Budget 2010 11
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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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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

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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

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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

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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

Expenditure l.jpg

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

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Expenditure in Pictures

Car Sales

IP Consumer Durables

CV Sales

Railway Freight

Budget 2010-11

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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

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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

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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

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  • 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

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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