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Budget 2010-11

Budget 2010-11. Key Announcements : Taxes. Excise duty raised by 2% to 10% for all non petroleum goods Service tax rates maintained at 10% , in parity with the new excise rate Income Tax exemption limits tweaked ; Would result in 50K savings per year per individual

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Budget 2010-11

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  1. Budget 2010-11

  2. Key Announcements : Taxes • Excise duty raised by 2% to 10% for all non petroleum goods • Service tax rates maintained at 10% , in parity with the new excise rate • Income Tax exemption limits tweaked ; Would result in 50K savings per year per individual • Additional exemption of 20,000 for investments in long term infrastructure bonds. • MAT raised from 15% to 18%. • Surcharge for companies reduced from 10% to 7.5% • Import duty on crude products restored • Excise duty of 1% per litre on petrol and diesel introduced • Service tax net widened • Direct Tax Code and GST to be implemented by April 2011 • Partial roll back in excise duty in line with expectations but may add to inflationary pressures • Uniform goods and service tax ahead of the GST roll out positive • Income tax changes would improve compliance and increase disposable income, - Will help maintain the momentum in consumption • Tax concessions for infra bonds may ease dearth of domestic long term funding • Clarity on GST and DTC roll out and implementation of the TFC recommendations positive Budget 2010-11

  3. Fiscal Numbers - Deficits All numbers are in Rs Cr • Fiscal deficit estimated at 5.5% of GDP for FY11- 140 bps reduction from a year back, when the off budget liabilities of last year are included • Absolute fiscal deficit number also estimated to fall by ~34K Cr • Assuming states’ deficit stays flat at 3.2% of GDP in FY11, combined fiscal deficit slips below 9% • Government’s decision to pay out subsidies as cash reduces ambiguity on the ‘actual” fiscal deficit • For the same reason, the upside risk to expenditure estimates and therefore to the budgeted fiscal deficit may be substantial Budget 2010-11

  4. Fiscal Numbers - Receipts All numbers are in Rs Cr • Overall tax growth assumption of 17.9% - 1.4x to the GDP growth assumption of 12.5% • Direct taxes assumed to grow by 11% - Income taxes expected to be in the negative • Rate hikes assumed to help indirect tax collections – 32% growth in indirect tax collections estimated • Disinvestment assumption of 40K Cr in FY 2010-11 aggressive -3G license fee of 36 K Cr assumed • Grants to states raised from 26% to 28% of Gross Tax, in a bid to move to the TFC recommendation of 32% • Greater reliance on non tax revenue - Net Tax/ GDP to rise by 22 bps while Non Tax revenue/GDP to rise by 32 bps. Budget 2010-11

  5. Fiscal Numbers - Expenditure All numbers are in Rs Cr • Increased in Plan Expenditure estimated to be higher than in FY10 • Subsidies estimated to fall by 11% - Has never happened in the past 15 years • Drop in food subsidies may be ambitious in the wake of the drought last year and uncertainty in monsoons' next year • Massive drop in fuel subsidies assumed – May be revised up given the under recoveries , unless price hikes are effected All numbers are in Rs Cr Budget 2010-11

  6. Expenditure All numbers are in Rs Cr • Muted increase in allocation for rural development • NREGA saw marginal increase in funds after the substantial jump last year • Agriculture has received marginally higher proportion of funds • As proportion of funds other social sectors such as education and health have risen as proportion of total spending • Spending on rural sector has clearly taken a back seat • Overall expenditure assumptions may be termed optimistic – the Budget builds in 58 bps fall in expenditure/GDP ratio Budget 2010-11

  7. Expenditure in Pictures Car Sales IP Consumer Durables CV Sales Railway Freight Budget 2010-11

  8. Fiscal Numbers - Borrowings All numbers are in Rs Cr • Net market borrowings lower by 50K Cr, surprising markets on the upside • Financing assumes greater reliance on external funding • Proceeds from small savings is assumed to be flat • At mandatory SLR of 25%, demand from banks, insurance and provident funds should see the central government borrowing programme sail through. • Fixed income market reacted as the fear of excessive borrowings turned out to be false • Risks are in terms of higher than expected credit pick up and additional borrowing announcements Budget 2010-11

  9. Takeaways from Numbers • Clear intent to tax consumption and reduce subsidies • Use of balance sheet (disinvestment) and income (taxes) to reduce fiscal deficit to 5.5% • Increasing disposable income by lower taxes to raise consumption which has remained the bulwark of Indian economy. • This is a continuing theme and we could see a regime of lower income taxes, but more goods and services being taxed. The intent is clear- consumption is being encouraged • Additional surprise possible should oil and commodity prices fall sharply • Divided house on ability of government to deliver fiscal consolidation Budget 2010-11

  10. Policy Intent and Impact • Government willing to use its majority to pass through cost increases such as fertilizer and fuel to the consumer • Inflationary ripples likely on account of higher fuel prices and taxes may make RBI to tighten/raise rates • Overall liquidity remains easy and velocity of money is still falling. Therefore, growth can pickup in private consumption and capex sharply. • Overall, a pro-growth laissez-faire budget • Upside risks to inflation post some of the measures may complicate monetary policy outlook • 10 year bond yield may move up to the 8-8.25% range in April/May • FII limits in G sec investments may be enhanced Budget 2010-11

  11. Risks • Risks remain on ability to manage growth and have higher taxes • Disinvestment and 3G targets need to be achieved for fiscal consolidation • Assumption is that monsoons would be normal and inflation remains under check • Consensus based politics may delay some of the proposals Budget 2010-11

  12. Implication for markets • More money in the hands of 60% of taxpayers – Will they save or spend? Spend perhaps • Large disinvestment plan will cap market performance (Rs40,000cr) • Will be a period of consolidation for markets as international scenario is still fragile • Overall, a pro growth budget, with higher indirect taxes • Coporate confidence has to remerge for the next phase of capital expenditure to sustain growth. Stimulus from the government is difficult. • Inflationary pressures may impact confidence and force a tighter monetary regime, impacting Indian markets • Indian markets may offer international investors an attractive sustainable long term growth story in an increasingly difficult environment Budget 2010-11

  13. Impact on Sectors

  14. Sector-wise Announcements Budget 2010-11

  15. Sector-wise Announcements Budget 2010-11

  16. Sector-wise Announcements Budget 2010-11

  17. Sector-wise Announcements Budget 2010-11

  18. Sector-wise Announcements Budget 2010-11

  19. Sector-wise Announcements Budget 2010-11

  20. Sector-wise Announcements Budget 2010-11

  21. Sector-wise Announcements Budget 2010-11

  22. Sector-wise Announcements Budget 2010-11

  23. Sector-wise Announcements Budget 2010-11

  24. Sector-wise Announcements Budget 2010-11

  25. Thank you

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