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India
BUDGET
SPECIAL
REFCO-SIFY Securities
India Pvt Ltd.
BUDGET 2001-02
Summary
Macro Economic Indicators
Rs. Bln
Fiscal Deficit
As % of GDP
Revenue
Deficit
As % of GDP
Planned
Expenditure
Growth (%)
Non-Planned
Expenditure
Growth (%)
Divestment
Target
The Budget for FY01/02 presented by the Finance Minister has
FY00-01
FY01-02
1119
5.1
774
1163
4.7
788
3.6
862
3.2
951
the economy and provided the trigger needed to improve the
13.20
2492
10.28
2751
sentiment. For Agriculture sector reduction in interest rates
12.33
25
10.36
120
addressed the most crucial issue of providing boost to the
industrial sentiment. The Budget has identified each sector of
on loans to farmers, investment in storage capacities and
increase in import duties on some of the commodities are the
positive factors. In case of other infrastructure sectors
Favourable To:
Automobile
FMCG
IT
Infrastructure
emphasis on imposition of user charges would help in
improving health of the utilities and infrastructure service
providers. The Finance Minister has agreed to reduce controls
over petroleum, fertilizer, sugar and drugs industries to
provide more flexibility and reduce subsidy burden. On the
Unfavourable To:
Cigarette
Readymade Garment
industria l segment, simplification of excise, customs, labour
laws, reduction in corporate surcharge and 1 0% increase in
planned expenditure by the government would improve
sentiments. Reduction in Income Tax surcharge and increase
in deduction on loans taken for housing purpose will help
individuals. Reduction in interest rate in small savings and
extension of exemption in long term capital gains by
investment in primary market would divert more funds to the
Analysts:
capital market. Increase in FII limit to 49% from 40% and two-
Nikunj Doshi
Rajini Panicker
Rajnish Khare
Arun Iyer
Jatinder Agarwal
way fungibility of ADRs/GDRs would provide vibrancy to the
equities market. On the whole, ability of the Finance Minister
to contain fiscal deficit to the budgeted level of 5.1% despite
shortfall in divestment proceeds and natural calamities is
commendable. Moreover, further reining in of fiscal deficit to
+91 (22) 2042671
Email: [email protected]
4.7% during FY01/02 with better control over non-planned
expenditure would go a long way in improving the economic
Sales Desk:
health of the country. We expect the capital market to remain
Jignesh Shah
vibrant in the days ahead and overall sentiment would turn
+91 (22) 2046838
positive.
email: [email protected]
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BUDGET ANALYSIS
Macroeconomic Overview
The Economic Survey presented last Friday set the pace and direction for
reforms process. The Budget for FY01/02 has p rogressed in the direction
and accelerated the reforms process. The Budget addresses the need for
revival of the business confidence and flow of investments into
infrastructure sectors. The Budget has aimed at curtailing fiscal deficit to
4.7% by assuming higher divestment credit and control over non-plan
expenditure.
GDP
The GDP growth for FY00/01 is estimated at 6.0% from the 6.5% growth
registered in FY99/00. The 6% level of growth is commendable, as it has
been attained despite high international oil prices, unfavorable distribution
of rainfall for the second consecutive year and a slowdown in industrial
production.
Inflation
The 52 week average for WPI has increased to 6.6% in FY00/01 from 3.4%
in FY99/00. This increase in WPI has been due to the result of increase in
fuel, power, light and lubricants group. Excluding this group the core WPI
has risen 2.4% in FY00/01 compared to 1.5% in FY99/00. The prices of
essential commodities, and of manufactured products as a whole, have
remained stable. Consumer Price Index, excluding energy, was around 4%
for FY00/01 as against 3.4% during FY99/00. Thus core inflation during
FY00/01 has largely remained in control
Fiscal Deficit
The targeted fiscal deficit of 5.1% of GDP for FY00/01 was achieved. This
is commendable given the industrial slowdown, massive shortfall in
divestment proceeds, reduced duties on oil products and additional burden
on account of the natural calamity in Gujarat.
Nonetheless the fiscal deficit continues to remain burdensome as reiterated
by the Finance Minister. Primarily,
Ø The combined fiscal deficit of the center and the state is estimated at
10% of the GDP.
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Ø Outstanding Liabilities (non RBI) of the Central Government has risen
to 51.8% of the GDP in FY99/00 from a low of 46.4% in FY96/97.
Ø 70% of the Center’s borrowing, i.e., Rs 770bn according to the
FY00/01 budget estimate, was utilized for financing unproductive
revenue expenditure.
Ø Debt servicing is estimated at 4.58% of the GDP.
These issues highlight the fiscal unsustainability. T he budget FY01/02 has
proposed to tackle these core issues and curtail fiscal deficit to 4.7% of
GDP, through the following measures.
Tax Reforms
The thrust of Budget FY01/02 has been to widen the tax base for direct
taxes and rationalize indirect taxes.
Direct Taxes
Ø The emphasis has been to widen the tax base, which has nearly
doubled to 23mn assesses in the last two years. The taxation slabs
for individuals and corporates have been left unchanged. However,
the surcharge of 15% on corporate and non-corporate taxpayers is
abolished. The FM has retained 2% surcharge imposed on account
of the recent earthquake in Gujarat.
Ø Dividend tax has been reduced from 20% to 10%.
Ø TDS on interest income of more than Rs 2500 on time deposits.
Ø Maximum limit of interest income deductible under Sec. 80L is
reduced from Rs 12000 to Rs 9000.
Ø Long term capital gains arising out of sale of securities or units are
exempt from tax if the proceeds are invested in Primary issues of
shares of public companies.
Ø Increase in deduction on loans taken for construction/purchase of
house property from Rs 0.1mn to Rs0.15mn.
The FM has assumed a revenue loss of Rs 55bn in direct tax collection.
However, he is optimistic that the tax buoyancy and increased tax
compliance would make up for the shortfall.
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Indirect Taxes
On the indirect tax front, emphasis has been towards rationalization of the
excise duty structure to a single rate of 16% from the existing three-tier
slab of 8 / 16 / 24 %. The FM has removed surcharge of 10% on customs
duty and has left the slabs unchanged at 5%, 15%, 25% and 35%.
The FM has assumed a gain of Rs 46.77bn in excise collection and has
assumed a loss of 21.28bn in customs collection. Thus indirect taxes are
expected to improve contribution by Rs 25.49bn. We believe the additional
burden of Rs 46.77bn on domestic industry could act as a stumbling block
in the gro wth target for industry.
Measures to control expenditure
Ø Administered interest rates are to be reduced by 1 to 1.5% as of
March 1, 2001. This will reduce the debt-servicing component of the
fiscal deficit.
Ø To curtail unproductive revenue expenditure, staff strength is to be
reduced by 2% annually for the next five years. Additional
expenditure control to be brought about through, attractive VRS.
On the whole, total expenditure in the budget estimate for FY01/02 is
estimated at Rs 3752bn of which Rs 1001bn is for plan and Rs 2751bn is
for non-plan expenditure.
BOP
The current account deficit in FY00/01 is estimated at 1.5% of GDP
compared to 0.9% of GDP in FY99/00. The surge in current account deficit
is attributed to the tripling of the oil import bill between early 1999 and mid
2000. Exports have remained buoyant and recorded a growth of 20.4% (in
US dollar terms). However the pressure exerted on the current account by
the increase in international oil prices, widened the deficit.
On the capital account, there was a decline in capital inflows from $ 3.7bn
in April-September 99 to $2.5bn in April-Sept 00. However, the collection of
USD 5.5bn through the IMD helped prop the foreign reserves.
Budget FY01/02 has proposed the following measures to increase capital
inflows:
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Ø The 40% limit of investment in a company under the portfolio
investment route by FII’s has been increased to 49%.
Ø Automatic approval for FDI investments exceeding $50mn in
NBFCs. A compulsory divestment of 25% of such FDI’s in NBF C’s
has also been abolished.
Budget FY01/02 did not introduce specific export boosting measures. But
the exemption of leather goods manufacturers from the SSI sector could
improve the export potential of this sector. Leather goods comprise the
second larg est component of Indian exports. Exports have sustained an
average growth of 10% over the last three years and are expected to
maintain this trend in FY01/02.
Forex and Banking
The overall health of the banking sector is expected to improve. Public
Sector Banks have recovered Rs 8bn of NPAs from 2 lac accounts in
FY00/01. Net NPA's as percentage of net advances are now almost half at
7.4% in FY99/00 compared to 14.5% in FY93/94.
However the existing level of NPA's are still burdensome and special
attention has been paid on the recovery of NPA’s by setting up of :
Ø
22 Debt Recovery Tribunals (DRTs) and 5 Appellate Tribunals.
Ø
7 more DRTs will be set up during FY01/02.
Efficiency of PSU banks is expected to improve as the Banking Service
Recruitment Board will be abolished and banks will attain autonomy on
staff recruitment. The decline in small saving interest rates will reduce the
cost of capital and improve credit off take.
Ø The rupee/dollar has depreciated by 4.8% in April ’00 -January 01.
Since the issue of capital account convertibility was not addressed in
this budget, the implications on the rupee/dollar exchange rate per se
is minimal. Nonetheless, the sincere effort on the part of the
government to control non-developmental spending, increase forex
inflows, develop debt market and reduce domestic interest rates will be
supportive for the rupee. According to the PPP, the rupee is
undervalued by 29% against the US dollar and hence healthy
economic conditions could support a rupee appreciation.
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CONCLUSION
The focus of budget FY01/02 has been to reduce fiscal deficit without
compromising on economic growth. Major thrust on infrastructure
sector and continuation of the reforms process would go a long way
in improving overall business sentiment. The rationalization of duty
structures and the attempts to widen the tax base are steps in the
right direction. Capital market reforms are also commendable.
However, the fiscal deficit target could only be achieved if the
divestment target is met. Considering the current political upheaval
on account of Balco divestment, reaching Rs 120bn divestment target
is farfetched. On the whole we believe that the FM has been able to
provide a thrust and direction to the sagging economy. We expect the
equitie s market to respond positively.
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SECTORAL ANALYSIS
Information Technology
Information Technology sector has been spared from any additional taxes
as feared by the most analysts. The sector in fact has been given due
importance once again and some of the additional demands are fulfilled.
Major announcements related to the sector are:
Indian companies wishing to invest abroad can now invest upto $50mn
annually through the automatic route, without being subject to profitability
condition. However, companies that have issued ADRs/GDRs can make
foreign investments upto 100% of the amount raised as compared to 50%
limit set earlier. Higher allocation could be made with special permission
from the RBI. Also, the Indian companies that have issued ADRs/GDRs
may acquire shares of foreign companies upto $ 100mn or an amount
equivalent to ten times export earnings, whichever is higher. We believe
these changes will provide flexibility to the IT industry in deciding
investment/acquisition strategy. With current decline in valuations in the
international markets this move could provide a fillip to the acquisitions by
Indian companies. We expect Infosys and Wipro to be major beneficiary.
Two-way fungibility is allowed for ADRs/GDRs. The government has
allowed reconversion of shares in ADRs/GDRs provided sectoral caps are
not violated. This move is not going to have any positive impact in the near
future as most of the ADRs/GDRs have been quoting at a premium in the
international markets and hardly any conversion in equity shares has taken
place. We therefore see no scope of reconversion by the investors.
However, at a later date the two-way fungibility would provide arbitration
opportunities for the FIIs.
The Finance Bill has exempted export earnings from on-site services
provided by the IT companies from Income Tax. This was a contentious
issue between the IT authorities and the software services companies and
a clarification regarding the exemption was expected. This will not have
any positive impact on the profits of the It companies as most of the
companies were not paying tax on the same.
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Customs duty on IT & telecom products and their components is reduced
to 15%. This will help in marginal reduction in capex for new projects.
Tax holiday of five years and 30% deduction for next five years is now
made available to Internet Service Providers and broadband network
service providers commencing their business on or before 31 st March 2003.
The finance minister has also proposed changes to the section 10A/10B of
the Income Tax Act in the Union Budget 2001, so that IT companies
operating in special zones can avail income tax exemption even after there
are changes in the company's shareholding pattern.
In order to improve efficieny in government activities with large public
interface, the FM has recommended increased use of information
technology. It is proposed that operations like GPF, pension, pay and
accounts offices, passports, income tax, customs, central excise, will be
fully computerized by March 31, 2002. Public sector banks and insurance
companies are also being asked to complete computerization of their
operations within this period. We believe the thrust to IT usage will open up
a huge domestic market to the IT companies. We expect the step to benefit
companies like HCL Info which have focus on domestic market.
Automobile
There has been a major thrust to put the automobile sector back onto track
through this budget. The sops given to this sector are growth oriented and
mostly as per market expectations. The benefits in the form of excise
reduction more or less cover the entire sector.
Excise Duty
FY00/01
FY01/02
Cars/Utility Vehicles
40%
32%
Commercial Vehicles
16%
16%
Scooters/Motor Cycles
24%
16%
Ø Accelerated depreciation at the rate of 50% on new commercial
vehicles for one year. The much -awaited move is expected to boost
demand in the recession hit automobile sector. Applicability of
accelerated depreciation would also lead to higher activity through
the leasing se ctor.
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Ø Special Excise duty on motorcars reduced to 16% from 24%
bringing down the total duty to 32% from existing 40%. Special
Excise duty on scooters/motor cycle’s abolished bringing down the
total excise duty to 16%. Demand for cars and two wheelers, which
was stagnating for quite some time could see demand boost. In a
prompt move, major auto manufacturers have passed on the benefit
to customers by slashing the prices with immediate effect.
Ø Customs duty on import of second hand cars has been increased to
105%, which is three times the peak rate. The total duty now
applicable to second hand cars will be more than 180%. A similar
structure of duty has been proposed for old multi utility vehicles,
scooters and motorcycles. With the abolition of quantitative
restrictions from April onwards, second hand cars will become
freely importable. The measure was important as a guard against
fears that it would lead to protect the domestic auto sector from
surge in import of second hand cars.
Infrastructure Development
The Budget has addressed all the areas of infrastructure needs, in order to
boost the economy.
Roads
Ø 50% of diesel cess earmarked for rural roads development.
Ø Work for more than 1500kms of the golden quadrilateral awarded in
addition to completed 600 kms.
Ø Plan outlay for road sector is increased by 93% to Rs 87.3bn.
Power
Ø Earmarking of Rs 7.5bn out of Rural Infrastrucure Development Fund
for rural electrification works.
Ø Allowing Rural Electrification Corporation to float capital gains tax
exemption bonds. This will help REC in raising resources for
implementation of development programs.
Ø Time bound program for installation of 100% metering by Dec. 2001.
Ø Energy audit at all levels.
Ø Commercialisation of distribution.
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Ø SEB restructuring.
Ø Plan allocation to Accelearated Power Development Programme has
been increased to Rs 15bn from Rs 10bn.
Ø To help accelerate the reforms in power sector a new bill will be
introduced in the current session of Parliament.
Ports
Ø Capacity of ports to increase from 314mn tones now to 376mn tones
at the end of FY01/02.
Ø Corporatisation of major ports.
Tax benefits extended for infrastructure projects
For the core sectors of infrastructure namely, roads, highways, rail system,
water treatment and supply, irrigation, sanitation and solid waste
management systems, a ten-year tax holiday is allowed during the initial
twenty years. In the case of other long gestation projects like airports,
ports, inland ports and waterways, industrial parks and generation and
distribution of power, a tax holiday of ten years is proposed to be availed of
during the initial fifteen years.
In addition to the tax holiday proposed for development of infrastructure,
tax incentives have also been provided for the investors providing longterm finance or investing in the equity capital of the enterprises engaged in
infrastructure facility. Any income by way of interest, dividends or long-term
capital gains from such investments is fully exempt. This concession is also
extended to guarantee commissions and credit enhancement fees earned
by financial institutions from infrastructure enterprises. Co-operative Banks
will also be eligible for exemption of their income from investments in
approved infrastructure facilities.
We believe the thrust given by the FM on infrastructure development
through increase in planned allocation and by providing tax incentives to
private investors will help in revival of business confidence.
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Pharmaceuticals
The Budget has left pharma industry untouched by and large except for the
general proposals, which would impact all the companies equally. The FM
has however, extended provision allowing weighted deduction of 150% on
R&D expenditure to biotechnology companies and for clinical trials, filing
patents and obtaining regulatory approvals. For pharma companies
engaged in research and exports, clinical trials, filing of patents and
regulatory approvals involve large expenditure. Hence, the benefit of
weighted deductions will help the industry. Majority beneficiary of this
guideline would be large domestic company like Dr. Reddy’s, Ranbaxy,
Nicholas, Cipla and Sun Pharma.
The other highlight of the Budget for pharma industry was the mention of
need to reduce controls. The FM has assured reduction in span of control
on the industry. Any relaxation in the price control will mainly benefit the
MNC pharma companies, as most of these companies have large
proportion of turnover controlled under DPCO. However, exact
beneficiaries would be known once the names of decontrolled drugs are
anno unced.
FMCG
FMCG industry is one of the major beneficiaries of the unification of excise
rates. As seen in the table below, while most of the items are unaffected
there are few items where the excise has been reduced.
Item
Excise duty
FY00/01
FY01/02
Toilet Soap
16%
16%
Washing Soap
16%
16%
Detergents
16%
16%
Toothpaste
16%
16%
Hair Oils
16%
16%
Cosmetics/Toiletries
32%
16%
16%
16%
16%
16%
8%
16%
40%
32%
Confectionery,
chocolates,
ice
creams etc.
Biscuits
Biscuits in retail packs upto 100
gm costing < Rs 5
Aerated Soft Drinks
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Ø Major benefit is given to the FMCG companies involved in processing
of perishable fruits and vegetables. The units in this business are
exempt
from
excise
duties
as
against
16%
excise
on
jams/sauces/juices etc. We believe this would largely benefit HLL and
Nestle. Also, HLL would be benefited from reduction in excise on
cosmetics and toiletries.
Ø Customs duty on crude palm oil for vanaspati is increased from 25%
to 55% and that for other importers is now 75%.
Ø Soda Ash import duty is reduced from 35% to 20%.
Ø CVD is to be charged on imported liquor.
Ø 15% surcharge is imposed on cigarettes, pan masala etc.
Ø CVD on imported consumer goods.
Ø Development allowance available for tea is increased from 20% to
40%, provided the amount is used for replantation, modernization of
tea plantations and processing facilities.
On the whole, FMCG companies are high dividend and tax paying
companies, hence, reduction in corporate tax and dividend tax will help
the companies in improving profits.
Entertainment
Ø Reduction in customs duty on cinematographic cameras, projectors
and certain other related equipment used by the film industry from
25% to 15%. The reduction in duty would encourage the media
companies to import high quality equipments that would result in
improved quality of final production and profitability. The move would
enhance the efforts to make India a major sourcing center for
television and animation postproduction jobs as the companies would
be in a better position to offer International standard facilities.
Ø Finance Minister in his budget speech announced that banks are in
the process of finalizing guidelines for financing such projects that are
bankable. The long awaited demand of getting the productions
financed by financial agencies is looking a reality now. This would
ensure greater transparency in transactions and avoid the hardship of
getting finances from unorganized sources.
Ø Broadcasting Services, Video Tape Production Services and Sound
Recording Services brought under service tax net.
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Ø The Government proposes to introduce the Convergence Bill to cover
telecommunications, information technology, and information and
broadcasting sectors in an integrated manner. To provide much
required impetus to the convergence sector. However, the final
picture would be clear only after looking into the details of bills, which
would be tabled in the house later. Though the news should boost
overall sentiment for the sector as it reflects Governments
seriousness towards recognizing the imperatives of technological
change in this area.
Ø The foreign telecasting channels will henceforth be taxed in India, on
their income computed in accordance with the provisions of the
Income -tax Act.
Telecom
Ø Customs duty on telecom products to be reduced to 15%. The budget
proposal is in line with the commitment made under ITA.
Ø The five-year tax holiday and 30% deduction for next five years
extended for the units commencing their operations on or before 31,
March 2003. These concessions will also be extended to Internet
service providers and broadband networks. The scheme, which was
earlier to expire this fiscal, has been extended to the units
commencing their operations on or before 31, March 2003 in order to
encourage speedy growth in the domestic infrastructure sector. The
inclusion of ISPs and broadband service providers would give an
impetus to growth for the players in the segment.
Ø Facsimile, telegraphic, telex, leased circuits and online information
services and database services brought under service tax net. No
major difference to service providers, as the burden would be
ultimately transferred on to the end users.
Petrochemicals
Ø Excise duty on High Speed Diesel and motor spirit is increased to
16% from current 12%. The burden of increase in duty will not be
passed on to the consumers except for any technical corrections.
Ø Excise on Compressed Natural Gas levied at par with CNG at the
rate of 8%.
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Ø There are some cases of anomaly in customs duty between raw
materials and intermediate goods on the one hand, and intermediate
goods and final products on the other. DMT, PTA, MEG and
Caprolactum are raw materials for production of man-made fibers and
yarns. However, the customs duty on these materials is higher than
the rate applicable to fibers and yarn. It is therefore, proposed to
reduce the customs duty on DMT, PTA, MEG and Caprolactum from
25% to 20%, which is the WTO bound rate for synthetic fibers and
yarns. The customs duty on polyester chips and nylon chips for the
manufacture of fibers and yarns is reduced from 35% to 25%.
Ø Duty on LPG conversion kits and their parts to be at par with CNG
kits and their parts at 5%.
The reduction in excise will help producers of PFY, PE, PP and PVC. Also,
reduction in customs duty on inputs will benefit non-integrated
manufacturers of PFY.
Cement
The cement sector is by and large untouched in the Budget. However,
several measures, as mentioned above, to boost infrastructure
development would provide a fillip to the demand of cement.
Duty
FY00/01
FY01/02
Excise
Rs.350/t
Rs.350/t
Custom (%)
35
25
White Cement and other special cements will attract SED of 16% and a
total duty of 32%.
The reduction of custom duty on cement from 35% to 25% is not expected
to have a major effect on the domestic industry as imports form a minor
part of the total demand. Moreover, infrastructure hurdles prevent users
from resorting to import of cement. Overall, we believe that the budgetary
provisions will have a positive impact on the cement industry.
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Fertilizer
Ø Phased programme of complete decontrol of urea by April 1, 2006
Ø The Finanace Minister has not touched upon the sensitive matter of
Urea Pricing in the current budget. However, he has outlined a
timetable for complete decontrol of Urea Prices. Urea pricing being
one of the most sensitive issues in the country, the move to decontrol
has to be backed by clear intention and support of the Cabinet. To
implement the plan, the finance minister would require complete
support and clear mandate of all its allies.
Ø Unit Specific Retention Price Scheme (RPS) to be replaced by a
Group Concession Scheme w.e.f April 1, 2001.
Ø Rate of concession for urea units based on naphta/FO/LSHS will be
linked to international prices of these feed stocks w.e.f April 1, 2001.
The measure of urea price decontrol would benefit the cost efficient
producers of urea like Indo Gulf Corporation. The new units will be at a
disadvantage.
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