. The duty is expected
to be immediately passed on to the consumers
▪ The much-debated imposition of additional tax on diesel cars might go
through as the step will not only add to the revenues for the
government but may also restrict the growth in diesel subsidies. While
the petroleum ministry is pushing for additional duty of Rs. 80,000 on
diesel cars and UVs, we expect a lower hike
▪ Any further allocation to rural employment schemes such as NREGA
would provide further strength to rural demand for tractors and other
vehicles. Increase in allocation under Rural Development program is
positive for auto companies with rural presence
| 13

15. Banking sector Neutral
Budget ▪ Fresh budgetary allocation for recapitalization of PSU banks which
Expectations would improve tier-1 capital and provide adequate capital to support
increased lending
▪ Further clarity on modalities of issuing new private sector bank
licenses
▪ Any policy initiatives affecting infrastructure projects
▪ Increase in exemption limit for borrower on housing loans
▪ Potential reduction in the lock-in period of term deposits to be eligible
for tax deduction from 5 years to 3 years. This would help in correcting
the asset liability mismatch of the banks
▪ Tax benefits on long-term deposits may be taken out of 80C and
provided as a separate tax exempt deduction
| 14

16. Capital Goods sector Neutral
Budget ▪ The budget might levy import duties on Power Equipment at 10-12%
Expectations or even higher, following demands from domestic power equipment
companies like L&T, BHEL etc for a level-playing field
▪ A potential increase in excise duty rate from current 10%
▪ Any increased spending on major infrastructure projects would also
revive demand for capital goods
| 15

17. Cement sector Positive
Budget ▪ We do not expect any industry-specific changes
Expectations ▪ The outlook on infrastructure spending will be important. Better
implementation of plan allocations could result in higher construction
demand from infrastructure segments
▪ The industry also expects removal of import duty on coal, pet coke,
gypsum and other fuels. Any import duty changes, if any, will give a
positive boost to the sector
| 16

18. Construction & Infrastructure sector Positive
Budget ▪ A pickup in spending is expected across various segments of Indian
Expectations infrastructure – Ports, Roads, Airports, Rail and Urban Infra, especially
focused on social spending through schemes such as Bharat Nirman,
JNNURM, etc. This will not just lead to higher investments but also
bring about improvements in the quality of urban infrastructure
▪ We also expect that the budget will increase the tax exemption limit
under Sec 80 CCF for infrastructure bonds from current Rs 20,000 to
Rs.1,00,000 to address funding constraints
▪ Specialized institutions may be allowed to fund infrastructure projects
since most banks are ill-equipped as it creates inherent Asset –
Liability Mismatch (ALM) issues
▪ Given the coal shortage in the country, we expect that the current 5%
import duty on coal may be abolished to reduce the cost of imported
coal
| 17

19. FMCG sector Neutral
Budget ▪ We expect specific excise duty on cigarettes to be raised by nearly
Expectations 10%. However, Companies will resort to price increases affecting
volumes. We believe that ITC is best placed to absorb the hike in
excise duties as it has demonstrated a track record of passing on
excise duty hikes to the end consumer
▪ There might also be a 200 bp increase in excise rates for consumer
products. While companies like Marico, Dabur etc won’t be affected,
as they have manufacturing facilities in excise exempt zone, Asian
Paints would get impacted and would have to pass it on
▪ Any increase in income tax slabs (particularly hike in the maximum
exempt slab), which lowers tax outgo and increases disposable
income will be positive for the consumer sector
| 18

20. Oil & Gas sector Positive
Budget ▪ We expect status quo to be maintained on customs and excise duties
Expectations in the oil & gas sector in light of the tight fiscal situation and sustained
high losses on sales of subsidized petroleum products at current retail
selling price. The customs duty was cut in June 2011 by 5% to nil for
crude oil and to 2.5% for petrol and diesel, and excise duty on diesel
was cut by INR2.6/lit to INR2/lit.
▪ The budget might grant extension of the commissioning date of new
refineries to avail the seven-year tax holiday. The exemption is
currently available for only those refineries which have been/would be
commissioned by March 2012. This will benefit Indian Oil Corporation
(IOC) which is setting up a greenfield 15 mmtpa refinery in Orissa
▪ Deregulation of all administered prices on fuel products is unlikely to
happen immediately but some price increases are possible to reduce
the subsidy burden and signal policy direction. The increase in prices
will be positive for the Oil Marketing Companies like HPCL, BPCL and
IOC as it will reduce the under-recoveries to some extent. It will also
reduce subsidy burden of ONGC, GAIL and Oil India
| 19

21. Pharmaceuticals sector Positive
Budget ▪ We expect increase in healthcare budgets which will be a positive for
Expectations the sector
▪ Higher weighted deduction (currently at 200%) on R&D related costs
and lower taxation on R&D incomes will be beneficial to the CRAMS
players.
▪ Excise duty on Bulk Drugs may be reduced from 10% to 5% to bring it
at par with formulations
▪ We expect an increase in MAT to 20% from 18.5%. This will affect
most of the front-line companies, especially those having SEZ units
| 20

22. Real Estate sector Positive
Budget ▪ Incentives for affordable housing such as
Expectations ▪ an increase in the limit for income tax deduction on interest on
home loans, which is currently Rs1,50,000 and/or
▪ an increase in the limit for income tax deduction on home loan
principal payments, which is currently Rs1,00,000.
▪ Thrust on infrastructure would be a longer term demand driver and
positive for the market
▪ Lower FDI restrictions and facilitation of foreign borrowings will help
companies overcome balance sheet issues
| 21

23. Utilities sector Positive
Budget ▪ Reduction of customs duty on imported coal which currently stands at
Expectations 5%
▪ Financial relief for SEBs in the form of new schemes in power
distribution
▪ Assistance to raise low‐cost long‐term resources to re‐finance power
projects
▪ Tax holiday under section 80IA for power plants may be extended.
▪ Differential between MAT and Income Tax rate may come down
| 22

24. Positive hope of stimulating growth
▪ In a scenario of high inflation, liquidity crunch, high interest rates and subdued
business sentiment, the Budget is expected to provide certain policy directions which
will shape the course of the economy in the coming months
▪ Ideally, the response from the policymakers should be a quick reversal in less
productive government spending, and at the same time initiating policy measures to
boost private investments. Apart from this, the government should consider expediting
the disinvestment process and ensure key reforms such as GST are implemented
quickly
▪ With this, we also need to tackle the implementation risk that has often been
associated with the Indian economy for many years. Particularly, on the expenditure
growth target, the implementation of the promise in the budget is more important than
the promise itself
▪ Industry expects the government to give policy directions to re-build investors'
confidence. Yes, not all of the issues are directly addressable in a Budget, but the
Budget this year can be a starting point towards such enabling policy making
▪ If the Budget assures a certain degree of fiscal prudence, without compromising on
growth excessively, the sentiment should improve. Nonetheless, in order to surge
ahead, industry will seek signs of at least an optimistic outlook from the FM
| 23

25. Central Government Accounts
All values in All values in
INR Cr FY10 FY11 FY12BE* INR Cr FY10 FY11 FY12BE*
REVENUE RECEIPTS 572811 783833 789892 REVENUE EXPENDITURE 911809 1053678 1097162
Tax Revenue 456536 563685 664457 Plan Expenditure 253884 326928 363604
Non-Tax Revenue 116275 220148 125435 Non Plan Expenditure 657925 726750 733558
CAPITAL RECEIPTS 453063 447743 447836 CAPITAL EXPENDITURE 112678 162898 160567
Capital Recpt. (Borr.) 419869 415998 392816 Plan Expenditure 49507 68096 77943
Capital Recpt. ( Ex . Borr) 33194 31745 55020 Non Plan Expenditure 63171 94802 82624
TOTAL- RECEIPTS 1025874 1231576 1237728 TOTAL EXPENDITURE
1024487 1216576 1257729
Revenue Receipts 572811 783833 789892 On Revenue Account
911809 1053678 1097162
Capital Receipts 453063 447743 447836 On Capital Account
112678 162898 160567
All values in
INR Cr FY10 FY11 FY12BE*
338998 269845 307270
Revenue Deficit
418482 400998 412817
Fiscal deficit
*Budgeted Estimates
Source: Ministry of Finance, Government of India | 24

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Nidhi Kedia || Research Analyst || nidhi.kedia@bmastock.com
March 06, 2012