Tuesday, March 2, 2010

Market Outlook 2nd March 2010

NIFTY FUTURES (F & O): 
Above 4944 level, rally may continue up to 4978-4980 zone by non-stop. 
Support at 4889 & 4920 levels. Below these levels, expect profit booking up to 4836-4838 zone and thereafter slide may continue up to 4785-4787 zone by non-stop. 
Buy if touches 4767-4769 zone. Stop Loss at 4716-4718 zone. 
On Positive Side, cross above 4995-4997 zone can take it up to 5047-5049 zone by non-stop. If crosses & sustains this zone then uptrend may continue.

Short-Term Investors:
Bullish Trend. 
Up Side Target at 5174.80. 
Stop Loss at 4830.00.

Equity:
RANBAXY (NSE Cash) 
Bulls have beaten expectations on Friday. At the same time, Support level broken & Bulls lost control too. Uptrend should continue today also. 
 
Buy for Intra-Day Gains with a Target of 517 level. 
Stop Loss at 419 level.

ICICIBANK (NSE Cash) 
Bulls have beaten expectations on Friday. Uptrend should continue today also. 
Buy for Intra-Day Gains with a Target of 890 level. 
Stop Loss at 842 level.

HINDALCO (NSE Cash) 
Bulls have beaten expectations on Friday. Uptrend should continue today also. 

Buy for Intra-Day Gains with a Target of 166 level. 
Stop Loss at 153 level.

SBIN (NSE Cash):  
Bulls may get trapped at higher levels during intra-day trades today. Expect Negative News within 7 days. 

DLF (NSE Cash): 
 Bulls may get trapped at higher levels during intra-day trades today. Expect Positive News within 6 days. 

UNITECH (NSE Cash): 
 Bulls may get trapped at higher levels during intra-day trades today. Expect Positive News within 5 days. 

RELIANCE (NSE Cash): 
Bulls may get trapped at higher levels during intra-day trades today. Expect Positive News within 2 days. 

HDIL (NSE Cash): 
Bulls may get trapped at higher levels during intra-day trades today. Expect Negative News within 2 days. 

OPTIONS (NSE):
NIFTY 5000  CALL OPTION 
Bulls dominated & they have beaten expectations. But Closed negatively & that was disappointing. Selling should continue. 

If Profit Booking Continues, then slide may continue up to 36.00 level. 
If Short Covering Starts, then it can zoom up to 135.50 level.

IFCI 50 CALL OPTION 
Should have fallen yesterday. Instead, zoomed & Superb performance by Bulls. Uptrend should continue today. 

If rally continues, then it may continue up to 4.20 level. 
If Profit Booking starts, then slide may continue up to 1.90 level.

STOCK FUTURES (NSE):
RELCAPITAL FUTURES  
Should have fallen yesterday. Instead, zoomed & Superb performance by Bulls. Uptrend should continue today. 

Buy with a Stop Loss of 728 level for Intra-Day Gains. Target at 832 level.

MOSERBAER FUTURES  
Should have fallen yesterday. Instead, zoomed & Superb performance by Bulls. Uptrend should continue today. But may not sustain the rally up to 05.03.2010. Profit Booking expected on (or) before 05.03.2010. 

Buy with a Stop Loss of 71.20 level with a Target of 77.85 level. It may zoom up to 82.15 level on (or) before 05.03.2010. 
Stop Loss on (or) before 05.03.2010 should be at 68.65 level.


Strong & Weak Stocks,
This is list of 10 strong stocks :
Hero Honda, Hindalco, Sesa Goa, Glaxo, Pir Health, IDFC, Axis Bank, Siemens, Maruti & Recltd.
And this is list of 10 Weak stocks:
Bajaj Hind, Renuka, EKC, ICSA, FSL, Polaris Software, Balrampur Chini, Dish TV, Tata Comm & BEML., ,
Nifty is in Up trend

Tata Coffee May See Rising Realisations, As World Coffee Supplies Fall
Coffee industry leaders say world supplies are growing tighter as demand grows.  
The weather has also been a problem, according to coffee producers, experts and officials from 77 countries gathered at the International Coffee Organization's World Conference in Guatemala City.

The organization's secretary-general says consumer countries have stocks of about 25 million bags, each weighing 130 pounds (60 kilograms). Nestor Osorio calls that level very tight.

The group says world coffee exports totaled 28.4 million bags between October and January. That was a 9.2 percent decrease from the same period a year earlier. 
 
(Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.)

Weekly Index Outlook: Thank you, Mr Mukherjee

Sensex (16,429.5)

The positives and negatives of the Union Budget balanced themselves to have little impact on stock prices. But Pranab Da, in a very subtle way, pleased market participants by giving them what they wanted the most – a clear plan to revert back to fiscal prudence. It may be recalled that not outlining a road-map for curtailing fiscal deficit was one of the prime reasons for the 870 points plunge in Sensex on the Budget day 2009.

Higher disposable income in the hands of the small investor through changes in income-tax slabs was a bonus. Since the Government needs a buoyant stock market to meet its colossal disinvestment target of Rs 40,000 crore, market is unlikely to face any unpleasant policy changes, at least in the ensuing months.

FIIs were net buyers on Friday though they have net sold almost Rs 2,000 crore so far this month according to BSE data. Domestic institutions continued to sell through last week. Volumes remained buoyant through the week and spiked sharply higher in the budget session. Expiry of the February contracts has resulted in the open interest coming down to a more sedate Rs 88,000 crore.

There was hardly any movement in the Sensex in the first four sessions, as the index oscillated in a very narrow range between 16,200 and 16,300. Friday's surge led the index to the intra-week peak of 16,669 but it could not sustain there for long and ended the week below 16,500.

We had outlined three possible routes that the Sensex could take on the Budget day last week. The index followed the second path -unable to move beyond 17,000 and closing the week at 16,500. The Budget day is a non-event as far as its impact on the market trend is concerned since it has altered neither the medium or the short-term trend.

It is interesting to note the similarity of patterns in the charts of all the global benchmarks. The medium term trend is down in all the indices since the mid-January peak. A mild pull-back is currently on since the beginning of February. This pull-back has however not progressed sufficiently to signal the end of the January correction.

To put it differently, all global equity markets are moving in tandem and the fate of Indian equities are strongly interwoven with that of the other markets. Since the Union Budget has not been able to scratch even the surface of the market trend, it is back to watching Greece, US, China et al to decipher where we are headed.

The medium term trend in the Sensex continues to be down and inability to move past 17,000 keeps open the risk of the third leg of the down-move from 17,790 peak unfolding that drags the index down to 15,347 or 14,530 in the days ahead. The 200 DMA at 15,910 is the critical support that most market participants would be watching in the event of a decline. A strong close above 17,000 is required to negate the current bearish medium-term view for the index.

The short-term trend in the Sensex is up. But since it is nearing key resistances at 16,775 where the 50 DMA is also poised, investors ought to stay cautious. The index could get back to a lacklustre state in the week ahead and decline to 16,280 or 16,040. The near term view will turn overtly negative on a close below the second target. Resistances for the week would be at 16,670, 16,800 and 17,000.

Nifty (4,922.3)


The Nifty too was confined in a narrow band between 4,850 and 4,900 in the sessions preceding the Budget before Friday's spurt took the index higher to 4,992. That the index was unable to move past 5,000 on the Budget day implies that the medium-term trend in this index continues to be down. If the third leg of the downtrend from the 5,310 peak unfolds now, it can drag the index to 4,599 or 4,357. The 200-day moving average at 4,680 would be the minimum target for a decline. Close above 5,070 is needed to mitigate this bearish view.

The short-term trend in Nifty is up since the trough at 4,675. But it is possible that this uptrend ended on Friday and the index could now decline to 4,870 or even 4,796. Traders can initiate short positions in rallies with stop at 5,025. Target on a move above 5,000 is 5,067.

Global Cues

Globally equities had a tough weak as worse than expected economic readings from the US and resurfacing of the Greece sovereign debt issue dragged stock prices lower. European and Latin American indices end the week 1 to 3 per cent lower. Asian benchmarks were relatively stronger and many of them such as KLSE Composite, Nikkei, Philippines Composite, Shanghai Composite and so on ended the week marginally in the green.

CBOE VIX spiked to 22.6 on Thursday before ending the week down at 19.5 implying that investors continue in a sanguine frame of mind. The dollar index appears to have formed a short-term peak at 81.4 and that should give some relief to emerging market equities and commodities.

The Dow could not move past the key short-term resistance at 10,400 and reversed mildly from there. Support for the week would be available at 10,200 and 10,100. Decline below the second support would mean that the downtrend from January 19 peak is continuing. Conversely rally above 10,400 would send the index to a new 2010 high.

The S&P 500 has also recorded a hanging man pattern in the weekly chart that is a reversal pattern. Key resistance for this index is at 1,110 and it is currently struggling to move over this. The week ahead is critical for defining the short-term trajectory for this index.


Index Strategy: Bear put spread on Nifty

Well, the Union Budget is over now and with it perhaps also the euphoria. As market participants wake up to the real impact of the budget proposals, it is quite likely that much of initial jubilation may die down. We suggest traders to set a bear put spread on Nifty to benefit from such a weakness. You can do this by buying Nifty March 4,900 put option and simultaneously selling Nifty March 4,800 put. This would result in a net initial debit as the strategy involves buying in the money put as against selling one that is out of money. In this case, you will have to shell out Rs 105 for buying Nifty March 4,900 put, while you will receive Rs 70 when you write Nifty March 4,800 put. On the whole, the spread will cost you Rs 35/share.

You can time the purchase and sale of options depending on the day's market movement to optimise your cost. Note that for the coming week, we expect the markets to trend upwards first before it begins to fall lower.

Maximum profit potential: The maximum profit for this spread will occur when the Nifty moves below the strike price of the sold option, i.e. 4,800. The maximum profit, however, will be limited to the difference between the two strikes minus the net debit paid or the cost of setting the spread. In this case, it will be Rs 65.

Maximum loss potential: When your spread is totally out of money i.e. when Nifty value is higher than the 4,900, the maximum loss that you can suffer will be limited to the net debit paid, Rs 35 – that is the money that was spent initially in setting the bear put spread.

This means in essence you would be taking a maximum risk of Rs 35 to earn a maximum profit of Rs 65. Traders with a slightly more bearish view can tweak the strike price of the sold option lower to 4,700. This will result in a slightly higher risk-return payoff. Traders can also consider going short on Nifty with a stop at 5,025.

When to exit?

Traders should consider booking profits and closing the positions as soon as the underlying trends below the strike price of the sold put option. If you feel that the likelihood of the underlying moving down is low, close the position prematurely.


FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
Category DateBuy Value Sell Value Net Value
FII 26-Feb-2010 3542.942701.71 841.23
DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
Category DateBuy Value Sell Value Net Value
DII 26-Feb-2010 1611.022470.65 -859.63
INTRODUCTION[Top]

Finance Minister, in his speech of Union Budget 2010-11, has emphasized on bringing the economy back on growth rate of 9% and strengthening the mechanism of inclusive growth. The Union Budget will not only provide fresh impetus to investment and consumption in the economy but also promote infrastructure development on a larger scale. The focus is on supporting the growth momentum of the economy as well as addressing long-term constraints to growth. Further, the budget continues with the government's plan to improve systemic efficiency through a simplified tax structure.

Upbeats of Union budget 2010

  • Introduction of DTC and GST by April 2011
  • Relief for individual tax payers
  • Reduces current surcharge of 10% on domestic companies to 7.5%
  • Sets aside Rs 16,500 crore for PSU banks to get minimum 8% tier 1 capital by March 2011
  • Rs 66,100 crore allocated for rural development in FY11
  • Allocation of a sum of Rs 1,73,500 crore for infrastructure development
  • Simplification of FDI policy to woo foreign investors
  • 13% hike in allocation for road transport
  • Allocation to power sector doubled to Rs 5,130 crore
  • Allocation of Rs 40,100 cr in NREGA

Downbeats of Union budget 2010

  • Petroleum products: basic duty of 5% crude , 7.5% on diesel & petrol; 10% on refined products
  • Central Excise Tariff hike of Re 1/litre on petroleum products
  • Custom duties on certain products to lead to price rise in products such as Cars, ACs, TVs etc
  • Peak excise duty hiked from 8% to 10%
  • Minimum Alternate Tax up from 15% to 18% on book profits







The budget, while highlighting the strong fundamentals of the economy, has presented a balanced approach towards long-term economic planning and short term considerations of sustaining and broad-basing the momentum in economic recovery.

Industry Analysis [Top]
Auto Ancillary and Automobile Positive[Top]

Expectations

  • Extension of excise duty benefits proclaimed in the stimulus packages, across two-wheelers, passenger three wheelers, small cars, commercial vehicles and buses segments for the next fiscal.
  • Elimination of excise levy on large cars/utility vehicles of engine capacity 2,000 cc and above.
  • Custom duties on imported auto component products should be raised to 10% from the existing 7.5% to boost local production.
  • Extension of R&D deductions for auto component makers who source it from abroad for use in India.

Measures

  • Component of excise duty on large cars, multi-utility vehicles and sports-utility vehicles which was reduced as part of the first stimulus package is being increased by 2% to 22%.
  • Concessional 4% excise duty on inputs for electrical vehicle.
  • Weighted deduction hiked from 150% to 200% for in-house R&D.
  • Hike in excise duty by 2%.

Impact

Domestic auto industry had all the reasons to cheer as the government did not introduce any surprise moves in budget 2010-11. FM decided to roll back the excise duty cut only from large cars, multi-utility vehicles and sports-utility vehicles segment. Although in the long run hike in excise duty might make cars costlier and impact companies such as Mahindra and Mahindra, Tata Motors and Ashok Leyland. Rise in excise duty will push the prices of cars up leading to lesser demand ultimately impacting the companies across sector. Hike in petrol and diesel prices might also prove negative for the auto industry as it might cause decrease in the demand of cars.

Banking Positive[Top]

Expectations

  • Tax saving deposit under section 80C: To bring down the lock in period of term deposit from current 5 years to 3 years. Also permit premature encashment during such lock in period and pledge loan against these deposits. Also allow all kind of deposits across various maturities to be claimed as deduction under Section 80C instead of deposits with higher maturity.
  • Reintroduction of the Sub Section 10 (23) G of Income Tax Act: Exemption of interest income gained from lending to infrastructure sector.
  • To step up lending to SSI and Export oriented units, these loans may be guaranteed by the Government.
  • Non-Performing Assets: Allow deduction for provisions made by banks for non-performing assets in compliance with the guidelines issued by Reserve Bank of India, without any artificial restriction.
  • Withholding tax: Withholding tax should not be applicable on any income paid to a scheduled bank.
  • FDI in insurance sector to be hiked to 49% from 26% at present.
  • Under Agricultural debt waiver and debt relief scheme Repayment period extended to December 31, 2009
  • Interest payment of up to Rs 3 lakh on housing loans (for self occupied property) should be exempted from tax.
  • Enactment of Banking Regulation (Amendment) Bill, 2005: In order to regulate acquisition of shares in banking companies, increase the flexibility on the statutory liquidity requirements and allow banks to lend to companies in which their directors are engaged.

Measures

  • The RBI will give additional branch licenses to private sector banks and NBFCs that meet the central bank's eligibility criteria.
  • An additional sum of Rs 16,500 cr will be offered to the under-capitalized public sector banks to ensure that all PSU banks are able to attain a minimum 8% Tier-I capital by FY11.
  • Banks' target for agricultural credit for the year FY11 has been enhanced to Rs 3, 75,000 Cr.
  • IIFCL which refinances bank lending to infrastructure projects will enhance its disbursements from Rs 9,000 Cr in FY10 to Rs 20,000 Cr by FY11.
  • Under the Debt Waiver and Debt Relief Scheme for farmers, the period for repayment of the loan amount by farmers has been extended by six months from December 31, 2009 to June 30, 2010.
  • Scheme of 1% interest subvention on housing loan upto Rs 10 lakh, where the cost of the house does not exceed Rs 20 lakh has been extended by a year up to March 31, 2011
  • With a view to strengthen and institutionalize the mechanism for maintaining financial stability, an apex-level Financial Stability and Development Council will be set up. Without prejudice to the autonomy of regulators, this council would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion.

Impact

  • Recapitalization of PSU banks will means that the under-capitalised banks do not fall short of capital to grow their loan book and at the same time are able to comply with Basel II norms. Banks like IDBI and OBC that currently stand undercapitalized will receive additional capital under the PSU banks' recapitalization scheme.
  • Sanctioning additional branches to private sector banks and NBFCs will mean that the banks will be able to grow their franchise at a faster pace and accordingly grow their balance sheet sizes. Private sector banks like Axis Bank, HDFC Bank, ICICI Bank and Yes Bank that are looking at aggressively going their franchise will benefit with the additional branch licenses. Further NBFCs whose banking applications were rejected earlier may also benefit with this scheme.
  • Higher target for agri credit and extension of loan repayment tenure for farmers may lead to some NPA problems in this sector. There will be negative impact on Bank of India and SBI.
  • Discounted interest rates on low cost housing will be benign for banks having presence in non metro areas as well as for housing finance companies. Housing finance companies like HDFC and LIC Housing Finance as well as PSU banks like SBI, PNB and Union Bank of India that have extended presence in the semi urban and rural areas will benefit from the interest sops offered to loan on low cost housing.
Cement Positive[Top]


Expectations
  • Abolition of import duty on coal, pet coke and gypsum
  • Removal of differential excise duty structure
  • Re-imposition of import duty on imported cement
  • 50% subsidy on freight on the logistics cost for cement and clinker for exports.
  • Government should allocate more funds to infrastructure industry like roads, irrigation projects etc. so that there is a boost to the business in general and growth will be on fast track.

Measures

  • Excise duty has been hiked from 8% to 10% on ad valorem basis and specific rates of duty on cement and clinker has also been raised upwards proportionately:

Present rate Proposed rate
Cleared other than in packaged form 8% or Rs 230 per bag whichever is higher10% or Rs 290 per tonne whichever is higher
Cleared in packaged form
retail sale price not exceeding Rs 190 per Rs 230 per tonneRs 290 per tonne
retail sale price exceeding Rs 190 per 8% of retail sale price10% of retail sale price
Cement clinkerRs 300 per tonneRs 375 per tonne
  • Government has increased allocation to housing sector and development of infrastructure.
  • Steps will be taken to set up a "Coal Regulatory Authority"
  • Clean energy cess of Rs 50 per tonne to be levied on coal produced in India which will also be applicable on imported coal.

Impact

Increased budgetary allocation for infrastructural development and housing will boost demand for cement. Cess on coal and rollback of duties on petroleum products would result in increase in higher freight and power cost for cement companies. As cement manufacture can pass through the higher manufacturing cost and excise to the final consumers, we believe the overall impact budget would be positive on sector. Larger player such as ACC, Ultratech and Ambuja cement will be key beneficiary of the budget.

Fertilizer Positive[Top]

Expectations

  • Fertilizer industry seeks 10 year tax holiday for new projects.
  • Withdrawal of excise duty on fuel oil and customs duty on raw material.

Measures

  • To provide Government subsidy in cash instead of bonds for fertilizer.
  • A nutrient based subsidy scheme to be introduced from April 1, 2010.

Impact

  • This budged is positive for the fertilizer sector as subsidy paid to companies on the sale of different farm nutrients at lower rates be paid in cash and not in bonds. This move will benefit for overall sector as to improve margins and also meet working capital requirements as the loss on the sale of bonds issued will not take place.
  • The Finance Minister had announced the intent of the Government to implement Nutrient Based Subsidy (NBS) policy for the fertilizer sector in Budget Speech of July 2009. A NBS policy has since been approved by the Government and will become effective from 1 April 2010. NBS means fertilizer with double dose of nutrients will get additional per tonne subsidy that will result in the supply of innovative fertiliser products in the market at reasonable prices and will help raise agricultural productivity. Over time, the policy is expected to reduce volatility in the demand for fertiliser subsidy in addition to containing the subsidy bill.
FMCG Positive[Top]

Expectations

  • Rapid implementation GST (Goods & Service Tax)
  • Increased allocation under social sector schemes such as NREGS
  • Continue with reduced taxes
  • Enforcement of the Trade Mark and Copyright Laws
  • Better infrastructure facilities in terms of road connectivity, warehousing facilities and cold storage.

Measures

  • GST to be implement by April 2011
  • MAT increased to 18% from 15%
  • Allocation of Rs 40,100 cr under NREGA in 2010-11.
  • Rs 66,100 cr provided for Rural Development.
  • Revision in tax slab
  • Increase in duty on cigarettes, cigars, cigarillos, non smoking tobacco and branded un-manufactured tobacco
  • To set up 5 more mega food park projects
  • Service tax exempted on transportation of food grains
  • Setting up of cold storages exempted from service tax
  • Excise duty exempted for specific agro processing units
  • External commercial borrowing will be available for cold storage. The government has also extended farm loan repayment by 6 months.

Impact

Increased allocation under various rural development and employment scheme will raise income level in rural area, thereby will boost rural demand. Further, the readjustment of tax slabs will raise disposable income, thereby will boost demand. Hike in excise duty on cigarettes and tobacco will have marginal negative impact on cigarette manufacturers like ITC, VST and Godfrey Phillips. Roadmap for rollout of Goods and Service tax (GST) by April 1, 2011 is a key positive for the industry. Implementation of GST will lead to reduction of retail consumer prices which may result in higher volumes. Further, consolidation of supply chain will result in cost savings.

Hospitality Positive[Top]


Expectations

  • Provide infrastructure status to hotel industry to aid funds at lower interest rate and tax concession to the companies.
  • To provide tax benefit to the newly constructed 5 star properties. Also 100% tax holiday benefit should be extended for 10 years instead of 5 years.
  • Rollback of depreciation rate for hotel buildings to 20%.
  • Improvement in infrastructure including better connectivity, developments of airports, railways, roadways and other facilities which will indirectly benefit the sector.

Measures

  • 2-Star hotels have been given investment linked deduction benefit and above category that are to be opened on or after April, 01 2010.
  • Rs. 19,894 cr worth of allocation for road development
  • Rs 200 cr for Goa to restore beaches.

Impact

The impact of budget on hotel industry has been positive. To give a boost to the tourism sector, the budget has extended the benefit of investment linked deduction to new hotels of two-star category and above across India. Under investment linked deduction all capital expenditure for a new hotel other than land cost will be tax deductible. Rs 200 cr allocation for building resorts in Goa will also be useful for companies across hotel industry.

Information Technology Neutral[Top]

Expectations
  • Extension of tax benefits under Sections 10A and 10B of the Software Technology Park of India (STPI) Act beyond FY11 for at least two-three years
  • The industry is seeking a lower Minimum Alternative Tax (MAT) rate of 10%

Measures

  • Rate of MAT on book profits increased from 15% to 18%
  • Current surcharge of 10% on companies reduced to 7.5%
  • Redefined export of services so as to simplify the process of refund of accumulated credits to exporters of services
  • A Technology Advisory Group for Unique Projects (TAGUP) to be set up
  • Allocation of Rs 1,900 cr to Unique Identification Authority of India for 2010-11
  • Rate of tax on services retained at 10% to pave the way forward for Goods and Service Tax
  • Allocation for elementary education and skill development.

Impact

  • As tax benefit on STPI units has not been extended, the net margin of companies will be lower by 300-500 basis points. The impact would be more pronounced in case of mid-cap companies and ITES/BPO units. However, as the tax benefit supposed to end in March 2011, therefore, the companies have one more year to reap the benefit of the same.
  • The increase in MAT from 15% to 18% will increase the tax liability of software companies and thereby reduce their margins. This will particularly impact the cash flows of small and mid size companies which enjoyed lower tax-outlays under the same. However, companies may get some relief from reduction in surcharge that will lower the tax outgo.
  • Setting up of a Technology Advisory Group for Unique Projects (TAGUP) along with increased focus on e-governance will create more demand for IT in the domestic market. Moreover, as the allocation to the Unique Identification Authority of India (UIDAI) has increased, this may benefit to domestic IT players.
  • Simplification of refund process for exporters is likely to give some clarity in the issue. However no clarity given on the definition of software products which are usually treated as goods as well service may continue to lead to dual taxation.
  • Companies like HCL Infotech, MindTree, Mphasis and KPIT Cummins will be impacted by these measures. Moreover, emphasis on elementary education and skill development can aid growth of companies like NIIT and Educomp Solutions.

Infrastructure Positive[Top]

Measures

  • Rs 1,73,552 cr have been allocated for infrastructure development.
  • 75% increase in allocation for urban development to Rs 5,400 cr in 2010-11.
  • Rs 35 bn have been allocated towards urban infrastructure development.
  • 13% increase in allocation for road transport to Rs 19,894 cr.
  • Target to build 20 km of highway each day.
  • Rs 66,100 cr provided for Rural Development.
  • Rs 48,000 cr allocated for rural infrastructure programmes under Bharat Nirman.
  • Additional tax benefit for investment of Rs. 20,000 in infrastructure bonds over and above Rs 1 lakh in 80C.
  • IIFCL to double refinancing to banks lending to infrastructure companies.
  • 30% increase in allocation for irrigation and flood control to Rs 526 cr.

Impact

Governments' thrust on infrastructural development will benefit infrastructure companies as it would lead to higher order inflows going forward. Higher allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) will benefit companies like IRB Infra, IVRCL Infra, HCC, Gammon and Reliance Infrastructure. L&T, IVRCL Infrastructure, GMR Infrastructure and IDFC are also likely to gain from thrust on Infrastructure spending. Increase in refinancing from IIFCL will encourage banks to lend to infrastructure companies boosting overall growth in the sector. Additional tax benefit for investment of Rs. 20,000 in infrastructure bonds would enable easier financing for infrastructure firms and allocated more funds in different segments such as roads, irrigation, ports, airports, power etc. Higher allocation for irrigation projects would benefit players having expertise in irrigation and water projects like Jain Irrigation.

Media & Entertainment Positive[Top]

Expectations

  • Reduction of import duty on set top boxes of 5% to nil
  • Reduction of excise duty on set top box for free to air transmission from 8% to nil
  • On the service tax front, the industry is demanding that parity be made between broadcasters and print media by abolishing service tax of 10.3% on broadcaster similar to that of print media
  • Elimination of dividend distribution tax of 16% as it has resulted in multiple taxation of profits distributed as dividends, particularly in a case where the corporate group had a holding company and its step-down subsidiary
  • Liberalization of FDI norms in segments like DTH, cable and radio

Measures

  • Custom duty to be charged only on the value of the carrier medium in the case of imports of films, music and games.
  • Service tax to be levied on the transfer of intellectual property rights incase of imports of films, music and games.
  • Imports for setting up of Digital Head End equipment by multi-service operators will attract a confessional customs duty of 5% along with full exemption from special additional duty to the initial setting up of such projects.
  • Exemption from service tax given to news agencies which provide news feed online subject to certain criteria

Impact

  • Broadcasters like Zee TV, NDTV and Network18 will be benefiting after news agencies got exempted from service tax.
  • The rationalization of customs duty structure on carrier medium will help companies such as Reliance Media Works, Prime Focus, Compact Disc, Adlabs and Balaji Telefilms.
  • The concessional customs duty on Digital Head End equipment will incentivize Multi Service Operators such as Dish TV, Sun TV, Den Networks, Hathway Cable and Wire & Wireless.
Metals Positive[Top]

Expectations

  • Increase of export duty on iron ore from 10% to 20%.
  • Imposition of customs duty on ferro alloy from nil to 10% except for ferro nickel.
  • Maintain excise duty.

Measures

  • Increased focus on infrastructure development.
  • Blueprint to be developed for long distance gas pipelines leading to facilitate transportation of gas across the length and breadth of the country.
  • Allocation for housing and provision of basic amenities to urban poor enhanced.
  • Plan allocation to power sector doubled.
  • Excise duty hiked to 10% from 8%.
  • Clean energy cess of Rs 50 per tonne to be levied on coal produced in India and it will also be applicable on imported coal.

Impact

  • Increased focus on infrastructure development would result in development of highways, ports, bridges etc, which will consequently increase the demand for steel. Major steel players like SAIL, Tata Steel and JSW Steel which accounts for more than 35% of total steel production capacity in the country.
  • Plans to cover long distance gas pipelines would mean increase in demand for steel pipes and tubes. Positive development for companies like Welspun Gujarat Stahl Rohren and Maharashtra Seamless.
  • Increased spending on urban development schemes, especially housing are likely to increase the demand for long steel products, a positive for companies like SAIL and Tata Steel, which have a large dealer network spread across the country.
  • Increased spending on power sector to trigger a rise in demand for aluminium, thus companies like Hindalco, Nalco and Sterlite Industries that are major players in the sector are likely to benefit.
  • With 2% increase in excise duty is neutral for metal sector, they would pass this to end consumers.
  • The proposed clean energy cess of Rs 50 per tonne on coal will lead to a hike in metal companies' coal bill.
Oil & GasNeutral [Top]

Expectations

  • Decontrol of diesel and petrol prices
  • Mechanism to share subsidy burden on kerosene and liquefied petroleum gas
  • Tax holiday on natural gas production and distribution
  • To extend Tax Holiday u/s 80-IB(9) to 10 years from existing 7 years and E&P companies to be exempted from Service Tax on input services on exploration.
  • Reduction in excise duty on petro products and rationalisation of taxes has been one of the lasting demands of the industry

Measures

  • Excise duty on naphtha to be reduced to 14% while duty paid High Speed Diesel blended with upto 20% bio-diesel to be fully exempted from excise duties.
  • Restoration of 5% duty on crude petroleum, 7.5% duty on petrol and diesel and 10% on other refined products.
  • Decision on pricing of petroleum products based on the recommendations of the Kirit Parikh committee deferred
  • Full exemption from basic customs duty is provided to compostable polymers
  • Reduction in surcharge on domestic companies upto to 7.5% from 10%
  • Increase in central excise duty on diesel and petrol by Re 1 each
  • Government subsidy to oil companies to be given in cash instead of issuing oil bonds

Impact

  • FM has increase custom and excise duty for petroleum products but ignored the oil bonds which indirectly indicate that deregulation may take place in due course.
  • The marketing companies and the refinery companies are going have extra burden
  • As on the Kirit Parikh Report the issues would be taken immediately after the Budget and surely for these, there is an extra burden likely to come which could be of the order of Rs 10,000-11,000 cr overall extra burden on the refineries per say.
  • Higher share of subsidy burden are likely to be seen on the upstream companies with the government opting to switch to cash subsidies instead of the oil bonds. Further, still there hasn't been any clarity in the subsidy sharing structure on the upstream segment.
  • With higher custom duty, the input cost of crude oil for the refinery segments will hamper the downstream companies.
PharmaceuticalPositive [Top]

Expectations

  • To raise weighted average tax deduction for R&D expenses from 150% to 200% and to be extended for 5 years. Currently this deduction is valid till 2012.
  • Tax incentives for the indigenous manufacturing of medical equipments/devices.
  • Extension of five-year tax holiday (till 2013) to all new hospitals coming up till 2013, irrespective of the area. According to existing policy, a five-year tax holiday (till 2013) applies to hospitals which had been set up in small towns by April 2008.
  • To provide special rate of depreciation of 25% and 50% on hospital buildings and medical equipment respectively.
  • Extension of 4 % excise duty on formulations and higher excise relief for Small Scale Units.
  • Reduction in excise duty on drug intermediates and bulk drugs from 8% to 4%.

Measures

  • Weighted deduction hiked from 150% to 200% for in-house R&D.
  • Plan to focus on improvement in the food security and healthcare systems.
  • To increase the plan allocation for the Ministry of Health and Family Welfare from Rs 19,534 cr to Rs 22,300 cr for 2010-11.

Impact

Union budget 2010-11 has bought positive impact on the pharmaceutical industry. Continuation of 4% excise duty on formulations may prove beneficial for companies including Cipla, Aurobindo pharma, Ipca labs, Cadila Healthcare, Ranbaxy, Piramal Healthcare and Sun Pharma. Drug makers could also indirectly benefit from the higher public healthcare spending as that would create health related infrastructure.

India is an attractive destination to outsource R&D work because of its low cost and high skill advantage. Global MNC's looking to reduce their research expenses prefer countries such as India for outsourcing their manufacturing pipelines. Therefore, the proposed increase in weighted deduction for expenses incurred on recognized in-house scientific R&D from existing 150% to 200% will prove a boon for the Indian pharmaceutical industry. Although this move would have been even more welcomed if the time limit for these weighted deduction benefits had also been extended.

Finance Minister has also announced that an annual health survey would be carried out to prepare the district health profile of the rural populace with an aim was to improve availability and access to quality healthcare for people living in remote areas. This will also help increase in demand of medical equipments and drugs in the domestic market.

Power Positive[Top]

Expectations

  • The time deadline for eligibility for Tax holidays U/s 80-IA of the Income-Tax Act has to be extended for another 5 years.
  • Central Government should link central assistance to States with reduction in T&D losses achieved by them.
  • Excise duty exemptions that are available now to power developers for mega projects, should be made available for transmission companies too.
  • Excise duty exemptions in power equipment should be reconsidered to attract investments.
  • Supplies to mega power projects/ ultra mega power projects have to be exempted from excise duty irrespective of whether the project is part of ICB or not.
  • Exemption from service tax to be extended to all the power projects.
  • All wind projects in India during the 11th Five Year Plan period (until 2012) should be eligible for GBI and not be capped at any MW value.
  • Projects with capacity of more than 500 MW should be given mega status
  • Exemption of income from investment in infrastructure and other projects under section 10 (23G) should be revived in the ensuing budget with a view to ensuring low cost of raising capital for thrust project areas.
  • A single rate of excise for all products and their raw materials, till the time a uniform GST is implemented
Measures
  • Plan allocation for power sector has been doubled to Rs 5,132 cr in FY11.
  • The government has proposed to introduce a competitive bidding process for allocating coal blocks for captive mining to ensure greater transparency and increased participation in production from these blocks.
  • A 'coal regulatory authority' is proposed to be set up to take care of issues regarding pricing and performance of coal mining companies.
  • Outlay for renewable energy has been increased by 61%.
  • Standard rate of excise duty, which was reduced to 8% in February 2009 as a part of the stimulus package on non-petroleum products has now been increased to 10%.
  • 'Clean Energy Cess' of Rs 50 per tonne to be imposed on domestic and imported coal.
  • Excise duty exemption provided on goods supplied to mega power projects from which supply of power has been tied up through tariff based competitive bidding or a mega power project awarded to a developer on the basis of such bidding.
  • Excise duty exemption on specified list of goods used for the manufacture of rotor blades for wind operated electricity generators extended to some items.
  • Excise duty exemption provided on specified goods required for initial setting up of solar power generation project or facility.
  • Rate of minimum alternate tax (MAT) on book profits has been increased from 15% to 18%. Surcharge on corporate tax reduced from 10% to 7.5%.

Impact

  • Higher allocation for power sector to aid new generation capacities that had been stalled for want of funds. Higher allocation for power sector to aid companies like NTPC, Tata Power and other private sector players.
  • Competitive bidding for allocating coal blocks to help bring about a level playing field in the sector as more and more generation companies are looking to have their own supplies of coal. Competitive bidding for allocating coal blocks to help companies like NTPC and Tata Power.
  • Higher outlay for renewable energy to help power companies given the mandatory requirements to source a part of their power distribution requirements from clean fuel sources.
  • Hike in the standard rate of excise duty to 10% to make equipments a bit more expensive that will impact the overall project costs for power companies. Hike in the standard rate of excise duty to 10% to impact the overall project costs for companies like NTPC, Tata Power and other new players.
  • 'Clean Energy Cess' of Rs 50 per tonne on domestic and imported coal to impact power companies across the board. Clean Energy Cess' of Rs 50 per tonne on domestic and imported coal to impact companies like Tata Power and Reliance Power.
  • Lower surcharge on corporate tax to help companies reduce their overall tax payments.
Real Estate Positive[Top]

Expectations

  • Increase the tax exemption limit against the interest payment on home loan and rental income to Rs 3 lakh.
  • Increasing the limit of Rs 1 lakh against the principal repayment on home loan to Rs 2 lakh
  • Time limit for notification of industrial parks under the New Industrial Park Scheme 2008 should be extended up to March 2015
  • Tax incentives for slum and decaying housing redevelopment

Measures

  • One-time interim relief to housing and real estate sector which includes 1% interest subvention scheme up to March 11 for housing sector and direct tax sops.
  • The time-limit for completion of projects eligible for deduction under section 80-IB has been extended to 5 years.
  • Service-tax retained at 10% is now proposed to be levied on value of (i) additional services provided by the builder such as offering preferential location, etc (ii) lease of vacant land, if construction is undertaken thereon.
  • Allowed developers to claim tax breaks on under construction residential projects over 5 years compared with 4 years earlier.

Impact

  • For developers, there may also be a trade-off between the realizing pre-sales, and reducing transaction costs, as service-tax would now be levied on sale of property, unless the entire consideration is paid after completion of construction. Companies which have residential projects in Tier II and III cities should benefit the most. On the flip side, however, companies executing such projects would now need to pay a higher minimum alternate tax of 19.93%.
  • Direct Tax Code which the government is going to introduce by April 1, 2011 may not tamper the fiscal incentives being offered under the SEZ regime as the FM is expressing more stress on commitment to the continued growth of SEZs
  • The realty sector would benefit from continued focus on strengthening existing affordable housing schemes and extension of tax exemption period for real estate projects from the existing 4-5-years.
  • The sector is expected to benefit the most from a move to raise tax slabs for personal income tax, that will boost disposable incomes and could add to demand that has been steadily improving in recent months.
Telecommunication Neutral[Top]

Expectations

  • COAI (Cellular Operators Association of India), sought a reduction and rationalization of the various duties and levies imposed on telecom at Central as well as State level, in order to simplify the regime and enable a reduction in the cost of services as levies on telecom industry works out to around as high as 24% to 32% of their total revenues, which is one of the highest in the world.
  • Tax benefit under section 80-IA:
      • The telecom industry demands that tax holiday benefits in case of mergers/ amalgamations should be continued and the Section 80 IA benefits to continue to companies undergoing amalgamation or de-merger after 31.3.2007 as well.
      • Also, as per existing provisions of section 80-IA services should commence before 1.4.2005. The industry demands that for the new licences issued, this period should be extended up to 1.4.2010.
      • COAI further expects that the period during which deduction under section 80 IA can be claimed by the telecom operators should be extended to 20 years in place of existing 15 years.
      • The association also expects 100% exemption for successive 10 years out of 20 years, like available to other infrastructure sectors such as power and thereafter 30% exemption on profits of next 5 years out of 15 years currently available to Telecom companies.
  • To ensure speedy spread of service, especially to the rural areas, the duty which has been imposed on handsets (NCCD & SAD) on mobile handsets should be withdrawn. Further, the additional duty on mobile handsets should be reduced to Nil.
  • An additional duty of customs (SAD) of 4% has been levied on ITA bound items which includes telecom equipment like MSC, BTS/ BSC, HDSL/DWDM/ Routers, ATM/Frame Relay/Ethernet Switch etc. COAI requested that a suitable notification be issued to allow set off of as additional duty of customs (SAD) against output service tax liability, or, to suitably reduce it in a phased manner.
  • COAI seeks that the duty for optical fibre cables for telecommunication should be fixed to Nil rate - whether they are classifiable under 8544 or 9001.

Measures

  • The allocation for National Rural Employment Guarantee Scheme (NREGA) has been increased to Rs 40,100 cr for FY11 and for Bharat Nirman it stands at Rs 48,000 cr
  • Full exemption of the countervailing duty (CVD) of 4% on accessories, parts and components imported for the manufacture of mobile phones has been extended for the full year. Plus, this exemption has been extended towards battery chargers and hands-free headphones as well.
  • Excise duty exemption on parts, components and accessories of mobile handsets including cellular phones has been extended to battery chargers and hands-free headphones as well.
  • Mobile phones imported in pre-packaged form and intended for retail sale are being provided an outright exemption from additional duty of customs of 4%.

Impact

  • Increase in allocation for the NREGA and Bharat Nirman will help in targeting more customers in the rural areas. Companies such as BSNL, Bharti Airtel, Reliance Communication, Idea Cellular and Tata Communication would be the key beneficiaries.
  • Lower CVD on accessories, parts and components of mobile as well as exemption of additional custom will help in keeping the cost of handsets low.
  • Telecom companies would be able to enjoy the benefits of low cost handsets as it would help in keeping the strong pace of subscriber additions buoyant. This would hold strong for rural markets.

TextilesPositive [Top]

Expectations

  • To remove mandatory excise duty of 8% on Man Made Fiber so as to have level playing field and utilization of man-made fibers.
  • As the domestic industry is supplying machinery of global standards only in the case of ring frames for spinning, that too excluding ring frames for compact spinning; Textile Industry has to import nearly 70% of the textile machinery and 100% of garment machinery. In such circumstances Industry suggests abolition of excise and customs duty on all machinery including ring frames for compact spinning but excluding other ring frames.
  • Exemption of textile industry from customs and excise duties for all liquid fuels used by textile and clothing units for captive power generation, on the back of acute power shortage in most of the textile producing areas of the country.
  • As a one-time measure, the industry seeks current accumulated Cenvat credit of all textile and clothing units may be refunded in cash in FY11. .
  • In order to upgrade the competitiveness of textile exports, it is requested that export credit for textile and clothing units may be provided at a uniform rate of 5% interest, both for pre-shipment and post-shipment credit.
  • As the textile industry has also been rolling under spike in the raw material cost like Cotton, polyester etc, working Capital for purchase of cotton may be provided to mills at 7% interest as against 10% margin money and for a period of 9 months.
  • To exempt all export related services to be exempted from service charges. The industry also requests the government, to treat service tax paid by textile units for erection and commission as well as repairs and maintenance of windmills as tax paid on input services under Cenvat Credit Rules.

Measures

  • FM extends interest subvention of 2% for exports of handlooms, handicrafts and SMEs for 1 year
  • Exclusive skill development programme in textile and garment sector
  • Khadi institutes get Rs 400 cr
  • GOI sign USD 150 mn deal with ADB for implementing Khadi programme
  • Government committed to SEZs to promote exports
  • Surcharge on domestic companies reduced to 7.5% from 10%
  • Increase in the rate of Minimum Alternate Tax from 15% to 18% of book profits
  • Extensive skill development programme to be launched by Textile Ministry to train 30 lakh persons over 5 years.

Impact

  • Companies that do not complete their capex related borrowing by the due date of March 31, 2012 will have to incur higher borrowing cost as the interest subvention under the Technology Upgradation Fund (TUF) will expire by that date. Most companies in the sector are highly leveraged and may have to cap their capex plans until FY12. Companies like Raymond, Arvind Ltd. and Alok that are heavily leveraged will get impacted from this step
  • Addition of skilled workers will help companies in the sector increase their value added product offerings and garner better realizations.
MARKET'S REACTION TO BUDGET[Top]

The Union Budget 2010-11 presented by the Finance Minster was welcomed by the stock market which is evident from the sharp jump in the key benchmark indices - Sensex and Nifty. Based on the concessions and support given in the budget, we can conclude that the Budget is very much friendly not only for the individuals but also for the industries. The salaried class may rejoice in their tax out goes coming down in a big way. The rural population can cheer over their cash outflows coming down. Banks, housing developers and those buying low cost houses can be happy with the 1% interest support. Further, announcement that the FY11 deficit will decline to 5.5% of GDP from 6.9% this fiscal also boosted market sentiments. At the end, Sensex closed at 16,429.55 up by 175.35 points. It touched an intraday high of 16,669.25 and low of 16,249.67. Nifty ended at 4,922.30 up by 62.55 points. It made a high/low of 4,992 and 4,858.45. The broader market, BSE Midcap and BSE Smallcap indices were also up by 1.47% and 1.08% respectively. Market breadth was highly positive as 1,848 shares advanced and 942 shares declined whereas 84 shares remained unchanged on BSE.

Indices

Closing on
February 26, 2010

Change from
February 25, 2010

Change
(%)

Sensex

16,429.55

175.35

1.08

Nifty

4,922.30

62.55

1.29

BSE Midcap

6,397.82

92.76

1.47

BSE Smallcap

8,067.40

86.45

1.08

BSE Auto

7,170.99

324.33

4.74

BSE Bankex

9,828.68

217.10

2.26

BSE Capital Goods

13,474.86

141.61

1.06

BSE Consumer Durables

4,001.78

37.12

0.94

BSE FMCG

2,662.05

(61.24)

(2.25)

BSE Healthcare

4,912.98

75.16

1.55

BSE IT

5,173.99

(14.93)

(0.29)

BSE Metal

16,401.52

411.75

2.58

BSE Oil & Gas

9,596.24

102.71

1.08

BSE Power

2,961.56

7.64

0.26

BSE Realty

3,236.69

40.35

1.26

Sectors those witnessed activity due to the wins and whines presented in the budget are:

Realty shares rose after Finance Minister allowed pending projects to be completed within a period of 5 years instead of 4 years for claiming a deduction on profits. DLF (up 2.73%), HDIL (up 2.73%), Omaxe (up 2.89%), Unitech (up 1.92%), Parsvnath Developers (up 3%) and Orbit Corporation (up 0.48%) moved up. Norms for built-up area of shops and other commercial establishments in housing projects is also proposed to be relaxed to enable basic facilities for their residents.

Auto stocks galloped as the government hiked the excise duty by 2% to 10% from 8% earlier. This came as a relief as the industry feared a 4% hike. Tata Motors (up 6.33%), Ashok Leyland (up 6.30%), Mahindra & Mahindra (up 5.06%), Maruti Suzuki (up 4.46%), Bajaj Auto (up 6%) and Hero Honda Motor (up 4.99%) spurted. Another positive for auto companies was higher slabs for personal income tax that would leave more finance in hands of individuals.

Banking stocks gained after Finance Minister said RBI is considering giving some additional banking licenses to private sector players. Yes Bank (5.27%), ICICI Bank (up 2.40%), State Bank of India (up 3.21%) and HDFC Bank (up 1.02%) rose. Shares of state-run bank got a boosted from the Finance Minister's proposal to provide Rs 16,500 cr for recapitalization to enable them to maintain minimum capital adequacy at 8% in tier I capital by 31 March 2011.

The BSE Capital Goods stocks like Suzlon Energy (up 4.74%), Thermax (up 1.11%), L&T (up 1.95%), Siemens (up 2.76%) and Usha Martin (up 0.58%) ended in green due to higher allocation of funds for infrastructure development.

PSU OMCs fell as Finance Minister raised excise duty on petrol and diesel by Re 1 per litre each. Oil Secretary said that government will increase petrol prices by Rs 2.71 per liter and diesel prices by Rs 2.55 per liter. BPCL, HPCL and Indian Oil Corporation fell by between 0.8-2.3%.

INDUSTRY [Top]

The current proposals on direct taxes are estimated to result in a revenue loss of Rs.26,000 cr for the year. This is the discouraging sine, keeping in view the already mounting fiscal deficit. Finance Minister came out with the Union Budget 2010-11 that could be described as a fine balancing act. A projected lower fiscal deficit in the financial year ahead, resulting in a lower government borrowing, soothed the industry. Not surprisingly, industries gave a rousing welcome to the Budget.

Basically, the Budget focused on various challenges:

  • To quickly revert to the high GDP growth path of 9%.
  • Find the means to cross the 'double digit growth barrier'.
  • To harness economic growth to consolidate the recent gains in making development more inclusive.
  • The development of infrastructure in rural areas has to be pursued to achieve the desired objectives.
  • To strengthen food security, improve education opportunities and provide health facilities at the level of households, both in rural and urban areas.
  • The overcome weaknesses in government systems, structures and institutions at different levels of governance.
  • To remove the bottleneck of our public delivery mechanisms.
The fund allocation to various sectors has been done keeping in mind the above mentioned challenges, so that they can be overcome within the prescribed time.


Fund Allocation for Various Sectors

SECTORS

2009-10 Budget Estimates

2010-11 Budget Estimates

Agriculture and Allied Activities

10,629

12,308

Rural Development

51,769

55,190

Irrigation and Flood Control

439

526

Energy

1,15,574

1,46,579

Industry and Minerals

35,740

39,019

Transport

94,306

1,01,997

Communications

16,731

18,529

Science Technology & Environment

11,207

13,677

General Economic Services

6,270

7,554

Social Services

1,03,856

1,27,570

General Services

1,400

1,535

Grand Total

4,47,921

5,24,484


Budget estimates for every sector have been raised which is a welcome sign. Looking broadly, the increased allocation towards railways, primary education, rural development will not only generate employment but will also stimulate growth. Some of the positive & favorable features of the union budget are:

  • Allocation of Rs 22,300 cr to health ministry for availability of proper health facilities at the level of households in rural as well as urban areas
  • Rs 31,000 cr for primary education to harness economic growth in the long run.
  • Rs 66,100 cr towards rural development to develop rural infrastructure, improve medical facilities and attract investment. This will help create employment and harness economic growth Rs 1,47,000 cr for defence.
  • Rs 16,500 cr towards railways

All these measures are being undertaken to overcome these challenges & these are being viewed positively by the industry.

Budget brought certain disappointments on the following fronts:

  • Encouragement of FDI would have been desirable to provide steam to the economy and considering the aggressive infrastructure plans.
  • Not many measures have been taken to curb inflation which will have a negative impact on the industry in the long run. The hike in fuel prices is rather discouraging.
TAX PAYERS [Top]

The Finance Minister announced a Personal Income Tax bonanza which was completely unexpected. It is a welcome relief for the aam aadmi. Though, the threshold exemption limits have been maintained at the previous levels, tax slabs have been broadened which will provide a substantial relief to a large number of taxpayers.

The current proposed tax slabs are as follows:

Applicable Tax Rates

For persons other than women and senior citizens
Upto Rs 1,60,000

NIL

Rs 1,60,001 – Rs 5,00,000

10%

Rs 5,00,001 – Rs 8,00,000

20%

Above Rs 8,00,000

30%


For women
Upto Rs 1,90,000

NIL

Rs 1,90,001 – Rs 5,00,000

10%

Rs 5,00,001 – Rs 8,00,000

20%

Above Rs 8,00,000

30%


For Senior citizens
Upto Rs 2,40,000

NIL

Rs 2,40,001 – Rs 5,00,000

10%

Rs 5,00,001 – Rs 8,00,000

20%

Above Rs 8,00,000

30%


A deduction of an additional amount of Rs 20,000 for investment in long-term infrastructure bonds as notified by the Central Government has been proposed. This would be over and above the existing limit of Rs 1 lakh on tax savings which will promote savings as well as ensure their utilisation for the thrust area of infrastructure. Contributions to the Central Government Health Scheme will also be allowed as a deduction under the provision of contributions to health insurance schemes.

Now taking a look at the Corporate Taxpayers, various proposals which are being made are as follows:

  • To reduce the current surcharge of 10% on domestic companies to 7.5% and at the same time, to increase the Minimum Alternate Tax (MAT) Rate from the current rate of 15% to 18% of book profit. This will help promote inter-se equity among corporate taxpayers.
  • To enhance the weighted deduction on expenditure incurred on in-house R&D from 150% to 200% as well as on the payments made to National Laboratories, research associations, colleges, universities and other institutions, for scientific research from 125% to 175%. This will further encourage R&D and promote innovation across all sectors of the economy.
  • Payments made to approved associations engaged in research in social sciences or statistical research would be allowed a weighted deduction of 125%. The income of such approved research associations will remain exempted from tax.
  • All businesses with a turnover exceeding Rs 60 lakh and all professions whose receipts exceed Rs 15 lakh would require to get their accounts audited. Currently these limits are Rs 40 lakh and Rs 10 lakh respectively. This will help to reduce the compliance burden on small taxpayers.
  • To rationalise the threshold limits of payments below which tax is not deductible at source. These have remained unchanged for a long time now.
  • To increase the interest charged on tax deducted but not deposited by the specified date, from 12% to 18% per annum.
  • To facilitate the conversion of small companies into Limited Liability Partnership (LLPs), it has been proposed that they will not be subject to capital gains tax.
  • Under the current provisions of the Act, "the advancement of any other object of general public utility" cannot be considered as "charitable purpose" if it involves carrying on of any activity in the nature of trade, commerce or business. It has been proposed that this restriction would not be applicable if the receipts from such activities do not exceed Rs 10 lakh in the year.
ECONOMY [Top]

India has been one of the best performers in the world economy in recent years, but rapidly rising inflation and fiscal deficits are proving challenging. The Indian economy turned around in the second quarter of 2009-10 with a growth of real gross domestic product (GDP) at 7.9% and is estimated to grow at 7.2% for the full year 2009-10. Low export dependence & high consumption base has made the mark for economy to revive from recession. IIP has also shown the growth of 16.8% on y-o-y basis over the previous year. But double digit inflation has shown a major of concern as money supply need to be reduced to curb down inflation which will have a negative impact on the growth of the economy.

Gross Domestic Product


The economy is estimated to have grown by 6.0% in Q3 FY10 over the corresponding quarter of previous year. Quarterly GDP at factor cost at constant (2004-05) prices for Q3 FY10 is estimated at Rs.11,58,764 cr, as against Rs.10,93,167 cr in Q3 FY10. Agriculture is estimated to have declined over the levels achieved last year by 0.2%, while non-farm sectors saw a growth of 8.5% in the current fiscal. The rate of growth of manufacturing sector stood at 14.3% while electricity, gas & water supply, the community, social & personal services and trade, hotels, transport and communication at 8.2%, 8.2% and 8.3% respectively for the year 2009-2010 are marginally below the benchmark.

Fiscal Deficit estimated at 4% by FY13


A revision in the base year for calculating GDP coupled with higher growth figures, paved a path for a lower fiscal deficit at 5.5% of FY11 GDP. The current year's GDP has been revised to 6.9%. For FY12 deficit has been estimated to 4.8% & for FY13 it has been predicted to be 4.1%. Revenue expenditure increased by 16.5% during April-December 2009-10, over the same period last year. Capital expenditure grew by 41.2% during the period. In the first nine months of 2009-10, total expenditure was 69.3% of Budget Estimates (BE). Non-debt receipts were sufficient to cover only 56.2% of the expenditure leaving a fiscal deficit of Rs.3,09,980 cr. Non-debt receipts during April-December 2009-10 increased by 4.9% over 2008-09 corresponding period.

Agriculture Production

The total food grains production in FY09 was estimated at 233.88 million tonnes as compared to 230.78 million tonnes in FY08. The deficiency in South West monsoon of 23%, compared to the long period average, severely affected the area sown during kharif FY10 season. The kharif food grains production is estimated at 98.83 million tonnes which indicates a decline of 16% compared to the fourth advance estimates of FY09. Sugarcane production in FY10 is estimated at 249.48 million tonnes, which is 9% lower in comparison to the previous year and 27% vis-à-vis the targeted production for FY10.

Double-Digit IIP



The recovery in the economy as gleaned from the quarterly estimates of the GDP is due to the resurgent industry.IIP grew by 16.8% in December 2009 as compared to -0.2% in December 2008. The IIP crossed the 10% mark for the fourth time the current fiscal in December 2009. The cumulative growth in IIP during April-December 2009 was 8.6%, as compared to a growth of 3.6% during April-December 2008. Mining industry grew by 9.5%, manufacturing industry grew by 18.5% & electricity sector grew by 5.4% as compared to level in December 2008.

Trend in Inflation 


Annual average inflation rate based WPI (%)

Year

Primary articles

Fuel, power, light & lubri.

Manufactured products

All commodities

2005-06

2.9

9.5

3.1

4.4

2006-07

7.9

5.6

4.4

5.4

2007-08

7.6

0.9

5.0

4.7

2008-09

10.1

7.5

8.1

8.4

2008-09(Apr-Dec)

10.9

11.3

9.5

10.2

2009-10(Apr-Dec)P

8.8

-6.4

1.8

1.6


The annual rate of inflation, based on monthly WPI, stood at 8.56% (Provisional) for the month of January, 2010 (over January, 2009) as compared to 7.31% (Provisional) for the previous month and 4.95% during the corresponding month of the previous year. Build up inflation in the financial year so far was 8.90% compared to a build up of 1.51% in the corresponding period of the previous year. In December 2009, nearly 67% of the overall WPI inflation could be attributed to food items, followed by 12% in the fuel and power commodity group.

Exports

Export Import growth


FY10 began with the full impact of the global recession in evidence. Exports during December, 2009 were valued at USD 14,606 mn, 9.3% higher in dollar terms than the level of USD 13,368 mn in December, 2008. Cumulative value of exports for the period April-December, 2009 was USD 1,17,587 mn as against USD 1,47,569 mn registering a negative growth of 20.3% in Dollar terms over the same period last year.

FOREIGN INVESTMENT [Top]

Government has taken a number of steps to simplify the FDI regime to make it easily comprehensible to foreign investors. For the first time, both ownership and control have been recognised as central to the FDI policy, and methodology for calculation of indirect foreign investment in Indian companies has been clearly defined. A consistent policy on downstream investment has also been formulated. Another major initiative has been the complete liberalization of pricing and payment of technology transfer fee, trademark, brand name and royalty payments. These payments can now be made under the automatic route.

Government also intends to make the FDI policy user-friendly by consolidating all prior regulations and guidelines into one comprehensive document. This would enhance clarity and predictability of our FDI policy to foreign investors.

Disclosure: I don't have any positions in the above said scrips & NIFTY FUTURES.
Disclaimer:
"I do not make any warranties, express or implied, as to results to be obtained from using the information in this e-letter.  Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report."

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Arvind Parekh
+ 91 98432 32381