20120317 India Flash Final

Tushar Poddar [email protected] +91 22 6616 9042

Prakriti Shukla [email protected] + 91 22 6616 9376

Vishal Vaibhaw [email protected] +91 80 6637 8602

Asia Economics Flash March 17, 2012

Goldman Sachs Global Economics, Commodities and Strategy Research

at https://360.gs.com

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India Union Budget—a play-it-safe budget The Union Budget for 2012-2013 had few surprises—it proposes some fiscal

consolidation, moving the central fiscal deficit to 5.1% of GDP in FY13, down from 5.9% in FY12, largely in line with our expectations.

Driving the fiscal consolidation is an increase in taxes, an increase of 2 percentage points

(ppt) in excise duties and services tax and broad-basing the latter, along with a customs duty increase on gold imports.

The key spending proposals include, a reduction of subsidies to under 2% of GDP, and a

big increase in infrastructure and capital spending. The budget is largely silent on structural fiscal reforms such as the Goods and Services

Tax (GST) as expected, but does provide fiscal incentives for capital markets and external borrowings.

The net market borrowing of the government at Rs4.8 tn was somewhat higher than our

estimate of Rs4.5 tn and market expectations, but is significantly lower than in FY12 if short-term borrowings are included. Though we see some near-term upside to bond yields, we think that this can be financed.

We think the fiscal consolidation will impart a negative impulse of 0.5 ppt in FY13 to

aggregate demand, and is largely neutral for the INR and for equities. We think the risks to the fiscal consolidation are balanced—the upside coming from

greater increases in service taxes due to broad-basing and lower capital spending than the numbers budgeted; the downside comes from rising oil prices and ambitious disinvestment targets.

Our sector analysts think the budget is positive for utilities, infrastructure, and metal

companies, and negative for autos, telcos, and consumer goods. Revenue proposals—an increase in indirect taxes India’s fiscal consolidation efforts are driven by an increase in tax rates in service and excise taxes. In addition, the service tax has been broad-based, moving from a positive list of 120 to a negative list which excludes only 17 services. We think this is a positive move for the medium term as it brings a large proportion of the economy (60% of GDP is services) into the tax net. We estimate that these measures may net the government an additional 0.5 ppt of GDP.

Goldman Sachs Global Economics, Commodities and Strategy Research Asia Economics Flash

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Exhibit 1: The FY13 fiscal consolidation was in line with our expectations

4.1 3.52.7

6.0 6.44.8

5.95.1

2.4

1.8

1.5

2.43.1

2.6

3.0

2.70.9

0.6

1.70.2

7.0

6.2

4.8

10.19.7

7.4

8.9

7.8

0

2

4

6

8

10

12

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12RE 2012/13BE

Off‐budget bonds State deficit

Central deficit General government fiscal deficit

% of GDP

Note: RE: Revised estimates, BE: Budget estimates, Note: 2.7% assumed for State Fiscal Deficit in FY13 is GS estimate.

Source: CEIC, Union Budget 2012-2013, GS Global ECS Research.

The budget envisages gross tax revenue growth of 20%, which we think is eminently feasible given the tax proposals. The broad-basing of the service tax could provide some upside to the projections on service tax receipts, and therefore to overall revenues. We find the targets on disinvestment and telecom auctions of 2G and 4G spectrum at Rs300 bn and Rs582 bn respectively, quite aggressive. After the sluggish disinvestment in FY12, where the government could garner only about Rs155 bn, the target for FY13 could have some downside risk. Similarly, the Rs582 bn target for spectrum sale is very generous in our view.

Spending proposals—replacing subsidies with capital spending The focus of spending in the budget is on capital spending, and among sectors on agriculture, infrastructure, and the social sector. Capital spending is budgeted to increase by over 30% in FY13. We see some downside to this number as the government tends to generally underperforms on capital spending due to delays in project execution. We welcome the move to restrict subsidies to 2% of GDP and the initial steps to move to a direct cash transfer system for underprivileged families rather than subsidizing the price. The government’s proposal to limit subsidies to 2% of GDP over the next 3 years, and 1.7% beyond that is the right objective, in our view. Moving towards the Unique ID (UID) System to provide for direct cash transfers in a larger number of districts another step in the right direction. The budget was also positive for investment in infrastructure. More infrastructure sectors were added as eligible for viability gap funding from the government, especially in irrigation and agriculture. The amount of tax-free bonds which state-owned infrastructure companies can issue was doubled (to Rs 600 bn from Rs300 bn); spending on key infra sectors was increased significantly; external borrowing through the ECB window was opened for capital spending on highways, working capital for airlines and low cost affordable housing, among others, and the withholding tax on interest payments on those loans slashed from 20% to 5%. In our view, the reduction in the subsidy burden is the biggest risk to the budget, principally oil prices. We estimate that if Brent crude were to average US$120/bbl in FY13, then domestic prices of diesel, kerosene and LPG would have to be raised by about 12% to not exceed the amount of government subsidy budgeted (Rs436 bn). Any increases in international oil prices would have to be passed on to the consumer. This looks very challenging for the government. Similarly, the outlay for food subsidies has been kept similar to FY12 and therefore does not budget for any increases arising out of the Food Security Bill currently in Parliament. The


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government’s assumption appears to be that the bill would only be implemented in FY14. Finally, the fertilizer subsidy envisages a small reduction which may be subject to global phosphate and potash prices. Exhibit 2: Subsidies proposed to be restricted to under 2% of GDP

0.0

0.5

1.0

1.5

2.0

2.5

FY06 FY07 FY08 FY09 FY10 FY11 FY12RE FY13BE

% of GDP Major Subsidies

Fertilizer

Food

Petroleum

Total

Note: BE: Budget estimates; RE: Revised estimates.

Source: CEIC, GS Global ECS Research. We would have liked to see slower growth in non-subsidy current expenditure, which is budgeted to grow at 16% from 8% in FY12, which would have given the government some room in the case of subsidy overruns, which looks highly likely.

Structural reforms—not much there On structural reforms, we do not think the budget had much of a forward momentum, generally in line with our expectations. We did not think the government had the political space to push through FDI in multi-brand retail or in aviation, and these were avoided. The government also steered clear of committing to details or a timeline to introduce the GST. However, the move to a negative list on services tax, and the harmonizing of the service and excise tax at a higher rate are steps in the right direction. The government also mentioned its intention of bringing in amendments to the pension, insurance, and banking bills in the budget session of Parliament, but we think there is low probability of these passing. For capital markets, the government announced a number of measures, including tax incentives for small investors in an equity savings schemes, reducing taxes on securities transactions, allowing qualified foreign investors in the domestic bond market, easier norms for listing of corporate bond offerings in exchanges. The government also allowed for easier access to external commercial borrowings for a range of sectors and also to reduce the withholding tax from 20% to 5% on interest paid for the infrastructure sector. Fiscal deficit—a step in the right direction The Union Budget made a significant step forward towards fiscal consolidation, generally in line with our expectations. The government proposed reducing the central fiscal deficit from 5.9% of GDP (6% our estimate) in FY12 to 5.1% (5.3% our estimate) in FY13. The absolute fiscal deficit at Rs5.1 tn is lower than our estimate of Rs5.3 tn.


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The budgeted overall market borrowings are considerably lower than in FY12. While the net market borrowing is higher at Rs4.8 tn compared to our estimates (Rs4.5 tn) and market expectations, if we include short-term market borrowings, then the overall market borrowing at Rs 4.9 tn is considerably lower than in FY12 (Rs5.5 tn) . This is largely due to significant borrowing by the government in short-term T-bills (Rs1.1 tn) in FY12 which are not considered part of net market borrowing. Exhibit 3: Overall market borrowings are considerably lower than FY12…

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

FY11 FY12 RE FY13 BE

% of GDP

T‐bills Net market loans Fiscal deficit

Rs billionCentral Government's Borrowings*

*include both long term and short term borrowings; do not include repayments which are Rs 736 bn for FY12 and Rs 906 bn for FY13.


Source: Ministry of Finance, GS Global ECS Research. Exhibit 4: …on lower short-tem borrowings

Capital receipts: Debt (Rs bn) FY12BE FY12RE FY13 BE

Debt receipts (Fiscal financing)

Borrowings 3580 5525 4880

Net‐market loans 3430 4364 4790

Gross market loan 4171 5100 5696

Repayments 741 736 906

Short‐term borrowings (T‐ bills) 150 1161 90

Securities against small savings 242 ‐103 12

State provident funds 100 100 120

Other Receipts (internal debt) ‐139 ‐159 22

External Debt 145 103 101

Total debt receipts 3928 5466 5136

Draw down of cash balance 200 ‐247 ‐

MSS 200 ‐ 200

Fiscal deficit (incl. Disinvestment) 4128 5220 5136

Fiscal deficit (% of GDP) 4.6 5.9 5.1

Borrowing and liabilities* 4128 5219 5136

*includes draw‐down of cash balance but excludes MSS Note: BE: Budget estimates; RE: Revised estimates.

Source: Ministry of Finance, GS Global ECS Research.


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India’s general government debt-to-GDP ratio may continue to trend down, according to our estimates. Our calculations show the government debt-to-GDP ratio to fall marginally to 65.7% in FY13 (BE: 64.4%) from 65.9% in FY12 (BE: 65.8%). This is primarily due to favorable debt dynamics as nominal GDP growth will exceed nominal interest payments quite substantially, and we think can off-set the primary deficit.1 Exhibit 5: General government debt to continue to trend down as GDP growth exceeds interest payments

50

55

60

65

70

75

80

85

90

2004‐05 2005‐06 2006‐07 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13

General Government Debt for FY12 and FY13

Government Debt as % GDP (BE)

Government Debt as % GDP (GS)


Source: CEIC, RBI, IMF, GS Global ECS Research. Impact on growth—a negative fiscal impulse, but medium-term positive We think the fiscal consolidation will impart a negative fiscal impulse of about 0.5 ppt of GDP to aggregate demand in FY13 (see India Union Budget preview: Expect some fiscal consolidation, Asia Economics Flash, February 23, 2012). This does not take into account the expansionary impact of a fiscal consolidation on reduced sovereign risk premium. We believe this hit to demand is not very large when compared with the benefits of fiscal consolidation in the medium term, the gains in credibility, and the space for expansionary monetary policy.

1 Government Debt Ratio is calculated as total liabilities of centre and states, inclusive of MSS and external debt, at current exchange rates. Change in debt ratio is calculated as the difference between primary deficit and automatic debt dynamics. Automatic debt dynamics is the relative importance of nominal GDP growth vis-à-vis the interest rate. A higher GDP growth relative to nominal interest rate means that the government’s debt burden is increasing at a rate lower than growth; so that the ratio falls and vice versa. We assume nominal interest rate at 7.4% for FY12 and 7% for FY13. GDP growth and inflation are measured as per respective estimates of the government and our own. States’ primary deficits are assumed to decrease in the same proportion as decrease in centre’s primary deficit.


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Exhibit 6: Fiscal consolidation to impart negative fiscal impulse of 0.5% GDP

‐6

‐4

‐2

0

2

4

6

8

FY 06 FY 07 FY 08 FY09 FY10 FY11 FY12(RE) FY13 (BE)

Change in actual fiscal balance

Automatic stabilizer: Expenditure component

Automatic stabilizer: Revenue component

Total fiscal impulse

Fiscal Impulse Measure % of GDP

Note: F ‐ Forecast

Fiscal Impulse = (ΔGt – g0 ΔYt*) - (ΔRt- r0 ΔYt)= - ΔFBt - g0 ΔYt* + r0 ΔYt; where Δ represents change in period t relative to past year; r0 = base-year receipts-to-nominal GDP ratio; g0= base-year expenditure-to-nominal GDP ratio; Yt*: potential GDP; Yt: actual GDP; Rt= primary nominal receipts; G0: primary nominal expenditure and FB: primary fiscal balance. A positive value for FI indicates fiscal policy has been more expansionary compared to past year, and vice versa.


Source: CEIC, IMF, GS Global ECS Research.

Impact on bond yields and monetary policy We think the budget is largely neutral for bond yields. While the net borrowing requirement at Rs4.8 tn and gross market borrowing of Rs5.7 tn is high, we think it is realistic. As discussed earlier, including short-term market borrowings, there is a large reduction in overall market borrowings in FY13 compared to FY12. As opposed to the ambitious budgeting last year, this year’s market borrowing expectations look realistic based on key tax measures and without major spending cuts which would be hard to defend. Our analysis of bond yields reaction to fiscal deficits over the past few years, though tenuous, suggests that in the fiscally expansionary budgets of FY09 and FY10, bond yields moved up. While the evidence on fiscal contractions is murkier, we do not envisage a big spike in bond yields. Exhibit 7: Our demand analysis suggests that government financing need can be met Center + State NET issuances FY12 FY13

Rs. bnGS est GS est

Supply of net gov securities: center + state 6325 6337Demand for government securities*

SLR funds1 2811 3316Insurance funds 2 1513 1815Open Market Operations 1393 678Mutual funds3 56 67FIIs4 110 143

Others5 443 317as a % of net borrowing

SLR funds 44 52Insurance funds 24 29Open market operations 22 11Mutual funds 1 1FIIs 2 2Others 7 5

Assumptions: 1) Deposit growth of Scheduled Commercial Banks at 18% yoy 2) Assumes assets of insurance sector will grow at 20% yoy

3) Based on difference in outstanding amount of government securities in debt mutual funds

4) Assumes $5 billion additional allocation in FY13, over and above present limit of $15 billion 5) Include Pension Funds, Primary Dealers etc Source: CEIC, GS Global ECS Research.


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We think the fiscal imparting a negative impulse to aggregate demand will allow the Reserve Bank of India (RBI) the space to begin to ease policy. We think that one of the key reasons for the RBI refraining from cutting the repo rate, i.e., an expansionary fiscal, may be less of a concern going forward. We continue to expect the RBI to ease by 125 bp on the repo rate in 2012, beginning in April. The key risk to this view is rising oil prices which can complicate the government’s fiscal consolidation plans. Exhibit 8: Bond yields move up in 30-day period after expansionary budgets

0

1

2

3

4

5

6

7

8

9

10

‐2.0

‐1.0

0.0

1.0

2.0

3.0

4.0

5.0

Feb 28 2007 for FY08


July 6 2009 for FY10 Feb 26 2010 for FY11


10‐year Government Bond Yield Movements Post Budget Announcements

+3 d'+7 d'+30 d'Targeted Central Government fiscal deficit for the financial year (rhs)*

% % GDP

*Includes off‐budget bonds

Announced CentralGovt budgets for FY09 and FY10 were expansionary, leading to higher increase in bond yields

Source: Bloomberg, GS Global ECS Research.

Impact on the INR We think the budget is generally neutral for the INR, as the fiscal consolidation was largely along expected lines. The reduced sovereign risk is positive, however, the still high market borrowing requirement is not. Our analysis shows that during the past few years, expansionary budgets were generally followed by INR weakness, while contractionary budgets helped the INR. The evidence, though, is not very strong to be considered definitive, based on very few data points. We think that from a medium term perspective, the proposals to increase external commercial borrowings of infrastructure companies, reducing the withholding tax on interest payments from 20% to 5%, and encouraging greater foreign participation in the corporate bond market are all INR positive. Exhibit 9: Currency weakness in short-term after announcement of an expansionary budget

‐8

‐6

‐4

‐2

0

2

4

6

8

10

12

‐3.0

‐2.5

‐2.0

‐1.5

‐1.0

‐0.5

0.0

0.5

1.0

1.5

2.0



July 6 2009 for FY10 Feb 26 2010 for FY11


USD/INR Movements Post Budget Announcements

+3 d'

+7 d'

+30 d'

Targeted Central Government fiscal deficit for the financial year (rhs)*

% chg % GDP

Depreciation

*Includes off‐budget bonds

Announced Central Govt budgets for FY09 and FY10 were expansionary, leading to greater currency movements

Source: Bloomberg, GS Global ECS Research.


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Impact on equities We think the fiscal consolidation steps were imperative and pragmatic and should allow some easing of monetary policy. We believe the elimination of the uncertainty on fiscal policy would at the margin be positive for equities. However, given the threat of rising oil prices and their potential impact on subsidies, we think the budget overall is largely neutral for equities.


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Appendix

Exhibit A1: A glance at the key budget proposals shows a number of small changes to policy Major Budget Proposals

Tax proposals New income tax slabs for individuals at 0% for < 2 lakh, 10% for 2 to <5 lakh, 20% for 5 to <10 lakh, 20% for >10 lakh

Allow individual taxpayers, a deduction of upto Rs.10,000 for interest from savings bank accounts.

Excise duty for non-petroleum goods raised to 12% from 10%

All services taxed except those in negative list. Increase in service tax rate from 10% to 12%.

Reduction in Securities Transaction Tax (STT) by 20 per cent (from 0.125 per cent to 0.1 per cent) on cash delivery transactions

Extention of Alternate Minimum Tax (AMT) on all persons other than companies, claiming profit linked deductions.

increase basic excise duty on cigarettes of more than 65mm length by adding an ad valorem component of 10 per cent

Excise duty on large cars raised to 24% from 22%

Cess on crude petroleum oil raised to Rs. 4500 per metric tonne from Rs. 2500 per tonne. To raise Rs 8858 crore (GS estimates).

Custom duty on gold raised from 2% to 4%. Duty on refined gold raised from 1.5% to 3%. 1% excise duty extended to non-branded gold jewellery. No excise duty on branded silver jewellery.

Infrastructure Exemption from import duty on specified equipment imported for road construction by contractors of Ministry of Road Transport and Highways, NHAI and State Governments extended to contracts awarded by Metropolitan Development Authorities.

FDI in multi-brand retail in abeyance

Increase in allocation to Ministry of Road Transport and Highways by 14% to Rs 25360 crore

Viability Gap Funding (VGF) under the Scheme for Support to PPP in infrastructure to incorporate irrigation, fertilizer sector, oil and gas storage facilities.

Allow ECB for capital expenditure on the maintenance and operations of toll systems for roads and highways

Approved guidelines for establishing joint venture companies by defence Public Sector Undertakings in PPP mode

ECBs to part finance Rupee debt of existing power projects

Tax-free bonds of Rs 60,000 crore in FY13 (from Rs 30,000 crore in FY12) for financing infra projects through NHAI, IIFCL, IRFC among others

Allow ECB for low cost affordable housing projects;

Rate of withholding tax on interest payments on ECBs to be reduced from 20% to 5% for three years for power, airlines, roads, fertilizer sectors.

Financial Markets

Rajiv Gandhi Equity Savings Scheme to allow income tax deduction of 50% to new investors who invest up to Rs50,000 directly in equities and whose annual income is below Rs10 lakh

Allowing Qualified Foreign Investors (QFIs) to access Indian Corporate Bond market

Mandatory for companies to issue IPOs of Rs 10 crore and above in electronic form through nationwide broker network of stock exchanges: to simplify process of IPOs and helping companies reach more retail investors in small towns

Rs 15888 crore for capitalization of Public Sector Banks, RRBs and other FIs

Propose to introduce Banking Laws (Amendment) Bill, Insurance Laws (Amendment) Bill, Micro Finance Institutions (Development and Regulation) Bill, Regional Rural Banks (Amendment) Bill, National Bank for Agriculture and Rural Development (Amendment) Bill in Parliament

FRBM Three year rolling target for expenditure indicators under the Medium Term Expenditure Framework statement in the FRBM act

Introduction of concept of Effective Revenue Deficit as a fiscal parameter.

Subsidy Restrict the expenditure on Central subsidies to under 2 per cent of GDP in 2012-13.

Mobile-based Fertilizer Management system to provide end-to-end movement on fertilizers and subsidies from manufacturer to retail.

Direct transfer to subsidies use of UID.

Public Distribution System to ensure food distribution through the UID platform

Food Security Act fully provided for. Better targeting and leakage proof delivery of subsidies.

Reduced dependence on imports of phosphate and potassium (P&K) through increase in production of single super phosphate (SSP) fertilizer.

Others Drafting of model legislation for Centre and State GST under progress

Introduction of General Anti Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes. Measures to deter unaccounted money include: compulsory reporting requirement in case of assets held abroad, tax collection at source on purchase in cash of bullion or jewellery > Rs 2 lakh, on transfer of immovable property, taxation of unexplained money, credits, investments, expenditures etc., at the highest rate of 30%, increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value

Source: Union Budget 2012-2013, GS Global ECS Research.


1 0

Exhibit A2: GS analyst post-views from Union Budget FY13 Sector (Analyst name) Key recommendation Impact

Cement (Pritesh Vinay) Proposal to prescribe a unified rate of 12 per cent + Rs120 PMT for non-mini cement plants and 6 per cent + Rs120 PMT for mini-cement plants. Proposal to charge this duty on the Retail Sale Price less abatement of 30 per cent. The impact of Rs 2-3 per bag is Negative. However higher excise duty will be later passed on to consumers

Negative

Reduction in import duty on steam coal from 5% to Nil. However, 1% CVD is now non-CENVATABLE, Positive as overall imported coal cost will come down.

Positive

Metals & Mining (Pritesh Vinay)

Iron Ore: Reduction of basic customs duty on plant and machinery imported for setting up or substantial expansion of iron ore pellet plants or iron ore beneficiation plants from 7.5 per cent to 2.5 per cent

Positive

Steel: Enhance basic customs duty on non-alloy, flat-rolled steel from 5 per cent to 7.5 per cent. Reduction of basic customs duty on coating material for manufacture of electrical steel from 7.5 per cent to 5 per cent.

Positive/ Positive

Coal: Full exemption from basic customs duty on importing equipment/machinery for coal mining projects. Providing a concessional CVD of 1 per cent to Steam coal for a period of two years till March 31, 2014.

Positive/ Positive

Mining: Reduction of basic customs duty on machinery and instruments for surveying and prospecting from 10 per cent or 7.5 per cent to 2.5 per cent.

Positive

IT (Rishi Jhunjhunwala) Approval of Rs.140 bn for the UID programme - Aadhaar - providing a boost the to IT companies looking to take a share of IT contracts associated with the implementation of UID programme

Positive

No extension of the STPI Tax Holiday or any new deductions for small and medium sized IT companies Mild Negative

Telcos (Sachin Salgaonkar) The increase in service tax from 10% to 12% slight negative for operators as it will more impact the low end consumers who prefer smaller denomination talk time vouchers. If operators keep their talk time voucher denomination unchanged, then a higher service tax would lead to lower available talk time impacting the overall MOU.

Slightly negative

The inclusion of telcos and tower companies under Viability Gap Funding would help telcos (particularly smaller operators) have better access to capital.

Positive

In line with expectations, the government is looking to raise Rs 582 bn from telcos (up 252% yoy) in FY13 with one-off items this year being amounts 1) raised from 122 cancelled 2G licenses; 2) intended 700 MHz auction and 3) amount for spectrum in excess of 6.2 MHz. We see downside risks to this amount raised as 1) we expect demand for 2G and 4G auctions to be relatively lower given higher gearing and some operators exiting the market; 2) Incumbent operators likely challenging the decision to raise amount for excess spectrum.

Negative

FMCG CENVAT Rates increased to 12% from 10% Negative

(Puneet Jain, Aditya Soman) Excise on cigarettes increased by about 15% on a blended level. Additional excise now ad valorem rather than fixed as earlier, which could lead to cascading taxes if VAT is increased. Marginal absolute increase on excise on Bidis.

Positive near term, neutral long term

Removal of cascading effect of dividend distribution tax for subsidiaries Marginally positive

Real Estate No change in income tax deduction from interest payments on Housing loans Negative

(Puneet Jain) Allow ECB for affordable housing. Witholding tax on the ECB reduced to 5% from 20% and Investment linked deduction on capex for affordable housing increased to 150% from 100%

Marginally positive

Utilities Full exemption on customs duty on coal for two years Positive

(Durga Dath) ECB allowed to part finance rupee debt of existing power projects Marginally Positive

Sunset clause extended by one year for power undertakings Marginally Positive

Allowing issuance of tax-free bonds by the power sector of Rs 100 bn Marginally Positive

Fertilizers Import custom duty (earlier 5%) exempted on equipment for fertilizer plants for three years Marginally Positive

(Durga Dath) Mobile-based Fertilizer Management System designed to provide end-to-end information on movement of fertilizers and subsidies to be rolled out during 2012.

Neutral

Automobiles (Sandeep Pandya)

Standard excise rate increased from 10% to 12%, which translates to 12% / 24% / 27% from 10% / 22% / (22% + Rs15,000) earlier across three different classifications. Impact - a) potentially negative stimulus to overall auto consumption, b) marginally positive for the diesel segment Vs expectations of higher rates for this segment.

Marginally negative

Financials (Tabassum Inamdar)

Capitalisation of PSU banks Marginally positive

Target for agriculture credit raised (by ~20% YoY) Marginally negative due to high NPLs

Interest subvention for short term crop loans and timely payment Marginally positive

Net borrowings from market pegged at Rs4.8tn Neutral for bond yields

Cap Goods (Ishan Sethi) Non-imposition of custom/anti-dumping duty on foreign power equipment makers Moderately Negative

Infrastructure (Ishan Sethi) Rural Infrastructure fund allocation increased to Rs20,000 cr (US$4 bn), with 5,000 cr (US$1 bn) for warehousing facilities Positive

a) Qualified Foreign investors to be allowed access to corporate bond market; b) Tax-free Infra bonds increased to Rs 60,000cr (US$12bn)

Moderately Positive

Streamlined definition for Infrastructure sector defining inclusions and exclusions from the definition; more sectors to be eligible for viability gap funding

Moderately Positive

Withholding tax of 5% on ECB interest payments on notified infra sectors, vs 20% earlier– encourage more FII investment in infra

Moderately Positive

8,800 km to be awarded in FY13 under NHDP, an increase of 20% in highway length Positive

Service tax increased to 12% from 10% and expanded to include all services except specified services Moderately Negative

Logistics (Ishan Sethi) GST implementation still under discussion with states and no timeline specified for GST implementation Neutral

Media (Sachin Salgaonkar) We believe increase in service tax from 10% to 12% would impact the revenues earned from the recharge vouchers (especially low-end) assuming operators keep recharge denomination same

Oil & gas (Nilesh Banerjee) Increase in Cess on production of crude in India from Rs2500/MT to Rs4500/MT. Negative impact on Crude oil producers such as Cairn India, ONGC and Oil India.

Negative

OMCs might benefit from plans for direct transfer of cash subsidy for kerosene and LPG. We believe that it will take atleast 2-3 years to see a meaningful impact as this direct transfer is linked to the UID project which will be rolled out over next five years.

Positive

OMCs may end up with some net under recoveries for FY12 as only Rs.685bn provided in the budget for FY12. For FY13, the budget provides for Rs435bn which may be increased through supplementary grants.

Negative

Increase in Service tax from 10% to 12% Marginally negative

Viability Gap Funding to attract private investment in Oil and Gas/LNG storage facilities and oil and gas pipelines Positive

Exemption from basic customs duty on Liquefied Natural Gas imported for power generation Marginally positive

Slight negative

General Excise duty increase by 20%, from 10% to 12% Moderately Negative

Source: Union Budget 2012-2013, GS GIR estimates.


1 1

Exhibit A3: Further granularity on Union Budget FY13

Fiscal Table FY12RE FY13BE FY13 GS

FY13BE vs

FY12RE*

Rs bn

Revenue receipts 7670 9356 8864 22%

% yoy -3 22 19

Net tax revenue 6423 7711 7664 20%

Non tax revenue 1247 1646 1200 32%

Spectrum/BWA fees 166 582 400 252%

Capital receipts (ex disinvestment) 143 116 150 -19%

Disinvestments 155 300 250 94%

Gross tax revenue 9017 10776 10356 20%

%yoy 13 20 17.9

Corporation tax 3277 3732 3583 14%

Income tax 1719 1958 1755 14%

Customs 1530 1867 1698 22%

Union Excise duties 1507 1944 1917 29%

Services 950 1240 1365 31%

Others 34 36 39 4%

Total expenditure 13187 14909 14568 13%

%yoy 10.0 13.1 11.3

Current expenditure 11619 12861 12752 11%

%yoy 12 11 10

Interest payments 2756 3198 3326 16%

On budget subsidies 2085 1796 2900 -14%

Food 728 750 1200 3%

Fertilizers 672 610 950 -9%

Petroleum 685 436 750 -36%

NREGA 310 330 400 6%

Capital expenditure 1568 2049 1816 31%

%yoy -2 31 25

Fiscal deficit (excl. disinvestment ) 5375 5437 5555 1.2%

Fiscal deficit (incl. disinvestment) 5220 5136 5305 -1.6%

% of GDP FY12 RE FY12 GS FY13 GS

FY13BE vs

FY12RE

Revenue receipts 8.6 9.2 8.9 0.6

Net tax revenue 7.2 7.6 7.7 0.4

Non tax revenue 1.4 1.6 1.2 0.2

Spectrum/BWA fees 0.2 0.6 0.4 0.4

Capital receipts (includes disinvestment) 0.3 0.4 0.4 0.1

Disinvestment 0.2 0.3 0.3 0.1

Gross tax revenue 10.1 10.6 10.4 0.5

Corporation tax 3.7 3.7 3.6 0.0

Income tax 1.9 1.9 1.8 0.0

Customs 1.7 1.8 1.7 0.1

Union Excise duties 1.7 1.9 1.9 0.2

Services 1.1 1.2 1.4 0.2

Others 0.04 0.03 0.04 0.0

Total expenditure 14.8 14.7 14.6 -0.1

Current expenditure 13.0 12.7 12.8 -0.4

Interest payments 3.1 3.1 3.3 0.1

On budget subsidies 2.3 1.8 2.9 -0.6

Capital expenditure 1.8 2.0 1.8 0.3

Fiscal deficit (ex. disinvestment) 6.0 5.4 5.6 -0.7

Fiscal deficit (incl. disinvestment) 5.9 5.1 5.3 -0.8

Net market loans 4364 4790 4505 426

Repayments 736 906 906 170

Gross market loans 5100 5696 5411 596

*RE: Revised Estimates; BE: Budget Estimates Source: Ministry of Finance, GS Global ECS Research.


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