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Impact & Analysis: Who is the ultimate recipient of Budget spend?
March 3, 2011

Impact analysis of the budget on sectors and investors


Author : iFAST Research Team



Untitled Document

The Union Budget for FY2011-12 was presented against a backdrop of negative macro-economic events both on the domestic side as well as global front. The budget focused on the agriculture, infrastructure and social sectors with due emphasis on the reduction in fiscal deficit and inflationary pressures. The equity and debt markets reacted positively after the budget announcement - the BSE SENSEX rose by 122.5 points by day end and the yield on 10 year G-Sec Bond eased by 8 basis points to 8.0%.

Main Highlights of the Budget

Fiscal Deficit Consolidation and future roadmap

  • For FY2010-11, the fiscal deficit has reduced to 5.1% from the targeted 5.5% of the GDP due to the unexpected inflows from the 3G and broadband spectrum auction

  • The Finance Minister has further reduced the fiscal deficit target for FY2011-12 from 4.8% to 4.6% of the GDP. The fiscal deficit for FY2011-12 works out to be Rs.4.12 lakh crores. However, owing to additional funding from disinvestment and other financing items, the government intends to borrow Rs. 3.43 lakh crores in FY2011-12 and an additional Rs. 15,000 crores in the form of treasury bills

  • The fiscal deficit target for FY2012-13 remains the same at 4.1% of the GDP while the deficit target for 2013-14 is at 3.5% of the GDP.

We believe that the fiscal consolidation and the reduction in government borrowings are steps in the right direction. But it needs to be seen if the Finance Minister would be able to keep his word on this front, considering that the global economy is surrounded by uncertainties which in turn would have an adverse impact on oil prices.

Taxation Proposals for Common Man

The Finance Minister increased the exemption limits for individual taxpayers from Rs.1,60,000 to Rs.1,80,000.This means that the citizens will have an additional Rs.2000 in their hands. Though this exemption was given to combat inflationary pressures, we are of the view that this is a minor amount as inflation is currently hovering in double digits.  On the other hand, the Budget seems to be very positive for Senior Citizens. The two major measures outlined for this category of investors are given below:

  1. The minimum age criteria to be a senior citizen has been reduced from 65 years to 60 years which is in line with the proposals in the railway budget.
  2. The creation of a Super senior citizen category for individuals over 80 years with additional income tax benefits.

The revised tax slabs for men, women, senior citizens and super senior citizens are as given below:

Table 1: Income tax slabs

 

Men aged below 60

Women aged below 60

Citizens aged above 60 and below 80

Citizens aged above 80

Tax Slab

Earlier

Proposed

Earlier

Proposed

Earlier

Proposed

Earlier

Proposed

No Tax

Up to Rs. 1.6 lakhs

Up to Rs. 1.8 lakhs

Up to Rs. 1.9 lakhs

No change

Up to Rs. 2.4 lakhs

Up to Rs. 2.5 lakhs

-

Up to Rs. 5 lakhs

10%

Rs. 1.6 lakhs to Rs. 5 lakhs

Rs. 1.8 lakhs to Rs. 5 lakhs

Rs. 1.9 lakhs to Rs. 5 lakhs

No change

Rs. 2.4 lakhs to 5 lakhs

Rs. 2.5 lakhs to 5 lakhs

-

 

20%

Rs. 5 lakhs to Rs. 8 lakhs

No change

Rs. 5 lakhs to Rs. 8 lakhs

No change

Rs. 5 lakhs to Rs. 8 lakhs

No change

-

Rs. 5 lakhs to Rs. 8 lakhs

30%

 > Rs. 8  lakhs

No change

 > Rs. 8  lakhs

No change

 > Rs. 8  lakhs

No change

-

> Rs. 8  lakhs

 

Good, Bad, Ugly – The impact on sectors

Here’s a snapshot of the main measures and their impact on different sectors:

Table 2: Sectoral Impact

Sectors

Measures

Impact

Automobiles

  • Excise duty maintained at 10% vis-a-vis expectations of increase in excise duty
  •  Agricultural credit to farmers enhanced from Rs. 3.75 lakh crores to Rs. 4.75 lakh crores

Positive

Banking

  • Recapitalization of the PSU banks and Regional Rural   Banks to the tune of Rs.6000 crores and Rs.500 crores
  • RBI planning to issue banking licenses before the close of the financial year
  • Financial sector reforms will be given due emphasis in the coming year
Positive

FMCG

  • Excise duty maintained at 10% as compared to the expectations of increase in excise duty
  • MNREGA wages will be linked to Consumer Price Index for Agricultural Labour
  • Increase in the wages of Anganwadi workers
  • Increased allocation to Bharat Nirman, Pulses villages, Oil Palm, Nutri Cereals and other social sector schemes
Positive

Pharmaceuticals

  • Plan Allocation to the Health Sector increased by 20% in FY2011-12
  • Current surcharge on domestic companies reduced from 7.5% to 5%
  • Service Tax on all services provided by hospitals with 25 or more beds with facility of central air conditioning
Neutral

Infrastructure

  • Rs. 2.14 lakh crore allocation to infrastructure sector. This allocation is 23.3% higher than the last year’s allocation
  • The FII limit in corporate bonds issued by Infrastructure companies with maturities over 5 years has been raised from US$5 billion to US$25 billion
  • Allow various government undertakings (Railways, Highway, Ports and Housing) to raise Rs. 30,000 crores in tax free bonds in FY2011-12
Positive

Oil & Gas

  • Provision of Rs.23,640 crore towards petroleum subsidies
Negative

Real Estate

  • Liberalization of the existing scheme of interest subvention on housing loans
  • Enhancement of existing housing loan limit to Rs.25 lakh for dwelling units under priority sector lending
Positive

Software

  • Several IT initiatives like e-filing, e-payment of taxes, launching e-stamping in all districts in the next 3 years,etc
  • Levy of MAT on developers of Special Economic zones and  units operating in such areas
Neutral

Impact on Real Economy and Debt Markets

Fundsupermart.com  view’s that the amount set aside for the infrastructure sector and the rural economy in the Budget will maintain the growth rate of the economy at more than 8.50%. Although the Budget did not have any big bang reforms, the measures proposed by the Finance Minister will help manage the structural rigidities in the agricultural sector. This would supplement the monetary tightening measures followed by the RBI to control inflation. We present the opinion that the Indian economy can achieve a growth rate of more than 8.50% only if the infrastructure bottlenecks are removed. Therefore, the huge emphasis given to this sector is a step in the right direction. The increased spend  to the rural economy is also a positive sign that the domestic consumption story will stay intact in this fiscal as well, without being adversely impacted by  the global economy.

We have in our previous articles been concerned about  the impact of the continuous rate hikes  on interest rate sensitive sectors like Real Estate, Banks and Auto Sectors. However, with the budget, the government has made sure that the fiscal policies are more conducive to the sectors that are reeling under the pressure of tight monetary environment.

In short, we continue to believe that investors should look at Infrastructure, Banking, FMCG and Pharmaceuticals. The budget also has had very good initiatives for these sectors which should yield results in the long term.

On the debt side, we continue to remain positive on the shorter end of the curve and we advise investors to park their surplus money in FMPs.The liquidity situation is expected to ease by April 2011 and hence, investors should try to lock-in money at higher rates. Though the fiscal deficit of 4.6% for FY2011-12 and the reduction in government borrowing looks impressive, one has to wait and watch how the government will achieve this target as global uncertainties are driving oil prices above US$100/barrel.

The increase in FII limits in the corporate debt market is also expected to bring in more liquidity to the system and aid the corporate debt market which is still in its nascent stage in India. If the government is unable to manage fiscal deficit at this rate and does the maximum borrowings in the first half of the fiscal year then we view that the long-term bond yields may go up. So, investors should be cautious at this stage and hold on before parking money in long duration papers.

 

Recommended Funds and Budget 2011-12

Table 3: Portfolio Allocation (Top 5 Sectors) of our Recommended Funds

Large Cap

Multi Cap

Mid Cap

Contra & Value

Balanced

MIP

Bank

Bank

Pharmaceuticals

Pharmaceuticals

IT - Software

Bank

IT - Software

Refineries

Auto  Ancillary

Bank - Private

Bank

IT - Software

Refineries

IT - Software

Bank - Public

IT - Software

Pharmaceuticals

Pharmaceuticals

Pharmaceuticals

Pharmaceuticals

Electric Equipment

 

Oil Exploration

Oil Exploration

Engineering

Engineering

 

 

 

Refineries

 

Table 3 shows that the portfolios of our recommended equity funds are mostly concentrated in sectors like Banks, Pharmaceuticals, Oil & Gas, IT, Infrastructure and  Auto.

Although the budget has positive/neutral impact on other sectors (see Table 1),  we believe that for sectors like Oil & Gas, the government will continue with the reforms started in 2010, even this year. The rising oil prices are a concern and we need to see how the government will manage the subsidies and the under-recoveries of the Oil Marketing Companies.

We continue to stay positive on our favorite sectors for CY2011 - Infrastructure, FMCG and Pharmaceuticals. The government’s heavy focus on these sectors would be beneficial to all investors who presently have exposure to our recommended sector funds.

Conclusion

The Union Budget is an event keenly watched by policy makers, analysts and investors as the central government lays down the road map for the coming year. In addition, we believe that the government also has to continue with the reform process that may/ may not be included in the budget. All measures taken by the government both, within the purview of the budget and outside, will definitely have an impact on the long-term India growth story.


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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