Union Budget 2012-13

Anuradha Basumatari, Nehal Waghmare, Tapobrata Das Roy, Bhavin Deliwala, Chirag Sheth, Divya Menon, Ashima Kharbanda, Pratik Kashyap, Aditya Jagati) March 16, 2012

The past and the present budget - Background

Indias Finance Minister Pranab Mukherjee presented Indias budget on March 16, 2012. The economic scenario in India was strikingly different during the last budget, in February 2011. The Finance Minister Pranab Mukherjee had expected the economy to grow by 9% (+/- 0.25%) in the FY 2011-12. However, as the year progressed the estimate was revised down to 8.2% in July 2011. The Prime Ministers Economic Advisory Council further revised down the growth rate of the economy to 7.1% later in the year. In the Union Budget 2012-13 presentation, the Finance Minister stated that the Indian economy is Annual growth rates at factor cost estimated to grow by 6.9% in 2011-12 in terms of GDP at factor cost GDP at factor cost, which follows a growth of 8.4% Agriculture, forestry&fishing, mining& quarrying Manufacturing, construction, electricity, gas and water supply in 2010-11. Relative to high growth in the period Trade, hotels, transport& communication Financing, insurance, real estate, business services 2003-04 to 2010-11 (with the exception of 2008-09), 15 Public administration, defence and other services growth in 2011-12 is on the lower side. This is 10 primarily due to weakening of industrial growth in 5 the wake of persistent inflationary pressures and 0 deterioration in the global economic environment. The industrial sector is estimated to grow at 3.9% -5 in 2011-12 as against 7.2% in 2010-11, while -10 agriculture is estimated to record lower growth of 2.5% compared to a high growth rate of 7% Source: Bloomberg, ICICI Bank achieved in FY 2010-11. Services sector is estimated to grow at robust rate of 9.4% in 2011-12, which is around the same level as in 2010-11. Global factors that had a negative impact on growth include, in particular, the crisis in the euro zone and near recessionary conditions prevailing in Europe; slow growth in many other industrialized countries, and hardening of international prices of crude oil.
% 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (RE)

In terms of expenditure method of estimation, GDP at constant market prices is projected to register a growth of 7.5% in 2011-12 as against a growth of 9.6% in 2010-11. This slowdown in growth could be attributed to the three major components viz. the growth of consumption expenditure, gross fixed capital formation, and exports that declined to 6%, 5.6% and 14.3% respectively in real terms during the year 2011-12. The growth in respect of these indicators was 8.1%, 7.5% and 22.7% respectively in 2010-11. The growth of investment in the economy is estimated to have registered a significant decline during the current year. As per the Quick Estimates released by the CSO, gross domestic savings as a ratio of GDP at current market prices (savings rate) declined from 33.8% in 2009-10 to 32.3% in 2010-11. This decline is accounted for by a reduction in private savings, primarily the household savings in financial assets and somewhat by a reduction in corporate savings. Public savings on the other hand registered an increase during 2010-11.

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2012-13 (BE)

Gross Domestic Savings

Total Domestic Savings Private corporate sector Household sector Public sector

Gross Fixed Capital Formation

Total Fixed Capital 35.00 30.00 25.00 % 20.00 15.00 10.00 5.00 0.00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Public sector Private sector

36.00 28.00 % 20.00 12.00 4.00 -4.00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Source: Ministry of Finance, ICICI Bank

Source: Ministry of Finance,, ICICI Bank

The wholesale price inflation (WPI) was relatively higher during the last budget, and it crossed 10% in each of the four following months. The interest rates in the economy were also on an upswing. The RBIs policy rate was trending at 6.5% in February 2011. Later in October 2011, the interest rates rose to 8.5%. In the backdrop of high inflation and rising policy rates, the Finance Minister, Mr. Pranab Mukherjee, wanted to give a big push to growth. However, the efforts to boost growth did not pay off last year. Monetary policy tightening to control inflation and inflationary expectations led to a compression in aggregate demand and this was particularly reflected in the quarterly GDP growth rates in 2011-12. Growth in the first three quarters of the FY 2011-12 came down successively. The slowdown in the economy, coupled with rising costs and narrowing profit margins of the corporate sector led to a lower than budgeted growth in government revenues. On the other hand, higher than targeted public expenditure, mainly due to higher subsidy burden, led to a higher than estimated fiscal deficit in FY 2011-12. The Finance Minister expects a gradual upswing in economic growth in the FY 2012-13, as there are some signs that the slowdown in economic activity has bottomed out. Indias GDP growth in 2012-13 expected to be 7.6% (+/- 0.25%). Headline inflation is expected to moderate further in next few months and remain stable thereafter. The WPI has dropped below 7% for the past two months and the RBI is expected to reverse the interest rate cycle. The central bank has already created a ground for rate cuts by lowering the cash reserve ratio. It has already lowered the cash reserve ratio by 125bps in two steps and released INR 800 billion into the banking system. In the January 2012 monetary policy review, governor D. Subbarao stated that, There is an urgent need for decisive fiscal consolidation. The Governor further stated that it is critical to yielding the space required for lowering rates without the imminent risk of resurgent inflation. The forth- coming Union budget must exploit the opportunity to begin this process in a credible and sustainable way.

Fiscal Consolidation
The fiscal consolidation was substantial in 2010-11 with fiscal deficit declining to 4.9% of GDP in 2010-11 from 6.4% in 2009-10, and accrued on the strength of larger than budgeted growth in tax and non-tax revenues, and higher nominal GDP. The Finance Minister wanted to constrain the fiscal deficit to 4.6% of the GDP in the FY 2011-12. Last year the Budget estimated that around INR

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3.58 trillion of government borrowing would bridge the deficit. In the last Union Budget, the central government projected the total subsidy bill to amount to INR 1.44 trillion for 2011-12. Subsidies to Fertilizers constitute a substantial portion of the total subsidy bill of the government. In 2011-12, the budget had a target of earning revenues to the tune of INR 400 billion through a reduction in the stake in public sector companies. The Union Budget last year had planned to raise money from selling telecom spectrum as well. However, the plan did not materialize, and instead of INR 400 billion only about INR 140 billion was raised through share sales in government undertakings. The government decided to holdback selling of the shares of cash rich enterprises, as this would have reduced investible resources and failed to convince market participants. The Prime Ministers advisory council reasoned that market participants do not assign much weight to proceeds from one-off asset sales. The Finance Minister stated that with higher than budgeted expenditure outgo, a slippage from the budgeted targets in terms of fiscal outcome became inevitable in 2011-12. As per the data made available by the Controller General of Accounts, revenue deficit and fiscal deficit had reached 93.1% and 92.3% respectively of Budget Estimate (BE) levels by December 2011. In the first nine months, gross tax revenue has grown by 12.2% as against the BE target of 17.6%. Among the major taxes, growth in corporation taxes at 6% as against the 20.5% envisaged in BE 2011-12 and union excise duties at 8% as against the 18.7% envisaged in BE 2011-12 inevitably affected the Government finances. Growth in total expenditure in the first nine months of 2011-12 was 13.9%, which comprised 15.4% growth in Non-Plan expenditure and 10.8% growth in Plan expenditure. The build-up of expenditure over the nine months and less than commensurate growth in revenue have led to high proportions of deficits in the first nine months. Consequently, the Revised Estimates place fiscal and revenue deficit at 5.9% of GDP and 4.4% of GDP, respectively in 2011-12. Budget Aggregates as a % of GDP
% of GDP Tax Revenue Capital Receipts Total Receipts Non-plan Expenditure Plan Expenditure Total Expenditure Revenue Expenditure Capital Expenditure Revenue Deficit Fiscal Deficit Primary Deficit 2009-10 7.00 6.90 15.60 11.00 4.60 15.60 13.90 1.70 5.20 6.40 2.97 2010-11 7.23 5.19 15.20 10.39 4.81 15.20 13.21 1.99 3.30 4.90 1.80 2011-12 (RE) 7.21 6.19 14.80 10.01 4.79 14.80 12.70 1.76 4.40 5.90 2.80 2012-13 (BE) 7.59 5.47 14.67 9.55 5.13 14.67 12.66 2.02 3.40 5.10 1.90

Source: Ministry of Finance, ICICI Bank Year on Year Growth of Budget Aggregates

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YoY Growth (%) Tax Revenue Capital Receipts Total Receipts Non-plan Expenditure Plan Expenditure Total Expenditure Revenue Expenditure Capital Expenditure Revenue Deficit Fiscal Deficit Primary Deficit

2009-10 2010-11 2011-12 (RE) 2012-13 (BE) 3.00 23.97 12.70 20.06 31.40 -9.76 34.94 0.64 10.14 13.06 15.90 13.22 18.50 24.38 9.02 8.72 10.20 49.29 12.55 22.13 10.14 13.06 15.90 16.87 14.90 14.14 8.76 13.62 25.00 38.98 0.11 30.64 56.57 -11.27 33.70 -25.59 24.20 -10.73 39.72 -1.61 41.90 -32.05 76.52 -21.32

Source: Ministry of Finance, ICICI Bank In the Union Budget of 2012-13, the government has assumed that the decline in growth has bottomed out during 2011-12 and the economy is likely to witness relatively higher rate of growth than previous year. Under this assumption, the fiscal policy of 2012-13 has been formulated. The Budget plans to implement fiscal consolidation by reducing fiscal deficit from 5.9% of GDP in Revised Estimate of 2011-12 to 5.1% of GDP in BE 2012-13. The reduction in fiscal deficit by 0.8 percentage point will be driven by increase in revenues. Tax revenue and non-tax revenue is estimated to increase by 0.5% and 0.2% of GDP respectively. The Budget states that, while increase in tax as percentage of GDP is mainly on account of further roll back of stimulus measures in indirect taxes, increase in non-tax revenue is on account of estimated receipts of INR 400 billion from auction of telecommunication spectrum. The estimates in the budget expects revenue deficit to decline from 4.4% of GDP in Revised Estimate 2011-12 to 3.4% of GDP in BE 2012-13. This is at the same level as estimated in BE 2011-12. The Budget states that the revenue deficit as percentage of GDP in 2012-13 may be seen in the context of lower growth in direct tax receipts assumed during 2012-13 due to moderated growth in economy and higher subsidy provision in 2012-13 at 1.9% of GDP against 1.6% of GDP in BE 2011-12. The Budget estimates that the gross tax revenue will increase from 10.1% of GDP in RE 2011-12 to 10.6% in BE 2012-13. The increase is attributed to an increase in additional resource mobilization measures (ARM) in indirect taxes. Barring the impact of ARM, BE 2012-13 is estimated at growth of 15.1% over RE 2011-12. Since the economy is expected to grow at a higher rate in 2012-13 as compared to 2011-12, it would be possible to further improve the tax to GDP ratio. In the medium term targets of the Union Budget, gross tax collection as percentage of GDP is projected at 11.1% in 2013-14 and 11.7% in 2014-15. The government is committed to continue the process of fiscal consolidation during 2013-14 and 2014-15. The budget expects the fiscal deficit to decline to 4.5% of GDP in 2013-14 and 3.9% of GDP in 2014-15. Revenue deficit is estimated to decline to 2.8% of GDP in 2013-14 and 2% in 2014-15. However, since a significant proportion of revenue deficit is because of provisions for grants for creation of capital assets, it would be relevant to look at the effective revenue deficit of the government. The effective revenue deficit will be an indicator of the structural nature of imbalance in the revenue account. The effective revenue deficit is projected to decline from 1.8% of GDP in BE 2012-13 to 1% of GDP in 2013-14. In 2014-15, the Budget statement projects the effective revenue deficit to get eliminated. Total expenditure is projected to decline from 14.7% of GDP in 2012-13 to 14.1% in 2013-14 and 13.6% of GDP in 2014-15. The reduction in total expenditure could be implemented through re-

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prioritization of expenditure towards developmental side and curtailing the growth in nondevelopmental expenditure. The Budget states that plan expenditure is projected to be maintained at 5.1% of GDP in BE 2012-13 and capital expenditure (including grants for creation of capital assets) is projected to increase from 3.6% of GDP in BE 2012-13 to 3.9% of GDP in 2014-15.

External sector
India's export and import growth that gained momentumin 2010-11 and it continued to grow robustly during 2011-12. During 2011-12 (April-December), exports were valued at USD 217.7 billion, registering a growth rate of 25.8% over the level of USD 173 billion in 2010-11 (April-December). Export growth has decelerated in the third quarter of fiscal 2011-12, while imports have remained high, partly because of continued high international oil prices. At the same time, foreign institutional investment flows have declined, straining the capital account and the rupee exchange rate that touched an all-time low of INR 54.23 per USD on December 15, 2011. Value of imports during AprilDecember 2011-12 was USD 350.9 billion, which was 30.4% higher than the level of USD 269.2 billion in the corresponding period of 2010-11. Rising crude oil prices, along with increase in gold and silver prices have contributed significantly to the import bill. Of the total imports, POL imports accounted for USD 105.6 billion (30.1% of total import) in April-December 2011, which was 40.4% higher than the level of USD 75.2 billion in 2010-11 (April-December). Non-POL imports during 2011-12 (AprilDecember) were valued at USD 245.3 billion, which were 26.5% higher than the level of USD 194 billion in 2010-11 (April-December). Consequently, trade deficit for 2011-12 (April-December) increased to USD 133.3 billion, which was 38.5% higher than the level of USD 96.2 billion in 2010-11 (April-December). Gold imports in the country have gone up from USD 40 billion in 2010 to USD 58 billion in 2011, a jump of 45% while the volume has grown marginally from 963 tonne to 969 tonne in 2011. This is on the back of 30-35% increase in gold prices in the last one year. Gold ETFs alone constituted 225 tonne or USD 14 billion of the total gold imports into the country. Custom duty on gold bars and coins has been doubled to 4% in the current budget. Import duties on gold increased from 5% to 10%. It is too early to say whether higher import duty on gold would lower demand and hence improve the trade balance in the next fiscal. The Budget expects average price of crude oil to exceed USD 115/bbl. With oil prices still at elevated levels, there could be further spikes in the event political problems in the Middle East deteriorates and/or the tensions between Iran and the West over Irans nuclear programme escalates further. The Current Account Deficit (CAD) increased to USD 32.8 billion in the first half of 2011-12, as compared to USD 29.6 billion during the corresponding period of 2010-11, mainly on account of higher trade deficit. The levels of capital inflows were sufficient for financing of the current account deficit in the first half of 2011-12. In net terms, capital inflows increased to USD 41.1 billion in the first half of 2011-12 as against USD 39.0 billion in the first half of 2010-11. Net foreign direct investment was higher at USD 12.3 billion in the first half of 2011-12 as against USD 7 billion in the corresponding half of 2010-11. However, net portfolio investment declined substantially from USD 23.8 billion to USD 1.3 billion during the same period on account of a major decline in FII flows to USD 0.9 billion in 201112 from USD 22.3 billion. Other capital flows, including ECBs and banking capital, increased sufficiently to compensate the less than adequate portfolio flows. The RBI, however, would be more comfortable to see a move towards non-debt creating flows to finance the current account deficit. The CAD for FY 2011-12 is estimated to come in at 3.6% of GDP

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The debt crisis in Europe, along with slowdown in the global economy and higher international prices of crude oil and petroleum products would pose downside risks to Indias economic growth. Though the domestic economy is showing signs of improvement in 2012, and growth is assumed to have bottomed out as per the Union Budget, economic growth in 2012-13 could come in lower than estimated. The rupee has appreciated from lows witnessed towards the end of 2011, FII inflows have resumed, lending support to the balance of payments and exchange rate. The global outlook, however, remains uncertain with the situation in the euro zone still remaining grim. The INR would remain subject to bouts of volatility and is expected to trade in the range 48-52 in the near-term.

Agriculture
In the budget session, the Finance Minister announced that the plan outlay for the Department of Agriculture and Co-operation would be increased by 18% in the current fiscal. The outlay, which stood at INR 171.23 billion in the previous year, has been increased to INR 202.08 billion for 2012-13. The outlay for Rashtriya Krishi Vikas Yojana (RKVY) has been increased to INR 92.17 billion in 2012-13. Out of this allocation, INR 3 billion has been kept aside for the implementation of Vidarbha Intensified Irrigation Development Programme, which falls under RKVY. Highlighting the success of Bringing Green Revolution to Eastern India (BGREI) in generating increased productivity of paddy (addition of 7 million tonnes of paddy in the kharif season), the allocation for the scheme has been increased to INR 10 billion in 2012-13 from INR 4 billion allocation seen in the last fiscal. The remaining activities were merged into five schemes under the Twelfth Five Year Plan, namely, National Food Security Mission, National Mission on Sustainable Agriculture including Micro Irrigation, National Mission on Oil Seeds and Oil Palm, National Mission on Agricultural Extension and Technology and National Horticulture Mission. Under the National Mission for Protein Supplement, the finance minister allocated INR 22.42 billion for a joint project with the World Bank aimed at improving productivity of the dairy sector. In addition, INR 5 billion has been allocated to support coastal aquaculture. On the credit front, target for agricultural credit has been raised by INR 1,000 billion to 5,750 billion in 2012-13. Also, interest subvention scheme for providing short-term crop loans at 7% per annum has been extended even in this fiscal. Urgency has been shown to set up an RRB credit refinance fund to provide credit support to small and marginal farmers. To promote greater research in the field of agriculture, a sum of INR 2 billion has been set aside. In order to improve the efficiency of the irrigation system, the finance minister proposed structural changes in Accelerated Irrigation Benefit Programme (AIBP), which would ensure enhanced benefit from investment in irrigation projects. To achieve the objective, the allocation for AIBP in 2012-13 has been stepped up by 13% to INR 142.42 billion.

TAX PROPOSALS Proposed Direct Tax Rates:

For Men Income Up to INR 2,00,000 INR 2,00,001 to INR 5,00,000 INR 5,00,001 to INR 10,00,000 INR 10,00,001 and above Tax rate NIL 10% 20% 30% Savings INR 2,060 INR 2,060 INR 2,060 INR 22,660

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For Women Income Up to INR 2,00,000 INR 2,00,001 to INR 5,00,000 INR 5,00,001 to INR 10,00,000 INR 10,00,001 and above Tax rate NIL 10% 20% 30% Savings INR 1,030 INR 1,030 INR 1,030 INR 21,630

For Senior Citizens of 60 years but less than 80 years Income Up to INR 2,50,000 INR 2,50,001 to INR 5,00,000 INR 5,00,001 to INR 10,00,000 INR 10,00,001 and above Tax rate NIL 10% 20% 30% Savings NIL NIL NIL INR 20,599

Very Senior Citizens of 80 Years and above Income Up to INR 5,00,000 INR 5,00,001 to INR 10,00,000 INR 10,00,001 and above Tax rate NIL 20% 30% Savings NIL NIL INR 20,599

The FM has introduced a tax exemption scheme for stock market investments to draw new retail investors to equities. The scheme, named Rajiv Gandhi Equity Savings Scheme, will allow 50% tax deduction for those whose annual income is below INR 1 million and who invest up to INR 50,000 in stocks subject to a three -year lock in. For instance, an assessee who invests INR 50,000 in equities stands to get income tax deduction on INR 25000, if her annual income is below INR 1 million Proposal to allow individual tax payers, a deduction of up to INR 10,000 for interest from savings bank accounts. Proposal to allow deduction of up to INR 5,000 for preventive health check up. Senior citizens not having income from business proposed to be exempted from payment of advance tax. To provide low cost funds to stressed infrastructure sectors, rate of withholding tax on interest payment on ECBs proposed to be reduced from 20% to 5% for 3 years for certain sectors. Restriction on Venture Capital Funds to invest only in 9 specified sectors proposed to be removed. Proposal to continue to allow repatriation of dividends from foreign subsidiaries of Indian companies at a lower tax rate of 15% up to March 31, 2013. Investment link deduction of capital expenditure for certain businesses proposed to be provided at the enhanced rate of 150 %

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New sectors to be added for the purposes of investment linked deduction. Proposal to extend weighted deduction of 200% for R&D expenditure in an in house facility for a further period of 5 years beyond March 31, 2012. Proposal to provide weighted deduction of 150% on expenditure incurred for agri-extension services. Proposal to extend the sunset date for setting up power sector undertakings by one year for claiming 100% deduction of profits for 10 years. Turnover limit for compulsory tax audit of account and presumptive taxation of SMEs to be raised from INR 6 million to INR 10 million. Exemption from Capital Gains tax on sale of residential property, if sale consideration is used for subscription in equity of a manufacturing SME for purchase of new plant and machinery. Proposal to provide weighted deduction at 150% of expenditure incurred on skill development in manufacturing sector. Reduction in securities transaction tax by 20% on cash delivery transactions from 0.125% to 0.1%. Proposal to extend the levy of Alternate Minimum Tax to all persons, other than companies, claiming profit-linked deductions. Proposal to introduce General Anti Avoidance Rule to counter aggressive tax avoidance scheme. Measures proposed to deter the generation and use of unaccounted money. A net revenue loss of INR 45 billion estimated because of Direct Tax proposals.

INDIRECT TAXES Service Tax

Proposal to tax all services except those in the negative list comprising of 17 heads. Exemption from service tax is proposed for some sectors. To maintain a healthy fiscal situation proposal to raise service tax rate from 10% to 12%, with corresponding changes in rates for individual services. Proposals from service tax expected to yield additional revenue of INR 186.6 billion.

Other proposals for Indirect Taxes

Given the imperative for fiscal correction, standard rate of excise duty to be raised from 10% to 12%, merit rate from 5% to 6% and the lower merit rate from 1% to 2% with few exemptions. Excise duty on large cars also proposed to be enhanced. No change proposed in the peak rate of customs duty of 10% on nonagricultural goods.

TAX REFORMS
The FM proposes the DTC Bill to be enacted at the earliest, after expeditious examination of the report of the Parliamentary Standing Committee. The budget also states that drafting of model legislation for the Centre and State GST in concert with States is under progress. It is proposed that the GST network would be set up as a National Information Utility and would become operational by August 2012.

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BANKING AND FINANCE

Disinvestment Policy: Government has further evolved its approach to divestment of central public sector enterprises by allowing them a level playing field vis--vis the private sector in respect of practices like buy backs and listing at stock exchanges. For FY2012-13, INR 300 billion is to be raised through disinvestment. At least 51% ownership and management control to remain with Government. Capital Market: Various steps proposed are to be taken for deepening the reforms in the capital markets, including simplifying process of IPOs, allowing QFIs to access Indian Bond Market, etc. Capitalization of Banks and Financial Holding Company: To protect the financial health of Public Sector Banks and Financial Institutions, a total of INR 158.88 billion is proposed to be provided for capitalization. There is a possibility of creating a financial holding company to raise resources to meet the capital requirements of PSU Banks under examination. Priority Sector Lending: Revised guidelines on priority sector lending to be issued after stakeholder consultation. Financial Inclusion: Out of 73,000 identified habitations that were to be covered under Swabhimaan campaign by March 2012, about 70,000 habitations have been covered. Rest of the habitations are expected to be covered by March 31, 2012. As a next step, ultra small branches are being set up at these habitations. In FY2012-13, Swabhimaan campaign is expected to be extended to more habitations. Regional Rural Banks: Out of 82 RRBs in India, 81 have successfully migrated to Core Banking Solutions and have also joined the National Electronic Fund Transfer system. Proposal to extend the scheme of capitalization of weak RRBs by another 2 years to enable states to contribute their share. Tax free bonds of INR 600 billion to be allowed for financing infrastructure projects in FY2012-13.

Agriculture Credit
Target for agricultural credit raised by INR 1000 billion to INR 5750 billion in FY2012-13. Interest subvention scheme for providing short-term crop loans to farmers at 7% interest per annum to be continued in FY2012-13. Additional subvention of 3% available for prompt paying farmers. Short-term RRB credit refinance fund being set up to enhance the capacity of RRBs to disburse short term crop loans to small and marginal farmers. Kisan Credit Card (KCC) scheme to be modified to make KCC a smart card, which could be used at ATMs.

Impact on Banking Sector: Creation of a financial holding company and provision for higher capital should act as a positive for the PSU Banks.

Indian Debt market impact

The yield on the 10-year benchmark 8.79% 2021 G Sec rose by 7bps to 8.42% post the budget reacting to fears of increased inflation on the back of increased service tax, excise duty and wide number of taxable services. The view on inflation for the next couple of months may tend to look good but underlying inflation remains strong as the hike in services tax and excise duty would mostly pass on to the consumers. The finance minister has revised the fiscal deficit target to 5.9% for FY

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2011-12 far above the 4.6% it had targeted in its budget in the previous year. This represents a total slippage of INR 1.09 trillion for FY12 over initial estimates. The fiscal deficit for FY 2012-13 is estimated at 5.1% and the government net borrowings is expected to be at INR 4.79 trillion in the FY 2012-13 (gross borrowing at INR 5.69 trillion) i.e. 93% of the fiscal deficit is to be borrowed via dated government bonds as against 83.5% in FY 2012. Despite, the fiscal deficit numbers for FY 2013 being more realistic compared to the last year, market remains circumspect and expect the government to again overshoot the target given higher fuel and power prices. We are expecting upward pressure on bond yield in the first quarter of FY 2012-13 as the large government borrowing is expected to be front-loaded. We are assuming 60-65% of borrowing to be done in the H1 FY 2013 like last year, which would translate into approximately INR 3.5 trillion and each month the supply would be around INR150-160 billion starting April 2012. The Reserve Bank of India (RBI) has emphasized that upside risks to inflation have increased from the recent surge in oil prices, fiscal slippage and rupee depreciation. Therefore, we expect that RBI will not be in a hurry to cut interest rates, as there are still signs of suppressed inflation. The disinvestment target for 2012-13 is at INR 300 billion. We are expecting telecom sector auctions to yield a reasonable amount of revenue for the government. The market would closely watch the RBI policy actions and liquidity conditions for direction. Liquidity conditions is expected to improve in April 2012 with advance tax outflows coming back in the system and the cash reserve ratio (CRR) cut of 125bps would inject around INR 800 billion. The opportunity for QFIs to invest in domestic corporate debt is a positive move and may lead to a deepening of the bond market. The yield on the 10-year benchmark 8.79% 2021 G Sec is expected to remain in the range of 8.3-8.5% in the short run. We maintain our stance and recommend investors with low risk appetite to invest in shorter maturity products like FMPs, Liquid and Ultra Short Term funds for 3-6 months horizon, Short Term Income Funds for 6-12 months horizon. However, investors who could take some volatility may invest in a staggered manner in Income over Gilt for 12-18 months horizon.

Interest on savings accounts

Further, the budget has proposed to exempt upto INR 10,000 interest earned through savings account. The deregulation of savings account rate prompted many banks to hike their interest rates. This budget exemption coupled with that, is likely to make savings deposits more popular as against the money market instruments.

Indian equity markets

Indian markets extended losses to hit one-week lows in late trade after Finance Minister Pranab Mukherjee in Union Budget 2012-13 set only modest targets for trimming a ballooning fiscal deficit and as there was lack of any big-bang reform announcement in the Budget. Intraday volatility remained high. BSE Sensex, was provisionally down 224.61 points or 1.27% off about 420 points from the day's high and up close to 20 points from the day's low. The market breadth, indicating the overall health of the market, was weak. On BSE, 1,761 shares declined and 1,067 shares rose. A total of 128 shares were unchanged.

Positive factors for equities

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DTC Bill to be enacted at the earliest after expeditious examination of the report of the Parliamentary Standing Committee. Drafting of model legislation for the Centre and State GST in concert with States is under progress. GST network is expected to be set up as a National Information Utility and to become operational by August 2012. Rajiv Gandhi Equity Saving Scheme to allow for income tax deduction of 50% to new retail investors, who invest upto INR 50,000 directly in equities and whose annual income is below `1 million to be introduced. The scheme will have a lock-in period of 3 years. Various steps proposed to be taken for deepening the reforms in the Capital markets, including simplifying process of IPOs, allowing QFIs to access Indian Bond Market etc. STT reduced by 20%from 0.125% to 0.1% in cash delivery to boost investment for delivery transactions.

Sectoral Impact Fertilizers Positive

Using a mobile-based Fertilizer Management System the government would route the subsidy payment of fertilizer to farmers through retailers, which will ease working capital problems faced by the industry due to delayed subsidy payments by the government. Exempted custom duty on fertilizer equipment and machineries till FY 2015. To make capital investment in fertilizer sector eligible for Viability Gap Fund, besides reducing the rate of withholding tax on interest payments on ECBs from 20% to 5% for three years. Allowed investment-linked deduction of capital expenditure incurred in fertilizer business to be at the enhanced rate of 150%, as against the current rate of 100%. This move may attract private sector investments by bringing down the capital cost. Steps taken to finalise pricing and investment policies for urea to reduce Indias import dependence in urea. Also the use of single super phosphate (SSP) will be encouraged as it is manufactured entirely in the domestic and will reduce dependency on fertilizer imports. Reduced basic customs duty on some water-soluble fertilizers and liquid fertilizers, other than urea, from 7.5% to 5% and from 5% to 2.5%.

Healthcare Neutral
The budget 2012 turned to be a disappointment for the pharma sector with no major concessions. The industry was expecting incentives on expenditure on Research and Development, which is crucial for its future growth considering the competition in the international market and stringent approval system in highly regulated market. Also the proposed hike in the excise duty to 12% is expected to increase burden on the

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healthcare companies.

Gold Neutral
Imports of gold and other precious metal have grown almost 50% in the first three quarters of 2011. According to Bombay Bullion Association, India imported a record 969 tonnes of gold in 2011. Gold accounted for 12.2% of Indias imports between April 2011 and September 2011, as compared with 9.9% in 2010. Custom duty on gold bars and coins has been doubled to 4%. The rise in import duties on precious metals is expected to slow the demand for gold imports, which in turn is expected to control the current account deficit as gold imports have been one of the primary drivers of the current account deficit in 2011. In the long run, rise in import duty is not likely to have much impact on the demand. Higher prices would be passed on to customers. As a part of rationalization measure, levy of excise duty of 1% on branded precious metal jewellery to be extended to include unbranded jewellery. This has been done to simplify operations to minimize the impact on small artisans and goldsmiths. However, branded silver jewellery has been exempted from excise duty. This measure is likely to increase the demand for silver relative to gold.

Other Metals and mining

Basic customs duty on coal mining project imports has been fully exempted. Full exemption from basic customs duty and a concessional CVD of 1% to steam coal till March 31, 2014 has been given. Basic customs duty on non alloy flat rolled steel was increased from 5% to 7.5%. For the steel sector, basic customs duty on coating material for manufacture of electrical steel was reduced from 7.5% to 5%. Basic customs duty on nickel ore and concentrate and nickel oxide/ hydroxide was increased to be reduced from 2.5% or 7.5% to zero. Export duty on chromium ore from INR 3000 per tonne to 30% ad valorem. Metals and mining industry is likely to gain on duty cuts and selective relief to metals sectors. The sectors, which will be positively impacted, include steel, textiles, branded readymade garments, low-cost medical devices, labour intensive sectors producing items of mass consumption and matches produced by semi-mechanised units. No major impact on the oil sector, as deregulation of diesel and LPG was not announced. However, global oil prices are likely to remain elevated and lead to rise in inflation and high fiscal deficit.

Automobiles Neutral
Excise duty hiked: Standard excise duty hiked to 12% from 10% and hike in excise duty on large cars from 22% to 24% in Budget 2012. Increase in excise duty will affect volumes, which eventually will put additional burden on customer. No announcement of extra tax for diesel vehicles however came as a big relief to the auto sector. Stocks to be benefited from this will be the larger players in diesel vehicles segment. Minimum tax limit raise: The FM announced a relief for common man by increasing the minimum tax limit by INR 20,000. The higher disposable income at the lower end of the spectrum will improve demand for the sector, particularly for 2 wheelers. Finance Minister announced INR 1,000 billion increase in the agriculture credit target to INR 5,750 billion for the next fiscal and raised the outlay for farm sector by about INR 30 billion. This will further increase the tractor and two wheeler sales, as rural India is bigger market for these auto segments.

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Telecom Neutral
Service tax increased from 10 -12%. This will be passed on to customers. On average ARPU of INR 100, it would imply a INR 2 incremental outgo per month This will have minimal impact. The Government expects to rise about INR 400bn from the sale of airwaves in 2012-13. The fixed network for telecom and telecom towers have been included to the list of sectors eligible for Viability Gap Funding.

Aviation Positive

ECB to be permitted for working capital requirement of airline industry for a period of one year, subject to a total ceiling of USD 1 billion. Proposal to allow foreign airlines to participate upto 49% in the equity of an air transport undertaking under active consideration of the government. Direct import of Aviation Turbine Fuel permitted for Indian Carriers as actual users. Tax concessions proposed for parts of aircraft and testing equipment for third-party maintenance, repair and overhaul of civilian aircraft.

Textile - Positive
Automated shuttle looms exempted from customs duty. Excise duty on readymade garments further reduced. Government has announced a financial package of INR 38.84 billion for waiver of loans of handloom weavers and their cooperative societies. Two more mega handloom clusters, one to cover Prakasam and Guntur districts in Andhra Pradesh and another for Godda and neighboring districts in Jharkhand to be set up. Three Weavers Service Centres one each in Mizoram, Nagaland and Jharkhand to be set up for providing technical support to poor handloom weavers. INR 5 billion pilot scheme announced for promotion and application of Geo-textiles in the North Eastern Region. A power loom mega cluster to be set up in Ichalkaranji in Maharashtra with a budget allocation of INR 0.7 billion.

Information Technology - Positive

Increase in UID spend by 13% to INR 142.32 billion. Increase in budgeted educational spend to INR 614.27 billion from INR 435.14 billion. Establishing 6,000 schools under the 12th Five Year plan - 2,500 of them through PPPs. Establishment of Credit Guarantee Fund for skill development.

Media
Film industry gets service tax exemption on copyrights related to recording of cinematographic films, which is positive for film producers. Full exemption from basic customs duty has been proposed on waste paper. Print companies using indigenous newsprint (higher proportion of waste paper) would benefit.

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The increasing share of fuel subsidy on account of rising oil prices is putting pressure on the already high fiscal deficit
100% 80% 60% 40% 20% 0% 2011-12 RE 2012-13 BE 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2010-11 2009-10
Food Subsidy Fuel Subsidy Fertilizer Subsidy

India's current account deficit has been a matter of concern in the recent years
20000 10000 0 -10000 -20000 -30000 -40000 -50000 2010-11(P) 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Current account deficit (USD million)

Source: Ministry of Finance, ICICI Bank

Source: RBI, ICICI Bank

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Budget At A Glance
Rs Cr GDP Indirect Taxes Excise Customs Service Direct Taxes Corporation tax Income tax Total Tax Revenue A, Net Tax Revenue B. Non-Tax Revenue Interest Receipts Dividend and Profits External Grants Other Non-Tax Revenue Receipts of Union Territories I Revenue Receipts(for centre) (A+B) A.Non- Debt Capital Receipts 1.Recovery of loans 2,Miscellaneous Capital receipts B. Debt Receipts 3. Market Loans 4. Short term borrowings 5. External assistance (Net) 6. Securities issued against Small Savings 7. State Provident Funds (Net) 8. Other Receipts (Net) II Capital Receipts (A+B) Total Receipts (I+II+III) Financing of Fiscal Deficit (Debt receipts +III) Total Expenditure 1.Non-Plan Expenditure (A+B) A.Revenue Expenditure 1. Interest Payments and Prepayment Premium 2. Defence Services 3. Subsidies B.Capital Expenditure 1. Defence Services 2. Other Non-plan Capital Outlay 3. Loans to Public Enterprises 2.Plan Expenditure (A+B) A.Revenue Expenditure 1. Central Plan 2. Central Assistance for State & UT plans B. Capital Expenditure 1. Central Plan 2. Central Assistance for State & UT plans Total Budget Support 1. Central Plan 2. Central Assistance for State & UT plans DEBT SERVICING 1. Repayment of debt** 2. Total Interest Payments 3. Total debt servicing (1+2) 4. Revenue Receipts 5. Percentage of 2 to 4 Sources of Financing the deficit Net Market Borrowings Short-term borrowings Gross Dated Securities Fiscal Defict (% of GDP) Revenue Deficit (% of GDP) Primary deficit (% of GDP) 2010-11 Actu 2011-12 BE 2011-12 RE 2012-13 BE 7624306 8974283 8847119 10070392 345128 397816 398696 505044 138299 164116 150696 194350 135813 151700 153000 186694 71016 82000 95000 124000 447944 534624 502968 572567 298688 359990 327680 373227 146587 172026 171879 195786 793072 932440 901664 1077611 569869 664457 642252 771070 218603 125435 124738 164614 19734 19578 20125 19231 47992 42624 50122 50153 2673 2173 3477 2887 147107 59891 49909 91207 1097 1169 1105 1136 788472 789892 766990 935684 35266 55020 29751 41650 12420 15020 14258 11650 22846 40000 15493 30000 367161 392816 546645 513591 325414 343000 436414 479000 7759 15000 116084 9000 23556 14500 10311 10148 11233 24182 -10302 1198 12514 10000 10000 12000 -13315 -13866 -15862 2245 402427 447836 576396 555241 1197329 1257728 1318722 1490925 373591 412816 521981 513591 1197328 1257729 1318722 1490924 818299 816182 892117 969899 726491 733558 815741 865595 234022 267986 275618 319759 92061 173420 91808 62056 23618 5834 379029 314232 232454 81778 64797 53496 11301 379029 285950 93079 147793 234022 381815 788471 29.7% 373591 325414 7759 373591 4.9% 3.3% 1.8% 95216 143570 82624 69199 13212 496 441547 363604 268287 95317 77943 67234 10709 441547 335521 106026 104927 267986 372913 789892 33.9% 412816 343000 15000 412816 4.6% 3.4% 1.6% 104793 216297 76376 66144 9617 593 426605 346201 252597 93604 80404 68809 11595 426605 321406 105199 123929 275618 399547 766989 35.9% 521981 436414 116084 521981 5.9% 4.5% 2.8% 113829 190015 104304 79579 23971 465 521025 420513 303528 116985 100512 87499 13013 521025 391027 129998 124302 319759 444061 935685 34.2% 513591 479000 9000 513591 5.1% 3.5% 1.9%

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Source: Ministry of Finance, ICICI Bank

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This material is intended for distribution to clients of following countries: Africa GCC Asia Europe Others : : : : : Ghana, Mozambique, Tanzania, Zambia, South Africa, Nigeria, Kenya, Uganda Bahrain, Kuwait, Oman, Qatar, UAE (including DIFC clients), Indonesia, India Sweden, Switzerland, United Kingdom, Spain Bahamas, Canada, BVI

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DISCLOSURE FOR BAHRAIN RESIDENTS ICICI Bank Limited's Bahrain Branch is licensed and regulated as an overseas conventional retail bank by the Central Bank of Bahrain (CBB), located at Manama Centre, Manama, P.O. Box-1494, Bahrain. We are guided by the extant guidelines issued by CBB from time to time. The document is for the benefit of intended recipients only and is not being issued/passed on to, or being made available to the public generally. No public offer of investment product is being made in the Kingdom of Bahrain. This offer is on a private placement basis and is not subject to or approved in terms of the regulations of the CBB that apply to public offerings of securities, and the extensive disclosure requirements and other protections that these regulations contain. This product offering is therefore intended only for Accredited Investors as per CBB rule book. 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DISCLOURE FOR QATARI RESIDENTS For the avoidance of doubt, whilst we provide support advisory services to our Clients who are resident in Qatar, as we do not carry out business in Qatar as a bank, investment company or otherwise we do not have a licence to operate as a banking or financial institution or otherwise in the State of Qatar. DISCLOSURE FOR RESIDENTS IN THE UNITED ARAB EMIRATES (UAE): This document is for personal use only and shall in no way be construed as a general offer for the sale of Products to the public in the UAE, or as an attempt to conduct business, as a financial institution or otherwise, in the UAE. 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