GDP growth target – 9% ± 0.25%. Fiscal deficit

4.6% of GDP (better than 4.8% set in roadmap L/Y); positive for bond markets.

Target looks aggressive given absence of non-tax revenues (3G booty) this year & underestimation of subsidies.

Target to reach 4.1% in 2012-13 and 3.5% in 2013-14 welcome. Effective Revenue Deficit – 1.8% of GDP; persistent Revenue Deficit a

concern. Net market borrowings

Rs 3.43 lakh crore. Lower than estimates; positive for bond markets.

Budget 2011 like the India England One-day result A TIE BETWEEN GROWTH & INFLATION BUT NOBODY WINS!!!

Fiscal highlights

Direct tax slabs tinkered with Exemption limit raised to Rs 1.8 lakh from Rs 1.6 lakh; with inflation at

over 10% , hardly any increase in real terms. Exemption limit for senior citizens - raised to Rs 2.5 lakh from Rs 2.4 lakh. Age to qualify as “senior citizen” reduced to 60 from 65. “Very Senior Citizens” (80 years +) - exempt upto Rs 5 lakh.

Salaried taxpayers not required to file return of income if tax discharged by way of TDS.

Corporate taxes Surcharge reduced from 7.5% to 5%. MAT increased marginally from 18% to 18.5%. SEZ units & developers to be subject to MAT; will hit infra companies. LLPs to be subject to MAT; negative for LLPs

Positive for corporates; not much for the aam aadmi

Direct Tax

No reversal of excise stimulus given in 2009; positive for auto companies. Environmental concern - Fuel cell, hydrogen cell technology, hybrid vehicles

granted concessions. Branded garments to get expensive – excise duty @ 10%. Consumer goods such as sanitary napkins, diapers to get cheaper – excise

reduced from 10% to 1%. Efforts to incentivize agriculture by reducing duties:

No excise on air-conditioning equipment, refrigeration panels used in cold chains.

No excise on equipment used in cold storages, mandis and warehouses. Customs duty on micro-irrigation equipment reduced from 7.5% to 5%. No customs on import of de-oiled rice bran cake. Export duty of 10% to

discourage exports; positive for dairy processing organizations.

Indirect Tax - Excise & Import

Excise duty on iron ore increased to 20%; negative for mining companies such as Sesa Goa, NMDC; positive for steel companies.

Capital goods used in ultra mega power projects exempted from excise duty. Customs duty on Solar lanterns reduced from 10% to 5%. Cash dispensers and their parts exempted from customs duty, in order to

further financial inclusion.

Indirect Tax - Excise & Import

Rate of service tax retained at 10%. More services brought within the tax net

Hotel rooms with tariff exceeding Rs 1,000 per day – 5% Air-conditioned restaurants serving liquor – 3% Healthcare to get expensive (Govt hospitals exempted)

Centrally air-conditioned hospitals with 25 or more beds - 5% Diagnostic tests of all kinds – 5%

Air travel to be dearer Domestic air travel (higher class) – 10% Domestic air travel (economy class) – Rs 50 International journeys by economy class – Rs 250

Indirect Tax – Service Tax

Positives DTC most likely to be enacted by April 1, 2012. 3 fold increase to Rs 1,000 crore for building judicial infrastructure & E-

Courts. Financial sector legal reforms – Amendment of the following laws:

Insurance Act - to increase FDI limit to 49%. Pension Fund Regulatory & Development Authority Act. SBI (Subsidiary Banks) Act – for merger with SBI. Other Banking Laws – including additional banking licenses to private

sector. SARFAESI Act.

Companies Bill to be tabled in present session of Parliament. Negatives No timeline for GST. Legal reforms promised for years, but no political support for the passage

of laws.

Mere announcements; will the Government be able to walk the talk?

Legal Reforms

Will the FM be able to meet the 4.6% Fiscal Deficit target?

Will subsidies be contained within budgeted levels?

No commitment to dampen inflation, with half baked supply-side measures.

Issues of concern

Equity markets – were up by 3% mid day but ended with modest gains of about 0.5%.

Top 5 NIFTY gainers

Gain (%)

Reason

ITC 8.13% Much expected increase in excise duty on tobacco and tobacco products not announced.

IDFC 5.18% Impetus to infrastructure. Reliance Capital

4.66% Banking licenses to private sector.

M&M 3.45% No roll back of excise stimulation.Fuel cell, hydrogen cell technology, hybrid vehicles granted concessions.

Maruti Udyog 3.38% No roll back of excise stimulation.

Vote of the market

Top 5 NIFTY losers Loss (%) Reason

Sesa Goa -7.54% Increase in excise duty to 20%.

Ambuja Cement -5.23% Rationalization in excise duty.

Reliance Infrastructure -4.35% MAT on SEZ developers.

Ranbaxy -3.23% No specific reason, as appears from the Budget Speech.

Jaiprakash Associates -3.20% MAT on SEZ developers.Rationalization in excise duty on cement.

Vote of the market

Sectoral overview

Positives Allocation of Rs 2.14 lakh crore; increase of 23.3% over L/Y. FII Investment in corporate bonds in infra sector raised to 40 billion USD. To attract foreign funding for infrastructure, infra debt funds to be notified, with

attractive TDS rate of 5%. Income of Fund exempt from tax. Tax free bonds of Rs 30,000 crore for infra development. Infra bonds eligible for tax rebate for individuals upto Rs 20,000. Rural Infra Development Fund – corpus increased to Rs 18,000 crore from

Rs 16,000 crore. Viability gap funding for capital investment in setting up of storage capacity. Infra status for cold chains and post-harvest storage facility. Infra status for capital investment in fertilizer production.Negatives Infra financing addressed partly, though execution still a concern. Limit for infra bonds not increased; concerns still exist for financing of USD 1

trillion during the 12th Plan.

Infrastructure

Allocation of Rs 160,887 crore – 17% increase, (36.4% of total plan allocation). Allocation for 6 schemes of “Bharat Nirman” increased to Rs 58,000 crore

(increased by Rs 10,000 crore). Direct transfer of cash for LPG, kerosene and fertilizer subsidy, eliminating

leakages; expected to be in place by March 2012. 10 lakh per day Aadhar numbers to be rolled out by October 2011, streamlining

the delivery mechanism. Wages indexed to CPI-AL under the MGNREGA. Pay for Aanganwadi workers doubled, albeit from an extremely low base. Pension rules relaxed for unorganized workers / BPL beneficiaries. India Microfinance Equity Fund of Rs 100 crore - for equity contribution to

smaller MFIs. Boost to low cost housing through favourable financing.

Not much for the aam aadmi; unless if the delivery mechanism starts functioning.May induce some consumption, with marginally higher budgetary allocations.

Social sector

Economic Survey 2010–11

Agriculture production estimated to increase by 5.4% Food grain : 6.5% (232 million tonnes) Oil seed :11.9% Cotton : 4.2% Sugarcane : 15.2% (24 million tonnes) Fruits : 4.1% Vegetables : 3.8%

Total farm credit given to farmers till September – Rs. 194,392 crore Period of repayment of loan extended by 6 months Share in country’s GDP : 14.2%

Agriculture

2010 - 11 2011 -12 ChangeTotal allocation (under Rashtriya Krishi Vikas Yojna) 6,755 7,860 16.35%

For Green revolution in eastern region 400 400 SameTo promote 60,000 pulses villages in rain fed area 300 300 SameFor sustaining the gains and conservation 200 NilFor promoting oil seed plantation Nil 300To establish efficient supply chain for vegetables Nil 300To promote higher production of traditional cereals (Ragi. Millet, etc.)

Nil 300

National mission for Protein supplement Nil 300For accelerated fodder development program Nil 300Total farm credit allocated 375,000 475,000 26.66%Rate of interest 7% 7% SameEffective interest rate 5% 4% -1%

Proposed investmentFigures in Rs crore

Allocations of Rs 300 crore respectively too small to make any difference!!!

Positives

To enhance rice production in eastern region, a good step taken by Govt. through Green Revolution. There could be a possibility for export in the coming year. Govt. will look to include urea in nutrient based subsidy. Basic customs duty reduced from 5% to 2.5% for agricultural machinery; Positive for organizations such as IFFCO. To increase fertilizer production and cold storage production capacity in the country, infrastructure status granted for capital investment in fertilizer production and for cold chains and post-harvest storage facility. Proposed 15 more mega food parks for the preservation of vegetables and fruits. Including these, total food parks in the country to rise to 30. Positive for food processing companies such as EID Parry, etc.

Analysis

Negatives

Total allocation for FY12 increased by 16.35%. However, Plan Expenditure is only 4.07% of total Plan expenditure, which is very low considering that about 58% of country’s population is employed in agriculture. Further, Plan capital expenditure is an abysmal 0.13% of total Plan capital expenditure. This will hardly address any supply side issues. An increase in interest rate subvention from 2% to 3%, if loan is repaid on time. It will bring down effective interest rate to 4%. But at the same time, there are no provisions for drought relief. Rs. 300 crore investment to improve supply chain management a good attempt but past experience shows that implementation may be tardy. Besides, Rs 300 crore is a paltry sum to address the problem.

Analysis

Why subsidy given to the sector is not in line with input cost? Why farm loan limit through Kisan credit card remains same, ie Rs. 300,000 despite inflation being around 10%? While additional interest subvention is welcome, however, if the farmer delays loan repayment even by 1 day (after six months grace period), he has to pay double interest, ie 14%. In Budget speech, FM endorsed that soil fertility has decreased through the use of chemical fertilizers. He proposed steps to increase organic agriculture in the country. But in the same speech, he talked about giving subsidy to chemical fertilizers and exemption from tax for any investment in chemical fertilizer sector. In India, more than 60% farmland irrigated by rain water. Sufficient steps have not been taken to ameliorate the situation. One funny but good argument given by a Kisan – While a car loan is cheaper than a tractor loan…… he has nothing to do with the car on his farm.

Questions remain unanswered

Mildly positive for Agriculture but negative for Kisan.

Key announcements Effects on FMCG sector

Income-tax exemption limit enhanced (Rs 1.6 lakh to Rs 1.8 lakh)

Positive for branded food items segment and personal care segment, because of increase in purchasing power.

Sanction of Rs 58,000 crore for Bharat Nirman

Will improve purchasing power of rural people, giving impetus to rural consumption.

100% increase in wages of Aanganwadi workers and helpers

Will enhance purchasing power.

Indexation of wage rates under MGNREGA to the Consumer Price Index for Agricultural Labour

Will positively affect the purchasing power of rural people.

Reduction in central Excise duty on sanitary napkins, baby and adult diapers from 10% to 1%

Positive for personal care companies, such as P&G.

Reduction in customs duty on bamboo for Agarbattis from 30 percent to 10 percent

Will reduce the input cost of Agarbattis. Positive for ITC, though agarbatti business very small right now.

FMCG

Measures could increase consumption, though marginally!!!

Key announcements Effects on FMCG sectorNo reversal of excise stimulus Will positively impact FMCG products

(positive for ITC, HUL & Dabur).No change in excise duties on cigarettes Positive for all cigarettes companies of

India (ITC, Godfrey Phillips).

Allocation of 15 mega food parks Will strengthen the supply chain for food articles.

Allocation of fund for 150 lakh metric tons warehouse facility and 1.4 lakh ton cold storage facility.

Positive for food & beverages segment. Companies such as ITC, Britannia to benefit.

10% excise duty on branded readymade garments

Negative impact on branded readymade garment companies (Raymonds, Future Group).

Roadmap for implementation of GST in next FY

Will positively impact FMCG companies with a single point taxation scheme.

FMCG

Allocation 2010-2011 2011-2012 % Change YOY

Estimated total allocation 41,981.45 52,057 24%

Percentage of Total Expenditure

3.45% 4.14% 0.69%

Allocation for National Skill Development Council

1,000 500 -50%

Expenditure on Sarva Shiksha Abhiyan

15,000 21,000 40%

Figures in Rs crore

Education

Special grant to recognize excellence in universities and higher institutions.

S.No. University/ Institute Amount

1 Aligarh Muslim University 50 Crore

2 Kerala veterinary and Animal Sciences University 100 Crore

3 Mahatma Gandhi Antarrashtriya Hindi Vishwavidyalaya, Wardha

10 Crore

4 IIT, Kharagpur 200 Crore5 Rajiv Gandhi National Institute of Youth

Development, Sriperumbudur, Tamil Nadu20 Crore

6 IIM, Calcutta 20 Crore7 Maulana Azad Education Foundation 200 Crore8 Centre for Development Economics and Ratan Tata

Library, Delhi School of Economics, Delhi10 Crore

9 Madras School of Economics 10 Crore

AnalysisPositives Increase in allocation of funds by 24% is truly commendable. A revised Centrally Sponsored Scheme “Vocationalisation of Secondary

Education” to improve the employability of youth. Special emphasis on areas such as Skill Development and the National

Knowledge Network that is critical for India to be a global leader in the 21st century.

National Knowledge Network initiative shows the government’s preference to reach quality education to the students irrespective of their geographical location.

With the increase in the Sarva Shiksha Abhiyan budget by 40% to Rs 21,000 crore, there should be a much larger role for the private sector in K-12 and Teacher Training space built around the PPP (public private partnership) model.

Pre-metric scholarship for SC and ST students will be advantageous and it would benefit about 40 lakh students.

Negatives

Education sector has not been opened up for foreign participation. Govt. has not given any emphasis on private sector participation. Govt. has not allowed any tax sops to the private players in the education segment.

Analysis

Jumbo rolls of 400 feet and 1,000 feet exempt from CVD (countervailing Duty). +ve for the film production companies such as Eros, Ashta Vinayak, Balaji Telefilms. Excise duty on LED reduced to 5% but the change in taxes on LED unlikely to affect the end consumer much. Excise duty reduced from 10% to 5% on parts of ink-jet and laser-jet printers Reduction in the price of printers a positive for companies such as Jagran Prakashan and HT Media.

Media and entertainment

The Government was expected to exempt from customs duty the cover paper used by magazines but not announced.

There was also a demand for tax concessions to animation, gaming and VFX, which is a booming segment.

A lot of program content is sourced from foreign players. If the recipient of income does not have a Permanent Account Number, the withholding taxes at 20% are borne by payer (Indian companies). Industry was expecting that this rate will be relaxed so that Indian players do not get penalized for payee’s failure to apply for PAN.

Issues not addressed

Positives Subsidy related liabilities to be met in cash and not bonds, bringing them

into fiscal accounting. Direct transfer of cash for LPG, kerosene and fertilizer subsidy – promised

for years though!!!!; expected to happen by March 2012. Negatives Subsidies grossly underestimated, when price of oil has gone past USD

100 a barrel and food prices are at all-time high.

Subsidies Actuals(2009-10)

Budgeted Estimate(2010-11)

Revised Estimate(2010-11)

Budgeted Estimate(2011-12)

Fertilizer 61,264 49,981 54,977 49,998Food 58,443 55,578 60,600 60,573Petroleum 14,951 3,108 38,386 23,640

Figures in Rs crore

Subsidies

Disinvestment target of Rs 40,000 crore quite optimistic, especially if the markets go into a tailspin.

No provision for the Food Security Bill (estimated provision required Rs 11,000 crore – Rs 15,000 crore, if the Bill goes through).

Subsidies grossly underfunded.

Deficit concerns

Liberalization of pricing of petro products. Reduction of duties on petro products; negative for Oil Marketing

Companies. No announcement on multi-brand retail. No announcement on the date for implementation of the IFRS. No reversal of excise stimulus ; positive for auto companies. STPI Scheme extension ; a big let down for the IT industry. Increase in customs duty on gold & silver ; positive for jewellery companies. Increase in excise duty on tobacco & cigarettes ; largely positive for ITC.

What was expected & missing !!

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The Budget these days is just another policy document, with the big bang announcements outside the Budget. Let’s hope that it is no different this time, given that the Budget was a big let down this year…..