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Expectations from India’s 2011-12 union budget

February 23, 2011
Key expectations-Budget FY12 – by HDFC bank’s Chief Economist Abheek Barua
  • FY11 fiscal deficit likely at 4.9 percent of GDP
  • Government to announce fiscal deficit close to medium-term target of 4.8 percent of GDP in FY12 ;slippages likely to push ratio to 5.1-5.2 percent of GDP
  • Gross borrowings likely to be close to Rs 4,70,000 cr in FY12 against Rs 4,50,000 cr in FY11
  • No changes in excise duty rates but income tax exemption limit could be hiked from Rs 1,60,000 to Rs 2,00,000
  • CST could be trimmed to 1 percent and exemptions on specific products could be scaled back
  • Customs; excise duty on petroleum products could be reduced
  • Service tax net likely to be widened to include retail services, gas and water distribution, research and experimental development
  • Food security bill implementation ;firm global commodity prices to keep subsidy bill elevated
  • Social sector to remain focal point for plan spending but unspent allocations from FY11 could curtail incremental budgetary support in FY12
  • Schemes such as MGNREGS,Sarva Shiksha Abhyan ( Right to education),Bharat Nirman and Rajiv Gandhi Vidyutikaran Yojana likely to get a leg up and additional emphasis likely on agricultural investment and supply chain management.
  • Government to target disinvestments of Rs 40,000 cr in FY12
  • Recapitalization of RRBs to the tune of Rs 1,100 cr likely over FY11 and FY12
  • DTC; GST implementation unlikely before April,2012
  • Extension of profit-linked tax incentives for infrastructure beyond March,2012
  • Finance reform bill likely to be pushed through

Rising strongly in the world economic order, the Indian economy is expected to clock a GDP growth of 8.6 percent for Financial Year 2010-11 while facing the most critical challenge of crossing the ‘double digit growth barrier’ in the next five years.

As the union budget approaches, India’s current macroeconomic challenges are manifold 1. Controlling inflation, including that for essential commodities, 2. Maintaining fiscal deficit amongst rising oil prices, 3. Absence of one-time revenues such as 3G, WiMax license fees, 4. Allocation & channelising investment in Infrastructure, 5. Domestic financial sector liquidity management with large government borrowing can potentially be a dampener for private investments, 6. Reducing current account deficit from current elevated levels. Keeping all these challenges in mind, Inchin Closer takes a look at those industries that have or are impacted by China and what to expect from them in the 2011-12 India Union budget.

Capital Goods & Infrastructure: Infrastructure spending is the backbone of any economy especially in a developing country like India. With end of XI five year plan and missing targets, focus would remain on the infrasctructure sector. Currently, the sector faces issues like higher commodity prices, higher funding cost and over and above slow pace of award win. At operational level difficulties are faced in obtaining several clearances for land, environment etc causing further delay in project execution and cost over run.
Given the recent reshuffling in the cabinet, low pace of award win activities and dismal IIP data over last couple of months, the thrust would be to accelerate the infrastructure spending and promote private participation to achieve inclusive growth of the economy. Emphasis would be towards higher infrastructure spending both from public and private participants in order to achieve higher GDP growth rate of 8.5%+. We expect higher fund allocation to various infrastructure development schemes (like Bharat Nirman, JNNURM, APDRP, RGGVY etc.) & focus on higher social spending benefitting construction and water & rural infrastructure taking front seat while allocation. Formalization of Public Private Partnership for Infra projects is also likely.

Metals / Mining: Metal prices have been in an uptrend on the back of rising input costs. Recent disruption in coking coal and iron ore supply due to floods in Australia have been responsible for the rising prices of steel. Spot prices of 63.5 Fe grade iron ore have risen sharply from ~USD 125 / MT in July 2010 to ~USD 196 / MT currently. China coking coal prices have increased from ~USD 265 / MT in July 2010 to ~USD 320 / MT currently. This steep rise in input costs have resulted in compression of margins for non integrated players such as JSW Steel and SAIL while it has helped the integrated players such as Tata Steel and Jindal Steel & Power and mining companies like NMDC and Sesa Goa to improve their profitability.
Going forward we expect steel prices to remain firm on account of strong demand lead by recovering global economies. However we believe iron ore prices would come under pressure going forward on account of high inventory levels. Iron ore inventory in China’s ports has reached 82.8 MT, record high in three years. With the resumption of supplies from Australia, prices of coking coal would also normalize from their highs. We believe this scenario would be positive for steel companies.

Oil & Gas: The International Energy Agency (IEA) estimates global oil demand at 89.1 million barrels per day (mb/d) for CY11, an increase of 1.4mb/d over CY10. Asia and the Middle East would account for a major portion of the increase with an expected rise in demand by 1 mb/d. Per capita consumption of energy in India is still one of the lowest in the world (around 0.3 tonnes of oil equivalent compared to world average of l .8). The rise in oil demand can be attributed to a buoyant economic recovery globally. To cater to this demand, IEA estimates OPEC supply at 29.9 mb/d, non-OPEC supply at 53.4mb/d and OPEC NGLs to contribute 5.8 mb/d in 2011.
With demand expected to remain strong we expect crude prices to remain high going forward which is negative for the sector, especially the downstream players. Uncertainty regarding subsidy continues to bleed the oil marketing companies. The three OMCs will end the fiscal with around INR 800 bn of revenue losses on selling diesel, domestic LPG and kerosene below cost, compared to ~INR 440 bn last year. The focus on laying of natural gas and gas transmission pipelines continues with transmission and distribution companies like GSPL, IGL, GAIL and GGCL having performed very well over the last year. With issue of coal availability, ramp up of KG basin production and government’s thrust on cleaner fuels, natural gas business is expected to grow very rapidly.

Power: Investments in power transmission & distribution (T&D) are currently lagging behind compared to investments in power generation and are expected to play catch up in the coming years. Given the heavy investment (INR 8370 bn for XIth Plan) requirement in this sector, we believe that the thrust on spending will be maintained. We expect the incentives to continue and in a best case scenario, there could be some more positive surprises as well. Incase of customs duty exemption, there would be reduction in the cost of power generation which will help our economy at large besides encouraging more industries to come forward to set up power plants. All initiatives from industries to set up Independent, Merchant and Captive Power Plants are expected to be encouraged by Government of India. Focus of the budget is expected to be on improving the T&D infrastructure in the country & promoting renewable energy.

Auto: The budget last year had partially rolled back the stimulus provided to the auto players by increasing the excise duty to 10%. We may see a complete withdrawal of the stimulus with excise duties on two wheelers and small cars back to 12%. The auto industry has begun showing signs of a slowdown, imminent on the back of a high base due to strong growth last year on account of pent up demand post the recession. Increasing input costs, rising vehicle & crude prices, general inflationand an upward spiral in interest rates have also resulted in moderating the auto demand. Most auto majors have expressed their concerns and we expect the industry to grow at 10-12% in CY11 compared to 31% in CY10.

Textiles: Indian Textile industry contributes 14% of the total industrial output and 15% of exports. The Industry ranked second in terms of employement generation employing more than 35 mn people. The industry is going through major technology upgradtion to increase the productivity during the last few year to counter global competiton. The Government expects the industry numbers to triple by the next decade to USD 220 bn from the current USD 70 bn considering the rising demand from the western countries. With the US economy showing good signs of recovery, textile demand would increase at a rapid pace going forward. The textile industry with help from TUFs scheme has already modernised with a lot of textile majors now having integrated business models right from raw materials to garments. To further support the growth story of the industry there are favourable expectation from the union budget.

Pharmaceuticals: The domestic pharma industry continues to grow at 11-12%, dwarfing the global average of five-six percent. Similarly, improved traction in productivity trends has prevented margin pressures, notwithstanding the intensifying competitive landscape domestically. The government’s Vision 2015 statement indicates an 18% plus CAGR for the pharma sector, translating to a doubling of revenues to USD40 bn over the next five years. Growth will be driven by all verticals: domestic formulations, generics exports, and outsourcing (CRAMS). The government has recently announced the setting up of a venture fund that will target the infusion of INR 20 bn into the sector.

Taxes and Duties: Excise duty rates are expected to remain the same, but the income tax exemption limit could be hiked from Rs 1,60,000 to Rs 2,00,000. CST could be trimmed to 1 percent and exemptions on specific products could be scaled back. Customs; excise duty on petroleum products could be reduced, Service tax net likely to be widened to include retail services, gas and water distribution, research and experimental development.

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