Budget expectations
As the countdown commences for the presentation of the Union Budget, the first of the reelected United Progressive Alliance (UPA) government on 6th July 2009, the stock market expectations remain high. The capital market is of the view that the government can stimulate the economy, reinforce fiscal prudence and yet enhance social welfare programmes. We are less optimistic and though we believe the government would announce some stimulus packages for the economy, fiscal deficit constraints would limit the efficacy of such proposals.
On excise duty
In order to bring about a spurt in the economy, the government brought down the general excise duty rate from 14% to 8% since December 2008 through couple of stimulus packages. Post excise duty cut the two wheeler segment and compact car segment has seen revival in sales volume. We expect the government would not like to tinker with sales volume recovery in these segments and therefore maintain "status quo" on the existing excise duty rates. However if the government decides otherwise and plans for partial/complete roll-back on the excise cuts, in that case it would be negative for the two wheeler and small car players.
The large car manufacturers are hoping for lowering down of excise duty in line with excise duty rates on small cars. We do not expect the excise duty rates on large cars would be changed because the customers of such cars are less sensitive to price changes and therefore bringing down the excise duty rate may not necessarily increase demand for large cars.
On depreciation
Due to slowdown in the economy, the commercial vehicles sector was the worst hit during FY09. In order to provide a demand push, the government through its second stimulus package announced accelerated depreciationof 50% on commercial vehicles purchased between Januray-March2009. Players in CV segments are expecting that the accelerated depreciation benefit be extended beyond 31st March2009. Due to continuing economic slowdown the CV sales continue to remain under pressure, and we therefore expect that the benefit of accelerated depreciation would be extended beyond 31st March2009.
Overall, we believe that the budget would be neutral for the auto sector as we do not foresee any direct measures (except for CV) would be announced in the budget that benefits the auto sector. Indirectly, the sector can benefitfrom additional farm loan waiver and improved financing scenario.
Banking:
Increase in foreign direct investments in insurance sector from present 26% to 49%:
We expect the Finance Minister to increase FDI limit in domestic insurance sector to 49% to facilitate much needed fund infusion for future growth.
Expectation of 50-75 bps reduction in government small saving interest rates:
We expect the FM to reduce small saving interest rates to provide room to commercial banks to further cut their deposit and lending rates.
Permission to infrastructure sector lenders to issue tax free bonds:
We expect FM to permit infrastructure lenders likes (PFC, IDFC etc.) to issue tax free bonds to increase their resources base; if permitted infrastructure lenders would benefit but the commercial banks would be at slight disadvantage.
Increase in limit of tax deduction on interest payment on housing loans:
We expect that the budget may propose to increase limit of tax deduction on interest payment on housing loans from present level of Rs 0.15 mn to make housing loans more attractive.
Overall, we expect that the budget to be positive for the banking industry at large. Considering the sharp run-up in stock prices, we are negatively biased on Indian banking sector.
Cement:
Restoration of excise duty from current 8% to 12%
Government has reduced the excise duty from 12% to 8% during the year to stimulate the cement demand. But cement industry has increased the cement price driven by strong demand. We believe the excise duty would be restored at 12% which has negative impact for the industry.
Abatement on excise duty
Currently excise duty on cement is based on MRP and industry gets abatement whenever excise duty is based on MRP. However we don't expect the abatement on excise duty would be given in this budget.
Abolition of import duty on pet-coke and coal
Coal is the major fuel for the production of cement. Currently there is 5% import duty on coal and pet coke. We expect the import duty on pet coke would be abolished from 5% to nil. The abolition of import duty would reduce the operational cost for the cement industry.
Subsidy on freight cost on export of cement and clinker
Most plants are in the hinterland which makes the export unviable due to higher freight cost. We believe the industry would be in capacity surplus in H2FY10. Hence the government may provide the freight subsidy to make export viable.
We expect primarily the budget would be negative for the sector. However indirectly it would benefit through increase in allocation for various infrastructure schemes.
Construction:
Increased allocation under various infrastructures schemes:
Clarification on section 80IA benefit
There is varying interpretation of section 80IA to claim the benefit (Currently allowed to developers of project). We believe section 80IA benefit would be clarified and construction companies would be included under the purview.
Re-introduction of tax benefit u/s 10 (23G)
The income of the companies engaged in infrastructure projects by way of debt or equity was exempted from tax under Section 10(23G) which was removed. We believe the exemption would be re-introduced which will bring down the interest cost of the funds for the infrastructure companies as the lending institutions may pass on the benefit or otherwise improve the interest in funding for infra projects.
We expect the budget to be positive for the sector.
Fertiliser:
1. The Government may announce incentives for green field expansion for urea capacities.
2. The government may also announce assured feedstock supply and minimum assured returns on new urea capacities.
3. Currently, the government disburse subsidy in cash as well as in bonds. In budget 2009-10, the Government may introduce full cash payment of subsidies.
We expect the budget to be Positive for the sector.
Infrastructure:
Higher budgetary allocation in Infrastructure development schemes
Road development to get a new face with higher allocation
Steps to ease out infrastructure funding
Setup monitoring units
Social Infrastructure focus to continue
Multiplex:
Rationalization of Entertainment Tax
Removal of service tax on rentals paid on immovable property
Real Estate:
Resume tax exemption under section 80 IB (10) to promote mass housing
Increase the tenure of tax holiday to hotels under section 80ID
Increase the exemption limit of home loan interest payable under section 24 (b)
This section deals with exemption on interest payable by home loan buyers for self-occupied houses. Currently, the exemption stands to the extent of Rs 150,000. We expect that the government could extend this to at least Rs 300,000. This will not only help the middle class home buyers in payment of their existing home loans but also encourage first time home buyers.
Service tax provisions relating to real estate
It has been clarified that no service tax should be levied in case pre-construction sale of residential complex where the seller and the buyer enter into an 'agreement to sell'. We expect that a similar clarification can be issued for pre-construction sale of commercial complexes as well.
Lower and uniform stamp duty rates
As the countdown commences for the presentation of the Union Budget, the first of the reelected United Progressive Alliance (UPA) government on 6th July 2009, the stock market expectations remain high. The capital market is of the view that the government can stimulate the economy, reinforce fiscal prudence and yet enhance social welfare programmes. We are less optimistic and though we believe the government would announce some stimulus packages for the economy, fiscal deficit constraints would limit the efficacy of such proposals.
On excise duty
In order to bring about a spurt in the economy, the government brought down the general excise duty rate from 14% to 8% since December 2008 through couple of stimulus packages. Post excise duty cut the two wheeler segment and compact car segment has seen revival in sales volume. We expect the government would not like to tinker with sales volume recovery in these segments and therefore maintain "status quo" on the existing excise duty rates. However if the government decides otherwise and plans for partial/complete roll-back on the excise cuts, in that case it would be negative for the two wheeler and small car players.
The large car manufacturers are hoping for lowering down of excise duty in line with excise duty rates on small cars. We do not expect the excise duty rates on large cars would be changed because the customers of such cars are less sensitive to price changes and therefore bringing down the excise duty rate may not necessarily increase demand for large cars.
On depreciation
Due to slowdown in the economy, the commercial vehicles sector was the worst hit during FY09. In order to provide a demand push, the government through its second stimulus package announced accelerated depreciationof 50% on commercial vehicles purchased between Januray-March2009. Players in CV segments are expecting that the accelerated depreciation benefit be extended beyond 31st March2009. Due to continuing economic slowdown the CV sales continue to remain under pressure, and we therefore expect that the benefit of accelerated depreciation would be extended beyond 31st March2009.
Overall, we believe that the budget would be neutral for the auto sector as we do not foresee any direct measures (except for CV) would be announced in the budget that benefits the auto sector. Indirectly, the sector can benefitfrom additional farm loan waiver and improved financing scenario.
Banking:
Increase in foreign direct investments in insurance sector from present 26% to 49%:
We expect the Finance Minister to increase FDI limit in domestic insurance sector to 49% to facilitate much needed fund infusion for future growth.
Expectation of 50-75 bps reduction in government small saving interest rates:
We expect the FM to reduce small saving interest rates to provide room to commercial banks to further cut their deposit and lending rates.
Permission to infrastructure sector lenders to issue tax free bonds:
We expect FM to permit infrastructure lenders likes (PFC, IDFC etc.) to issue tax free bonds to increase their resources base; if permitted infrastructure lenders would benefit but the commercial banks would be at slight disadvantage.
Increase in limit of tax deduction on interest payment on housing loans:
We expect that the budget may propose to increase limit of tax deduction on interest payment on housing loans from present level of Rs 0.15 mn to make housing loans more attractive.
Overall, we expect that the budget to be positive for the banking industry at large. Considering the sharp run-up in stock prices, we are negatively biased on Indian banking sector.
Cement:
Restoration of excise duty from current 8% to 12%
Government has reduced the excise duty from 12% to 8% during the year to stimulate the cement demand. But cement industry has increased the cement price driven by strong demand. We believe the excise duty would be restored at 12% which has negative impact for the industry.
Abatement on excise duty
Currently excise duty on cement is based on MRP and industry gets abatement whenever excise duty is based on MRP. However we don't expect the abatement on excise duty would be given in this budget.
Abolition of import duty on pet-coke and coal
Coal is the major fuel for the production of cement. Currently there is 5% import duty on coal and pet coke. We expect the import duty on pet coke would be abolished from 5% to nil. The abolition of import duty would reduce the operational cost for the cement industry.
Subsidy on freight cost on export of cement and clinker
Most plants are in the hinterland which makes the export unviable due to higher freight cost. We believe the industry would be in capacity surplus in H2FY10. Hence the government may provide the freight subsidy to make export viable.
We expect primarily the budget would be negative for the sector. However indirectly it would benefit through increase in allocation for various infrastructure schemes.
Construction:
Increased allocation under various infrastructures schemes:
Clarification on section 80IA benefit
There is varying interpretation of section 80IA to claim the benefit (Currently allowed to developers of project). We believe section 80IA benefit would be clarified and construction companies would be included under the purview.
Re-introduction of tax benefit u/s 10 (23G)
The income of the companies engaged in infrastructure projects by way of debt or equity was exempted from tax under Section 10(23G) which was removed. We believe the exemption would be re-introduced which will bring down the interest cost of the funds for the infrastructure companies as the lending institutions may pass on the benefit or otherwise improve the interest in funding for infra projects.
We expect the budget to be positive for the sector.
Fertiliser:
1. The Government may announce incentives for green field expansion for urea capacities.
2. The government may also announce assured feedstock supply and minimum assured returns on new urea capacities.
3. Currently, the government disburse subsidy in cash as well as in bonds. In budget 2009-10, the Government may introduce full cash payment of subsidies.
We expect the budget to be Positive for the sector.
Infrastructure:
Higher budgetary allocation in Infrastructure development schemes
Road development to get a new face with higher allocation
Steps to ease out infrastructure funding
Setup monitoring units
Social Infrastructure focus to continue
Multiplex:
Rationalization of Entertainment Tax
Removal of service tax on rentals paid on immovable property
Real Estate:
Resume tax exemption under section 80 IB (10) to promote mass housing
Increase the tenure of tax holiday to hotels under section 80ID
Increase the exemption limit of home loan interest payable under section 24 (b)
This section deals with exemption on interest payable by home loan buyers for self-occupied houses. Currently, the exemption stands to the extent of Rs 150,000. We expect that the government could extend this to at least Rs 300,000. This will not only help the middle class home buyers in payment of their existing home loans but also encourage first time home buyers.
Service tax provisions relating to real estate
It has been clarified that no service tax should be levied in case pre-construction sale of residential complex where the seller and the buyer enter into an 'agreement to sell'. We expect that a similar clarification can be issued for pre-construction sale of commercial complexes as well.
Lower and uniform stamp duty rates
