ECONOMIC SURVEY 2011-12

The Government of India today released the Economic Survey for 2011-12, giving a backdrop of macro-economic challenges and trends for India along with an outlook on growth for the next two years. Although the past year has registered some weakness in the economy, the tone of the Survey sets a rather positive view for the coming years, with economic activity having bottomed out and a gradual upswing being imminent. Challenges in FY12 On the domestic front managing growth and price stability has been a prime concern in policy formulation. While agriculture and services sector have provided support to overall growth, weakening industrial activity (against monetary tightening causing borrowing costs to rise and investments to fall) has pulled down economic performance. Simultaneously, the global economic environment has been tenuous through the year, particularly turning adverse post-September 2011, against the Euro-zone crisis, downgrades of sovereign credit rating of euro-zone and other advanced countries (including the US), followed by political unrests, currency wars and the more recent oil crisis. Macro-economic Performance The performance of the Indian economy, on the domestic front and external sector is captured in the trends shown in the following table

Picture in FY12
GDP Growth estimated at 6.9% Growth in Agricultural sector estimated at 2.5%, growth in services robust at 9.4% Growth in industrial activity at 4.5% a concern, with contribution of this sector to GDP slipping to 25% (as shown in table 1), a direct fall-out of lower rate of gross fixed capital formation (GFCF). GFCF a proxy for investments was earlier estimated at 31.9% of GDP in FY12 by MOSPI, when compared with 32.5% in FY11 The rate of both savings and investments has slowed in FY11. It may be expected that these numbers continue to be low in FY12 as well, on account of monetary tightening pursued during the year to control inflationary pressures

Table 1: Domestic Macro-economic Indicators (%) FY08 Growth Rates GDP Agri. & allied Industry* Services Share in GDP Agri. & allied Industry* Services Other Indicators Inflation Savings Investment Government Finances Internal Debt/GDP External Debt/GDP GFD/GSDP Source: Economic Survey 2011-12 *Industry includes construction #April-January FY12 9.3 5.5 10.3 39.9 19.3 26.3 54.5 4.8 36.8 38.1 36.3 4.2 2.5 FY09 6.7 0.4 4.7 10.0 18.1 25.8 56.1 8.0 32.0 34.3 36.3 4.7 6.0 FY10 8.4 1.7 8.6 10.5 17.0 25.8 57.2 3.6 33.8 36.6 35.7 3.8 6.3 FY11 8.4 6.8 7.4 9.3 16.8 25.6 57.7 9.6 32.3 35.1 34.7 3.5 4.8 FY12 (E) 6.9 2.5 4.5 9.4 16.0 25.0 59.0 9.1# n.a. n.a. n.a. n.a. 4.6

Fiscal management is crucial, the fiscal slippage in FY12 has halted fiscal consolidation, with central spending on social services pegged at 18.5% this fiscal Table 2: External Sector FY09 FY10 Trade 29.0 13.6 -3.5 35.5 20.7 -5.0 -1.3 -2.3 -2.8 Foreign Investment Flows (US $ bn) 15.9 19.8 18.0 27.4 -14.0 32.4 Reserves (US $ bn) 309.7 252.0 279.1 FY08 FY11 40.5 28.2 -2.7 9.4 30.3 304.8 FY12 (E) 23.5* 29.4* -3.6# n.a. n.a. 292.8//

Exports growth (%) Imports growth (%) CAD (% of GDP) FDI Portfolio Invt. (FII) Forex Reserves *April-January FY12,

#April-September FY12, //As at end of January 2012

Between April and January FY12, exports have grown by 23.5% and imports by 29.4% In H1 FY12 the current account deficit stood at 3.6% of GDP Foreign investment flows, particularly FDI have slowed down in FY11 over FY10, the same have been volatile in FY12 amidst uncertain global conditions

Forex reserves moderated below the $300 bn mark, with the RBI intervening in the forex market this year to curtail the appreciation of the rupee against the dollar

Going Ahead? ...

Outlook for real GDP growth promising at 7.6% in FY13 and 8.6% in FY14 Recent decline in inflation is expected prompt ease in interest rates, which is likely to spur investments Suggested Policy Measures In the backdrop of the current domestic and global environment, uncertainty continues to prevail thereby, rendering economic slowdown inevitable in India as in other countries across the globe. The Survey thus identifies a need for innovative policy strategies on the fiscal and monetary side. Some important suggestions have been enlisted below Progressive deregulation of interest rates on savings accounts to help mobilise financial savings and improve monetary policy transmission Deepening of financial markets, especially corporate bond market (for instance the introduction of credit default swaps and increasing limits for FIIs in the corporate bond market) Attracting foreign long-term investment flows, particularly dedicated infrastructure funds. The process for institutionalising infrastructure debt funds has already begun through both mutual funds and NBFCs Whats New? The Economic Survey this year has announced a methodology to rank sovereigns across the world, through the launch of a new index, the Comparative Rating Index for Sovereigns (CRIS). Each nations CRIS is calculated based on Moodys foreign currency credit rating and IMF GDP statistics with no purchasing power parity correction.

This new index suggests that countries with low per capita incomes tend to show greater improvement over the years, emphasising the potential of the country. Paraguay, Indonesia, Philippines, Brazil and Turkey are the top five countries, with the US having the 13th rank. 27 economies (largely in the Euro-zone) have recorded negative growths in this index. India remains one of the fastest growing economies of the world, with the sovereign credit rating registering substantial increase of 2.98% for the period 2007-12 The index and performance, there-from for select countries has been shown in table 3 below Table 3: Sovereign Ratings The CRIS 2007 Paraguay Brazil India China US UK Japan Portugal Greece Ireland Spain 14.4 22.7 23.8 28.7 32.1 32.1 32.1 30.5 29.0 32.1 32.1 2012 19.6 26.0 24.5 30.8 32.8 32.8 30.5 20.5 7.4 23.0 27.3 % change 36.2 14.4 2.9 7.2 2.1 2.1 -5.1 -32.8 -74.5 -28.4 -14.9

Conclusion The Survey states that sustainable development would be vital for the Indian economy, with the country actively and constructively partaking in global negotiations. The role of India has expanded in the world economy along with other major emerging market economies.

UNION BUDGET 2012-13

Highlights Macro-Economy
The Budget, first and foremost, notes that FY12 has been a year of economic recovery interrupted whilst further outlining a rather firm macro-economic environment in the forthcoming fiscal year. A real GDP growth of 7.6% (+/-0.25%) has been estimated for FY13, with nominal GDP expected to grow at 13.8%. This translates to inflation being in the range of 6%-6.5%. Inflationary pressures, structural bottlenecks, mobilisation of private investments and resilience to external shocks would impact growth prospects in FY13.

Financial

Gross tax receipts are estimated at `10,77,612 crore for FY13, which marks an increase of
15.6% over the Budget Estimates for FY12 (and 19.5% over FY12 (RE))

Non-tax revenue is estimated at `1,64,614 crore for FY13 The total expenditure proposed for FY13 amounts to `14,90,925 crore, registering an increase
of 18.5% over FY11 (BE) o Plan expenditure at `5,21,025crore, marks an increase of 18.0% o Non-plan expenditure at `9,69,900crore, marks an increase of 18.8%

Revenue deficit for FY12 has been revised to 4.4% and is budgeted to decline to 3.4% in FY13 Fiscal deficit has been revised upwards to 5.9% (from 4.6% as per Budget Estimates of FY12)
and is budgeted to decline to 5.1% in FY13

The net borrowings of the government through dated securities for FY12 would stand at
`4,79,000 crore in FY13 while gross borrowings would be `569,616 crore

Disinvestments for the year have been placed at `30,000 crore

Overview
Table 1: Summary of accounts (` crore) FY09 Revenue Receipts Tax revenue(net to centre) Non tax revenue Capital Receipts Recoveries of loans Other receipts Borrowing and other liabilities Total Receipts Non plan Expenditure On revenue account of which, Interest payments On capital account Plan Expenditure On revenue account On capital account Total Expenditure Revenue expenditure Capital expenditure Revenue Deficit Fiscal Deficit Primary Deficit Key Tax Proposals 5,40,259 4,43,319 96,940 3,43,697 6,139 566 3,36,992 8,83,956 6,08,721 5,59,024 1,92,204 49,697 2,75,235 2,34,774 40,461 8,83,956 7,93,798 90,158 2,53,539 3,36,992 1,44,788 FY10 5,72,811 4,56,536 1,16,275 4,51,676 8,613 24,581 4,18,482 10,24,487 7,21,096 6,57,925 2,13,093 63,171 3,03,391 2,53,884 49,507 10,24,487 9,11,809 1,12,678 3,38,998 4,18,482 2,05,389 FY11 7,88,471 5,69,869 2,18,602 4,08,857 12,420 22,846 3,73,591 11,97,328 8,18,299 7,26,491 2,34,022 91,808 3,79,029 3,14,232 64,797 11,97,328 10,40,723 1,56,605 2,52,252 3,73,591 1,39,569 FY12(RE) 7,66,989 6,42,252 1,24,737 5,51,730 14,258 15,493 5,21,980 13,18,720 8,92,116 8,15,740 2,75,618 76,376 4,26,604 3,46,201 80,404 13,18,720 11,61,940 1,56,780 3,94,951 5,21,980 2,46,362 FY13(BE) 9,35,685 7,71,071 1,64,614 5,55,241 11,650 30,000 5,13,590 14,90,925 9,69,900 8,65,596 3,19,759 1,04,304 5,21,025 4,20,513 1,00,512 14,90,925 12,86,109 2,04,816 3,50,424 5,13,590 1,93,831

Benefit to individual tax payer Personal Income tax exemption limit raised to `2,00,000/- from `1,80,000/-, resulting in tax relief of `2,000/Deduction of up to `10,000/- for interest from savings banks account. The 20% tax slab to be raised from `8 lakh to `10 lakh.

Boost to government resource base Central Excise and Service Tax being harmonized o o Standard rate of excise duty raised from 10% to 12% Service tax levy on all goods except those on the negative list comprising 17 heads (by and large all service provided by the Government or local authorities); rate increased from 10% to 12%

Incentive to corporates in raising finances abroad Rate of withholding tax on interest payments on ECBs reduced from 20% to 5% for 3 years for certain sectors viz infrastructure sectors

Deepening financial markets Reduction in Securities Transaction Tax (STT) by 20% from 0.125% to 0.1% on cash delivery transactions Tax Reform The GST network to be set up as a National Information utility that would be operational by August 2012 Policy Reforms Permit the airline industry to raise working capital through External Commercial Borrowing (ECB) up to US$1 bn. To allow qualified foreign investors in THE Indian corporate debt markets. ECB to part finance rupee debt in THE existing power projects. Implementation of Advance Pricing Agreement in Finance Bill, 2012

Sector Spending `25,360 crore has been allocated towards road transport and highways. A provision of `1,93,407 crore has been made for defence sector in the Budget 2012-13. Healthcare spending to be increased from `24,000 crore to `26,760 crore. The allocation for defence under capital expenditure has been estimated at `.79,590. To strengthen the financial health of Public Sector Banks (PSBs) and financial intuitions `15,888 crore have been allocated for capitalization

Revenue The tax proposals announced this year have the objective of boosting the resource base of the government. A comparative picture of the tax proposals of THE last year and this year are given below in Table 2 Table 2: Tax Measures Tax Measures Direct Taxes Exemption limit for general category Corporate taxes `1,80,000 18.5% of book profits (MAT rate) Investment in long-term infrastructure bonds Deduction on interest from savings bank accounts `10,000 ` 20,000 deduction retained `2,00,000 retained 2011-12 2012-2013

Net revenue loss(direct taxes)

Indirect Taxes Central Excise Duty Service Tax Peak Customs Duty on non-agricultural goods

` 11,500 crore for year

` 4,500 crore for year

10% standard rate 10% 10%

12% standard rate 12% retained

Net revenue gain (indirect taxes) Overall Net revenue gain (loss) Gross Tax Revenue
Impact

`7,300 crore (`200 crore) `9,32,440 crore

`45,940 crore `41,440 crore `10,77,612 crore

1. Although, the government has raised its sources of revenue/ revenue stream, its expenditure still remains high, so any slippages in its revenue collection and disinvestment targets would

have an adverse impact on its fiscal situation making the fiscal deficit target of 5.1% difficult to achieve. The Budget 2012-13, has envisaged considerable improvement in revenue receipts buoyancy, which is expected to move from the negative zone (-0.2 times) in FY12 to 1.6 times in FY13. In particular if the GDP growth target of 7.6% is not attained, revenue collections will be impacted. 2. Inflation is likely to be pressurized with the increases in excise duty and service tax (as a part of the alignment process towards the GST) and the likely rationalization of fuel and fertilizer subsidy. Moreover, the recent increment in railway freight charges could increase costs by 1-3%, which too would translate into higher prices. 3. Given the risk associated with oil prices, in the scenario of rising prices, the under- recoveries of oil marketing companies would see a commensurate increase wherein the budget envisaged fuel subsidy of `43,580 crore would be inadequate and if oil companies increase prices as a result it would translate into inflationary pressures. 4. With no substantial reforms being announced in the budget the expected policy boost to economic growth has not been forthcoming. A close watch has to be maintained on the various bills proposed to be moved in the budget session of parliament. Expenditure Measures Total plan expenditure allocation has increased by 22.1% over FY12 (RE), with non-plan expenditure showing an increase of 8.7%. Table 3: Expenditure (` crore) Expenditure Non Plan expenditure Revenue non- plan expenditure Interest payments Subsidies Pensions Social services FY11 8,18,299 7,26,491 2,34,022 1,73,420 57,405 35,014 FY12 (RE) 8,92,116 8,15,740 2,75,618 2,16,297 56,190 19,709 FY13 (BE) 9,69,900 8,65,596 3,19,759 1,90,015 63,183 20,784

Expenditure Economic services Capital non plan expenditure Plan expenditure Revenue plan expenditure Capital plan expenditure Total expenditure Subsidies

FY11 28,051 91,808 3,79,029 3,14,232 64,797 11,97,328

FY12 (RE) 23,702 76,376 4,26,604 3,46,201 80,404 13,18,720

FY13 (BE) 24,105 1,04,304 5,21,025 4,20,513 1,00,512 14,90,925

Food, fertilizer and petroleum are the main components of the subsidies given by the
Government.

With subsidy rationalization as the road map, the Union Budget targets to reduce fertilizer
subsidy by 9.3% (to ` 60,974 crore) and petroleum subsidy by 36.4% (to `43,580 crore).

Food security would be fully covered by the Government.

Endeavour to keep subsides under 2% of GDP in FY13. Further bringing it down to 1.75%
in FY15 Agriculture

Plan outlay for Department of Agriculture and Co-operation increased by 18%. Target for agricultural credit raised by `1,00,000 crore to `5,75,000 crore in FY13. `200 crore set aside for incentivizing research with rewards
Food grains storage capacity is to be increased by 2 mn tonnes.

Continuation of lower farm interest rate (at 7%) and interest rate subvention of 3% for
prompt paying farmer.

Interest subvention on post harvest loans up to six months against negotiable warehouse
receipt. This will encourage the farmers to keep their produce in warehouses.

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Infrastructure

During 12th plan period, investment in infrastructure to go up to `50 lakh crore, half of
which is expected from private sector.

Telecom towers and irrigation projects to get viability gap funding. Setting up of the infrastructure debt fund. Tax free bonds of `60,000 crore to be allowed for financing infrastructure projects in FY13
Other Announcements

Proposal to lay a White Paper on Black Money Interest subvention scheme for providing short term crop loans to the farmers at 7% p.a.
Additional subvention of 3% available for prompt paying farmers.

NREGA assistance is revised from `35,840 crore in FY11 to `31,000 crore in FY12 (RE).
The same is expected to increase to `33,000 crore in FY13 (BE)

Non-plan capital expenditure dominated by defence expenditure in FY13 which accounts

for 76% of total Impact 1. Higher direct flow of credit to agriculture will help to improve the production and logistics for various crops. 2. The interest rate subvention for the farmers will help to accelerate repayment. The governments interest subsidy outgo is projected to increase by 37.5% in FY13 to `7,968 crore. The interest subsidy for providing short-term credit to the farmers has been set at `6,000 for FY13, up 50% from the revised estimate of `4,000 crore in FY12. 3. The slew of initiatives and outlays for the agri -sector would aid in increasing productivity and overall growth of the sector. 4. During 12th plan period, investment in infrastructure is estimated to increase to `50 lakh crore, indicating emphasis on infrastructure and industrial development thereby relieving structural bottlenecks. The allocation of tax-free bonds for financing infrastructure projects in 2012-13 would improve funding for the sector.

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Deficit Position Table 4: Deficit Position (as a % of GDP) FY11 (A) Fiscal Deficit Revenue Deficit Effective Revenue Deficit Disinvestment (` crore) 4.90 3.30 2.10 22,846 FY12 (RE) 5.90 4.40 2.90 15,493 FY13(BE) 5.10 3.40 1.80 30,000

Fiscal balance has been adversely impacted in FY12 on account of lower than estimated direct tax revenue collection (as profitability of corporate entities, impacted by high interest rates, shrunk) and increased subsidy burden (on food bill on account of high inflation and on fuel and fertilizer on account of rising global oil prices).Fiscal deficit is estimated to be `5,13,590 crore in 2012-13. It was `5,21,980 crore(RE) in 2011-12 and `3,73,591 crore in 2010-11(A). The budgeted fiscal deficit of 5.1% in FY13 is marginally higher than that of FY11 (at 4.9%) when revenue receipts were backed by one-time windfall income through the auctioning of telecom spectrum. Simultaneously, however, this estimate is lower than the 5.9% of FY12. The re-auction of telecom spectrum, is expected to yield only `40,000 crore of receipts in FY13 (as against nearly `100,000 crore in FY11). A slippage on account of this source would impact the deficit position of the State. Prima facie, it appears that indirect tax revenues would perhaps be the major support factor for curbing the deficit gap in FY13. Effective Revenue Deficit is defined as the difference between revenue deficit and grants for creation of capital assets. This bifurcation helps in reducing the consumptive component of revenue deficit thereby creating space for increased capital spending. The revenue deficit stood at 4.4% in FY12 and is budgeted at 3.4%, with the effective revenue deficit budgeted at a much lower 1.8%. Performance on the disinvestments front has been rather subdued in FY12, where the State is expected to mobilise `15,493 crore of funds (as against a budget estimate of `40,000 crore in FY12). The budget estimate for the same in FY13 stands at `30,000 crore, perhaps a more achievable amount (closer to the FY11 sum).

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Implications 1. Given the fiscal slippage in FY12 (fiscal deficit at 5.9% under revised estimates as against 4.6% of budget estimates of FY12) the path of fiscal consolidation has been adversely affected. However, Budget 2012-13 makes the much required attempt to balance a growth oriented strategy whilst reverting to fiscal prudence. 2. The amount of resources actually mobilised through equity disinvestment in public sector enterprises during the course of the year would be critical for the government to meet the above-mentioned deficit targets, especially if liquidity conditions continue to remain tight. 3. The enthusiasm of telecom players in the second round of auctions of telecom spectrum in the upcoming fiscal would be a crucial determinant of the fiscal gap that materialises at the end of the year. Fiscal Consolidation Table 5: Borrowing Position (` crore) FY09 FY10 Actuals Internal Borrowings Net Borrowings Gross Borrowings Repayments Net Borrowings Gross Borrowings Repayments 2,33,630 2,73,000 39,370 11,015 21,022 10,007 3,98,424 4,51,000 52,576 11,038 22,177 11,139 3,25,414 4,37,000 1,11,586 23,556 35,330 11,774 4,36,414 5,10,000 73,586 10,311 24,177 13,866 4,79,000 5,69,616 90,616 10,148 26,048 15,900 FY11 FY12 RE FY13 BE

External Borrowings

The long-term gross internal market borrowing programme of the Government is envisaged at `5,69,616 crore for FY13, 11.7% increase over the last year. Gross external market borrowings have been estimated to grow by 7.7% to `26,048 crore in FY13. Public debt for FY13 is expected to increase by 12% to `50,25,072 crore, of which internal debt stock contributes 96% at `48,46,973 crore. Proportion of the external debt has been declining over the years and stood at 3.5% in FY13 (BE). In order to maintain a healthy mix of internal and

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external debt the Government intends to explore other sources of external debt in the form of sovereign bonds. In FY12, the Government revised its borrowings upwards to `5,10,000 crore on account of the shortfall in receipts. This brought about a sharp increase in the liquidity deficit leading to bank borrowings of over `1,00,000 crore from the RBI through the LAF. The hardening of interest rates alongwith the enhancement of the government borrowings in FY12 took a toll on the government securities. The Government is committed to prudent debt management in order to sustain public debt within comfortable limits so that it does not crowd out private investment. Budget 2012-13 targets debt stock to be 45.5% of the GDP, well ahead of the Thirteenth Finance Commission (TFC) targets of 50.5% of GDP. Interest Payments Burden Table 6: Trends in Interest payments of the Government FY09 Actuals Interest Payments (` crore) Growth (%) Interest/Revenue Receipts (%) 1,92,204 12.4 35.6 FY10 RE 219500 14.2 37.2 FY11 BE 2,34,022 6.6 29.7 2,75,618 17.8 35.9 3,19,759 16.0 34.2 FY12 FY13

The Governments interest payment burden increased by 17.8% to `2,75,618 crore in FY12 (RE). However, Budget 2012-13 estimates a slight slowdown in this growth rate to 16.0%, with interest payments burden amounting to `3,19,759 crore. Implications 1. The implicit rate of interest on the government debt is expected to increase marginally from 6.6% in FY12 to 6.7% in FY13. Furthermore, the governments market borrowings are to grow by `60,000 crore. This could add to the already prevailing liquidity pressures in the system as well as interest rates.

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RAILWAY BUDGET: FY13

The Railway Budget for 2012-13, while emphasizing on its priority to increase rail safety and security, also seeks to raise investment in modernization and up gradation of rail infrastructure. The rail Budget has also proposed the first hike in passenger fares in nine years and a plan outlay of `60,100 crs for the railways, the highest ever outlay by far. The Railway Minister has envisaged 5 focus areas for the coming year safety, consolidation, decongestion & capacity augmentation, modernization and improvements in operating ratios. The measures to improve the operational efficiency of the rail system would help reduce transport time of the various commodities that are transported though the rail system. Highlights: Increase in passenger fares across classes 50% concession in fare in AC-2, AC-3, Chair Car & Sleeper classes to patients suffering from Aplastic Anaemia and Sickle Cell Anaemia Highest ever plan outlay of `60,100 crore that would be financed through Gross budgetary support `24,000 crore Railway safety fund `2,000 crore Internal resources `18,050 crore Extra budgetary resources `16,050 crore, which includes market borrowing of `15,000 crore and PPP of `1,050 crore Addition of 725 new lines. `6,872 crore allocated for the same Proposal to electrify 1,100 km rail network. `828 crore provided for the same

Financial Performance FY12 Loading target reduced by 23MT to 970MT Gross traffic receipts revised to `1,03,917 crs from `1,06,239 crs (Budget Estimate FY12) Working expenses revised to `75,650 crs from `73650 crs (BE) Pension payments up by `1,000 crore

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Current dividend liability of `6,735 crore to be fully discharged. Excess of receipts over expenditure of `1,492 crore as against the budget amount of `5,258 crore

Operating ratio at 95%

Budget Estimates FY13 Freight load of 1,025MT Passenger growth pegged at 5.4% Gross receipts `1,32,552 crore Ordinary Working Expenses `84,400 crore. Dividend payment estimated at `6,676 crore Operating ratio estimated at 84.9% Surplus expected to be `15,557 cr.

Budget Implications 1. The expected decline in operating ratio in FY13 will need to be monitored as the drop expected is quite sharp compared to the increase witnessed in FY12 (revised) over FY12 (budget). Share of goods earnings could come down in case there is substitution to road transport. 2. With highest ever allocation of `60,100 crore, the budget looks positive on moving towards building a strong infrastructure. The budget provides significant opportunities for private investment through public-private partnership resources. In particular on account of the focus being put on modernization, electrification, increasing the lines, use of solar energy etc, there will be a positive boost for related industries such as cement, steel, containers, carriages, electrical equipment, cables, solar equipment etc. 3. The increase in freight rates across the board will have an impact on prices and will affect goods that use railways as a mode of transport. A guesstimate is that for industry as whole the average increase of over 20% in freight rates (will vary depending on the class as well as distance) cost of production could increase by between 1-3% which will exert pressure on

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prices of final products. Even in case of farm products where railway transport is used, the cost would tend to move up. 4. Increase in passenger fares would result in additional revenue of `4,000 crore. This will partly help to offset the rising costs over the years. 5. Market borrowing of `15,000 crore during the year, should be added to that of the central government when the Union Budget is announced on the 16th March when arriving at the aggregate borrowing for the year. 6. The budget also estimates that surplus will increase sharply to `15,557 cr from `1,492 cr in FY12. This will depend critically on the higher growth in freight and passenger fares, and any slippage will impact this surplus.

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AIRLINES
Industry Snapshot

POSITIVE

India is the ninth-largest and one of the fastest growing aviation markets in the world. During 2011, domestic passenger numbers increased to 60.66 million passengers, a growth of 16.6% y-o-y, primarily driven by Low Cost Carriers (LCC) segment (Source: Centre for Monitoring Indian Economy). The growth momentum is expected to continue given the strong market fundamentals. However, though the Indian aviation sector witnessed significant growth in passenger traffic over the last few years, Indian carriers lost money in FY11 (refers to period April 2010 to March 2011) and are expected to post significant losses even during 12 months ending March 31, 2012. This is primarily due to combination of low fares in a competitive market and sustained high costs on account of high fuel cost, wages and rising debt levels. In these challenging circumstances, Indias airlines are struggling to raise capital and even banks are wary of extending additional bank facilities. During January 2012, private carrier Jet group (Jet Airways + Jet Lite) was the market leader with 28.8% share, closely followed by Indigo with 20.8%, National Aviation Company of India Limited (NACIL) with 17.1%, SpiceJet with 16.3%, Kingfisher Airlines with 11.3% and Go Air with 5.8% (Source: Directorate General of Civil Aviation). The key challenges for the industry are inadequate infrastructure, FDI restrictions, high taxation, highly competitive domestic market, high fuel costs and rising debt levels.

Duty Structure
Travel Type Domestic Travel (Economy Class) International Travel (Economy Class) Domestic Travel (Other than economy class) International Travel (Other than economy class) Service Tax (Before) `150 `750 10% 10% Service Tax (After) Same as PY Same as PY 12% 12% Impact

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The concessional rate on economy class is subject to a bar on taking CENVAT credit, but there is no such bar for the tariff rate of 12% chargeable for first / business class passengers.

Sales Tax on Aviation Turbine Fuel (ATF): At present, sales tax on ATF varies from 4 per
cent to more than 30 per cent across the country.

Proposal and Impact

Budget proposals Impact on the industry

FDI in aviation not announced in Budget, Airlines expected an announcement about Government permitting FDI by foreign airlines in however, under active consideration the Indian aviation sector, which could have eased tight liquidity position and provided the much-needed relief. Government has permitted direct import This will have positive impact on the profitability of ATF by Indian Carriers, as actual users. on airlines as fuel cost comprises of around 40% of total operating cost for airlines. However, infrastructure & logistics challenges for importing ATF remains a concern. ECB for working capital requirements of Will help Airlines to get working capital at lower the airline industry for a period of one rates. This should provide some respite to airlines year, subject to a total ceiling of US considering their huge debt position. Dollar 1 billion. Withholding tax on interest payments on Will help reduce the cost of borrowings. ECB reduced from 20% to 5%. Full exemption from basic custom duty on Will help Maintenance, Repair and Overhaul import of parts of aircraft and testing (MRO) sector to become more competitive and equipment. It is also proposed to fully grow, which is presently at nascent stage. exempt both new and retreaded aircraft tyres from basic customs duty and excise duty.

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AUTOMOBILE
Industry Snapshot

NEGATIVE

The automobile industry is sensitive to economic cycle. Factors like interest rates, fuel prices, disposable income, inflation, consumer confidence etc have strong influence on the industry demand. However, the extent of cyclicality differs across passenger vehicles (PV), commercial vehicles (CV) and two-wheeler (TW) industry. For instance, medium and heavy commercial vehicle (M&HCV) along with PV industry is highly sensitive to factors like interest rates, fuel prices and consumer spending whereas TW and light commercial vehicles (LCV) are comparatively less sensitive to the aforesaid factors. The PV industry bore the brunt of economic slowdown during FY12 on account of high interest rates coupled with high inflation eating upon consumer disposable income. The CV industry was able to avoid impedance in economy owing to high demand from freight transport segment. The TW industry also managed to grow due to low dependence on financing and increasing rural demand. In spite of high interest rates and high fuel prices the passenger vehicle (PV) segment is expected to witness a growth of around 6-8 % in FY13 on the back of delayed purchases by consumers. The growth in TW segment would be driven by the low TW penetration and increasing disposable income in rural India. For the CV industry, CARE Research estimates that domestic demand would grow by around 13-14 % in FY13. We believe healthy long-term macro-economic outlook coupled with increase in government focus towards development of transport infrastructure would fade away the short-term concerns over rising fuel prices and interest rates.

Duty Structure
Customs Duty (%) Passenger cars, Twoand Threewheelers
Old New

Before

After

Impact

Excise Duty (%) Passenger cars, UV and MPV

Small Cars

Before

After

Impact

105 60 10 105 75 10

10 22 22+ `15000 5 10 12 24 27 5 12

Other Cars* Other Cars#

CV (Old & New)

Hybrid Vehicles Buses

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Excise Duty (%) Trucks Two-wheeler Three-wheeler

Before 10+ `10,000 10 10

After 12+ `10,000 12 12

Impact

Proposal and Impact

Budget proposals Hike in excise duty Small Cars : From 10% to 12% Other Cars*: From 22% to 24% Other Cars#: From 22%+`10,000 to 27% Impact on the industry The rise in the excise duty would result in price hikes across all the segments in the passenger car industry, which consecutively would dent the demand by some extent.

Hike in custom duty for imported cars from 60% Rise in custom duty on imported completely to 75%, where value of the vehicle exceeds USD built units (CBUs) on large cars and SUVs is 40,000 almost 25%. This will lead to considerable rise in prices of luxury cars and UVs. Imposing of 3% ad valorem excise duty on body building of commercial vehicle from flat rate of `10,000 Interest subvention schemes on short-term crop loans continued at 7%. Further, additional subvention of 3% will be available for prompt payment Increase in the excise duty on body building of commercial vehicles would exert extra burden on end customers i.e. freight transport operators. Continuation of interest subvention scheme would lead to higher farm income with small farmers and thereby push the demand for mid-size and small tractors.

Investments towards infrastructure development Aggressive investments towards infrastructure (mainly roads and highways) development would drive the demand for Increase of financing of infrastructure M&HCV tippers. projects through tax-free bonds from `30,000 crore to `60,000 crore Allocation of `25,360 crore on NHDP proposal Increase income tax exemption limit from `180,000 to `200,000 Minimal rise in disposable income due to increase in the tax slab combined with increased farm income will be the key driver for two-wheeler demand.

*Indicates cars which have engine capacity more than 1,500cc in case of diesel and 1,200cc in case of petrol and length exceeding 4 meters. #Indicates cars having engine capacity more than 1,500cc in case of diesel cars and 1,200cc in case of petrol cars and exceeding 4 meters.

22

Impact on companies
Company Impact MSIL Comments Compact and mini car segments are major revenue contributor for MSIL. Hence rise in excise duty on large cars is not a major concern factor for the company. The commercial vehicle business of TML would be benefited from aggressive investments proposed in infrastructure projects. In passenger vehicle industry, the company will have to face challenge to pass on the rise excise duty in the gloomy current scenario where the industry is facing demand pressure as well as rise in competition levels. The company will also have to pay higher custom duty on import of its luxury cars from Jaguar and Land Rover. M&M

TML

The commercial vehicle business of M&M would be benefited from the investments proposed in infrastructure projects.

In passenger vehicle segment, M&M product portfolio mainly consists of vehicles with engine capacity greater than 1,500cc. Hence it will be challenging to negate the pressure in demand owing to rise in prices The tractor business of M&M is likely to benefit due to the continuation of interest subvention scheme. ALL HMCL BAL

Rise in allocation towards infrastructure to push demand for M&HCV Price hike will be offset by rise in income-tax slabs Price hike will be offset by rise in income-tax slabs

23

BANKING AND FINANCIAL SERVICES

Industry Snapshot
Banking

POSITIVE

Total bank credit for Scheduled Commercial Banks (SCBs) as on December 30, 2011 stood at `4,365,640 crore, registering a y-o-y growth of 15.9%. The credit growth has been decelerating continuously since December 2010 on account of economic slowdown coupled with tightening of policy rates. The Incremental Credit-to-Deposit (ICD) ratio for all SCBs moderated from over 100% for twelve months ended January 2011, to 78.5% for twelve months ended January 2012. In line with the slowdown in credit growth, the deposit growth has also started slowing down from over 17% y-o-y level till September 2011 to around 15.7% level by January 2012. Money market liquidity tightened significantly since November 2011 partly due to dollar sales by RBI. Despite the tightening liquidity situation, the banks continue to maintain excess SLR in the range of around 5% partly due to rising risk aversion among the banks as well as deployment of funds in Gsecs on account of the rise in the Government borrowing programme. With headline WPI standing at over 9.5% in H1FY12, the regulator continued to maintain a hawkish stand and cumulatively increased the repo rate by 175 bps in FY12. The banks however, refrained from passing the entire impact of rise in cost of borrowings to prevent asset quality pressures resulting in Net Interest Margin (NIM) of most of the banks seeing some pressure. On an overall basis, provisioning expenses rose by around 30% on y-o-y basis in 9MFY12 on the back of higher NPA provisioning by banks with the sharp increase in NPAs and RBI guideline mandating higher specific provisioning for all NPAs. Consequently the overall Net Profit growth was muted at around 6% year-on-year due to rise in provisioning cost as well as margin pressures. The overall Gross NPAs of the banks covered in CAREs banking study (study covered 26 PSU and 13 Private banks) stood at 2.88% of Advances) as on December 31, 2011. During 9MFY12, the absolute level of Gross NPAs for these select 39 banks rose by over 40% y-o-y with Public Sector banks seeing a jump of over 50% y-o-y. PSU banks NPA addition is due to migration to system based NPA recognition as well deterioration in general economic environment. Capital adequacy ratio for the banking system as a whole however continued to be comfortable with median capital adequacy ratio standing above 12% as on December 31, 2011.

24

NBFC Total assets of the NBFC sector witnessed good growth during FY11 even amidst uncertainty in the global markets. As per RBIs report on trends and progress of banking in India (2010-11), total assets of NBFCs (excluding non-systemically important non-deposit small NBFCs that account for less than 10% of the sector) increased from `7 lakh crore to `8.47 lakh crore witnessing a y-o-y growth of 21%. There was an improvement in asset quality for NBFC-Ds (deposit-accepting NBFCs category as Gross NPA ratio (Gross NPA / Gross Advances) declined from 1.35% for FY10 to 0.7% for FY11. Gross NPA ratio for NBFC-ND-SIs (non-deposit accepting systemically important NBFC) also improved to 1.8% for FY11 compared with 2.8% for FY10. NBFCs have improved their risk profile by reducing the asset-liability mismatches as well as reducing exposure to unsecured lending. Going forward NBFCs are expected to maintain the growth momentum along with the overall economic growth. Insurance Growth in sales of automobiles and retail health (for retail health share increased from 21% in FY10 to 23% in FY11) helped the domestic non-life insurance industry to grow at 22.98% in 2010-11, with the total premium collection at `42,576 crore as against `34,620 crore in the previous year. The four public sector players - National India, New India Assurance, Oriental Insurance and United India share stood at 59.07% and private players share was at 40.93% in 2010-11. Gross premium in the life insurance sector increased y-o-y by 9.85% during FY11 with 11% growth in premiums of private life insurers and 9.35% growth in premiums of LIC. However, the sector is still dominated by Life Insurance Corporation of India (LIC) with a dominant market share of 70.1%. Going forward any new regulatory requirements by IRDA might affect the growth of life insurance companies, however the impact is expected to be a medium-term adjustment as long-term growth will be driven by increasing penetration levels in India that are still low compared to other countries. Mutual Funds Total AUM (monthly average) of the industry decreased by 3% y-o-y to `5.92 lakh crore for March 2011 that reflected the overall volatility in the stock markets and tight liquidity conditions thereby decreasing the AUM. Proposal and Impact Budget proposals Impact on the industry

Government to provide `15,888 crore for A credit positive considering that some of the capitalisation of Public Sector Banks, PSU banks are having Tier I capital ratios clos to Regional Rural Banks and other financial 8% mark

25

Budget proposals institutions including NABARD. Extension of the scheme of capitalisation of weak RRBs by another 2 years.

Impact on the industry

Rise in overall limit of issuance of tax free Financial Institutions to benefit from cost bonds from `30000 last year to `60000 cr in effective funding avenues 2012-13 by certain institutions such as NHAI, IRFC, IIFCL, HUDCO, NHB and SIDBI. To overcome the shortage of housing for Housing Finance Companies engaged in low and low income groups in major cities and towns, middle income housing segment stand to benefit the government proposes to: on account of the rise in indirect finance housing a) Allow ECB for low cost affordable eligibility limit. housing projects; b) Set up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans; c) Enhance provisions under Rural Housing Fund from `3000 crore to `4000 crore; d) Extend the scheme of interest subvention of 1 per cent on housing loan up to `15 lakh where the cost of the house does not exceed `25 lakh for another year; and e) Enhance the limit of indirect finance under priority sector from `5 lakh to `10 lakh Allowing Qualified Foreign Investors (QFIs) to access Indian Corporate Bond market Allowing Qualified Foreign Investors (QFIs) to access Indian corporate bond market will help in deepening debt markets in India and allow companies especially non bank finance companies to widen their resource base through capital market borrowings.

Introduction of a new scheme called Rajiv The government has introduced a tax exemption Gandhi Equity Savings Scheme. The scheme

26

Budget proposals would allow for income tax deduction of 50 per cent to new retail investors, who invest up to `50,000 directly in equities and whose annual income is below 10 lakh. The scheme will have a lock-in period of 3 years.

Impact on the industry scheme (Rajiv Gandhi equity scheme) for equity markets targeted at new investors and will increase the retail participation in equity market. This will improve the depth of the domestic capital market.

Reduction in Securities Transaction Tax Reduction in Securities Transaction Tax (STT) is (STT) by 20 per cent (from 0.125 percent to likely to have positive impact on the investors and 0.1 per cent) on cash delivery transactions also benefit broking firms as there would be increase volumes in equity market Tax all services except those in the negative list which also includes services of business facilitators and correspondents to the banks and insurance companies This step is to increase financial inclusion and take delivery of financial services to the door step of the unbanked section of the population. This would be one of the factors for the intermediaries to act as business facilitators and correspondents. The MFI bill is likely to remove the uncertainty existing in the microfinance sector on the regulatory front would make way for clear set of guidelines for the MFIs to operate.

Process of financial sector legislative reforms, the Government proposes to move the following Bills in the Budget Session of the Parliament including The Micro Finance Institutions (Development and Regulation) Bill, 2012

Impact on segment Segment Banking Sector Financial Institutions Housing Finance Companies Impact Comments PSU banks to benefit from capital infusion by GoI To benefit from rise in tax free bond issuance as it would help in raising funds at relatively finer rates

To benefit from rise in housing loan eligibility limits for qualifying as indirect priority sector lending by the banks

27

Segment Non Bank Finance Companies Microfinance

Impact

Comments To benefit from participation on QFIs in the bond market

To benefit from the exemption of business facilitators from service tax Introduction of Microfinance bill to remove uncertainty on the regulatory front

Broking Firms

To benefit from reduction in STT

28

CEMENT
Industry Snapshot

POSITIVE

The Indian cement industry recorded a moderate growth of 5.1% in FY11 on account of slowdown in construction activities due to prolonged monsoon, heavy winter, delay in execution of infrastructural projects etc. During the first nine months of FY12, cement demand has registered a growth of about 5.3% on a y-o-y basis. During the third quarter of FY12, the quarterly cement demand picked up post monsoon and registered a growth of about 9.5% on a y-o-y basis. The long-term cement demand in the country is expected to remain intact. Cement demand will largely be driven by increased focus of the government on promotion of low-cost affordable housing and infrastructure development.

Average cement prices have increased by about 10% from `253 per bag in FY11 to `278 per bag in FY12. On the back of pick up in cement demand, especially during the third quarter of FY12, quarterly average cement prices rose by about 13% to `284 per bag.

The cement industry has been grappling with cost pressure in FY12 due to rise in raw material cost & freight charges, increase in prices of imported coal on account of rupee depreciation, etc. However, the industry has managed to pass on the higher input cost through a series of price hikes in the past few months.

Duty Structure
Customs Before Duty (%) After Impact Excise Duty (` per tonne) Before After Impact

Coal

5%

NIL

Retail - Price below 10% ad`190 per 50 kg valorem+`80 bag 10% ad- Price above valorem+ `190 per 50 kg `160 bag Bulk 10% advalorem 10% advalorem+`200

12% advalorem* + `120

12% advalorem* 12% advalorem

Clinker

* An abatement of 30% has been notified on the Retail Sale Price.

29

Proposal and Impact

Budget proposals Excise duty structure has been revised as per details given in the above table. Customs duty on coal has been exempted. The scheme of 1% interest subvention on housing loan (for a loan amount upto `15 lakh for the cost of house not exceeding `25 lakh) is extended for the next fiscal. ECB allowed for low-cost affordable housing The increased impetus of the government on infrastructure development and affordable projects. housing will continue to drive the cement Allocation towards PMGSY has been demand. increased by 20% to `24,000 crore. Allocation of the Ministry of Road Transport and Highways for road development has been increased by 14% to `25,360 crore. Allocation to AIBP increased by 13% to `14,242 crore. Impact on the industry This will lead to reduction in excise duty by about `5-7 per bag. Marginal reduction in the input cost is positive for the cement industry.

Impact on companies
Company UltraTech ACC Ambuja Shree Cement Impact Comments Reduction in cost (with reduction in excise duty and custom duty on coal) and increased allocation towards infrastructure projects is positive for the cement players. Further, continued focus of the government on affordable housing will also augur well for the cement companies. Since the company uses pet coke as a fuel, the reduction in

custom duty of coal will have no impact on the cost structure.

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CHEMICALS
Industry Snapshot

NEUTRAL

Chemical Industry is highly diverse and primarily consists of basic chemicals, petrochemicals, pesticides and agrochemicals, specialty and fine chemicals, drugs and pharmaceuticals, paints and varnishes, dyestuff and inks, etc. The size of the Indian Chemical industry is estimated at USD 108 billion and accounts for approximately 7% of the Indian GDP. The sector contributes heavily to the export import segment of the country accounting for around13-14% of total exports and 8-9% of total imports. In terms of volume, India is the third-largest producer of chemicals in Asia, after China and Japan and 12th largest in the world.

The per capita consumption of chemicals in India is about 1/10th of the world average indicating more room for growth.

Challenges faced by the industry are high prices of basic feedstock, SSI reservation/fragmented nature of the industry, low R&D levels, low level of brand development, issues related to dumping, environmental regulations etc.

Duty Structure
Customs Duty (%) Organic and inorganic coating Boric Acid Titanium dioxide Before 10 After 5 Impact Excise Duty (%) Overall Before 10 After 12 Impact

5 10

7.5 7.5

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Proposal and Impact

Budget proposals Impact on the industry

Reduction of customs duty on Expected to benefit companies engaged in organic/inorganic coating material for manufacturing of electroplating chemicals. manufacturing electrical steel from 10% to 5%. Customs duty on titanium dioxide is reduced Expected to help manufacturers of dyes and from 10% to 7.5%. pigments. Titanium dioxide is a key input in the paints industry and constitutes 12-15% of total raw material cost. Enhancement of customs duty on boric acid Expected to negatively affect the insecticide and from 5% to 7.5% pesticide manufacturers. Higher excise duty of 12% ad valorem Expected to have a negative impact across chemical manufacturers. However it is expected to affect small unorganized players more.

Impact on companies
Company Asian Paints, Kansai Nerolac Paints, Berger Paints and ICI Grauer & Weil (India) Impact Comments Profitability margin is expected to improve due to reduction in customs duty of titanium dioxide (one of the key inputs). Decline in input prices is expected to be offset by rise in excise duty.

32

CONSTRUCTION
Industry Snapshot

POSITIVE

Construction activity is an essential part of countrys growing need for infrastructure and industrial development. Construction as a percentage of GDP has been in the narrow range of 7.9-8.1% in the past six years. Considering first three quarters of FY12, the construction growth slowed down to 4.2% from 7.7% registered in the corresponding period of previous year. The slowdown in construction is mainly on account of delay in the project awarding & execution due to environmental clearance hurdles, political instability in some states etc.

Since last couple of years, margins of construction companies are under pressure due to muted topline growth led by the delay in execution of orders, rising interest rates and fairly high prices of key input materials like steel, cement, bitumen, copper.

At the end of third quarter of FY12, the ratio of order backlog to net sales (four trailing quarters) of the major construction companies was in the range of 2.6-5.5 times. However, execution of the order backlog remains a key challenge due to various constraints like land acquisition, environmental clearances, political issues etc.

Duty Structure
Excise Duty (%) Cement Retail - Price below `190 per 50 kg bag - Price above `190 per 50 kg bag 10% ad-valorem + `80 per tonne 10% ad-valorem + `160 per tonne - Price above `190 per 50 kg bag Bulk Cement Steel 10% ad-valorem 10% 12% ad-valorem* 12% 12% ad-valorem* + `120 per tonne Before After Impact

* An abatement of 30% has been notified on the Retail Sale Price of cement.

33

Proposal and Impact

Budget proposals The government has proposed to issue tax free bonds to the tune of ` 60,000 crore through various infrastructure institutions. Allocation of the Ministry of Road Transport and Highways for The sustained focus of the government on rood development has been increased by 14% to `25,360 crore. infrastructure development Allocation towards the PMGSY has been increased by 20% to especially power, roads, `24,000 crore. irrigation etc through increased allocation to Allocation to AIBP increased by 13% to `14,242 crore. In order mobilize large resources to fund irrigation projects, government schemes like PMGSY, owned Irrigation and Water Resource Finance Company is being RIDF, AIBP would be beneficial for the operationalised. construction sector. Also, Allocation towards RIDF has been increased to `20,000 crore. continued focus of the The scheme of 1% interest subvention on housing loan is extended government on the lowtill next fiscal for a loan amount upto `15 lakh, with the cost of cost and affordable housing will augur well for the house not exceeding `25 lakh. sector. The easy availability ECB allowed for low cost affordable housing projects. of funds and relaxation in The rate of withholding tax on interest payment on ECB for ECB norms will be positive Power, Roads, Ports & Shipyards, affordable housing, Dams etc. is for the construction proposed to be reduced from 20% to 5% for next 3 years industry. ECB is permitted to part finance rupee debt of existing power projects. Impact on the industry

Impact on companies
Company IVRCL Infrastructures & Projects Hindustan Construction Company Gammon India Ltd Patel Engineering Ltd Nagarjuna Construction Company Impact Comments Increased allocation towards various infrastructure projects is expected to result in increased order inflow to the construction companies.

34

EDUCATION
Industry Snapshot

POSITIVE

Educational services consist of Academic, Non-Academic, Vocational, Technical and Other certified and training courses. India has the third-largest education system in the world after America and China with around 13.5 lakh schools and 31,000 higher education institutes (HEIs). It is home to the largest population in the age group 0-24 years. The growth in the personal disposable income of the Indians, growing contribution of the services sector to Indias GDP thereby requiring greater number of qualified youths and the increasing thrust of the GoI to improve the countrys educational system and eventually the literacy rates has resulted in manifold growth of the Indian Educational sector since the last decade. Correspondingly, the countrys literacy rate has improved from 64.8% during 2001 to 74% as per the Census 2011. With the growing penetration of educational concepts such as Preschool, Information & Communication Technology (ICT) in schools etc the market size of the Indian Education industry aggregated US$66.6 bn during FY11. Importantly, over the years, the role of private sector in education has increased with the setting-up of institutes especially in the K-12 & Higher education segment. Even, the GoI has emphasised on Public Private Partnership (PPP) in education so as to expand the reach and provide quality education to students in small towns & villages. The growth in the Indian Education System is expected to be fuelled by growth in disposable income, acceptance of vocational courses, GoIs orientation towards Public Private Partnership, entry of corporate and foreign educational institutions and growing focus on distance education mode.

Duty Structure
Service Tax (%) Service Tax on other educational services such as coaching class etc (excluding pre-school and school education, recognised education at higher levels and approved vocational education) Before 10 After 12 Impact

35

Proposal and Impact

Budget proposals Budgetary allocation for Right to Education scheme under the Sarva Shiksha Abhiyan (SSA) at `25,555 crore; y-o-y increase of 21.7% Impact on the industry

In an effort to improve the literacy rates of the country, the GoI has been emphasising on providing subsidised education to the populace specially in the rural India. The increase in budgetary allocation under the various Budgetary allocation for Rashtriya educational schemes of GoI augurs well for the Madhyamik Shiksha Abhiyan (RMSA) private players in the industry in terms of greater scheme at `3,124 crore; y-o-y increase of flow of orders to be received by the private 29% players from the government bodies. 6,000 schools proposed to be set-up at block level as model schools during the XIIth plan period. Of the same, 2,500 schools are proposed to be set-up through the PPP mode The setting-up of 2,500 schools through the PPP mode would result in greater involvement of the private industry players thereby increasing their penetration in the brick-n-mortar form of education service.

Budgetary allocation of `1,000 crore to This would result in increased demand from the GoI for skill development-related programmes National Skill Development Fund (NSDF). being offered by the private players in order to increase the number of skilled youths in the nation. Service tax on Pre-school and school education, recognised education at higher levels and approved vocational education exempted The exemption from service tax; being an indirect form of taxation would be passed on to the students / consumers in the form of lower cost of educational services. However, the exemption remains restricted to certain categories of educational services only.

Budgetary allocation for Mid Day Meal No impact on the private players in the industry programme in schools at `11,937 crore, y-o-y increase of 15%

36

Impact on companies
Company Everonn Education Ltd. Impact Comments The increased budgetary allocation by the GoI under various educational schemes such as SSA, RMSA and skill development / vocational education augurs well for private players in the education industry with the allocation expected to result in higher inflow of orders to these players especially in the Information and Communication Technology (ICT) segment of education. Further, the announcement of set-up of schools through the PPP mode during the XIIth plan period is expected to enable these players establish a greater footprint in the brickn-mortar form of education service.

Compucom Software Ltd.

Educomp Solutions Ltd.

Core Education & Technologies Ltd.

37

FERTILIZER
Industry Snapshot

POSITIVE

The Indian fertilizer industry is dominated by urea comprising around 50% of the volume of fertilizer consumption followed by di-ammonium phosphate (DAP; 20%), complex fertilizers (17%), single super phosphate (SSP; 6%) and muriate of potash (MOP; 7%).

The skewed consumption is a result of uneven subsidy policy reforms in the fertiliser sector. The Government brought most fertilisers under nutrient-based subsidy (NBS) scheme from April 1, 2010; however, urea remains under the old subsidy regime. The New Pricing Policy Stage III for urea units that ended on March 31, 2010 was extended until the formulation of the new policy. As a result urea subsidy follows fixed retail price and floating subsidy and all other fertilisers under NBS follow fixed subsidy with floating prices. Hence, the government bears most of the input price fluctuation through subsidy for urea, whereas some amount of price fluctuation is passed on to the farmers through retail prices in other fertilisers

The fertilizer sector is expected to remain a priority for the Government due to its larger role in the national food security. However, the new allocation of natural gas may not increase in the near term due to reduction in output from a major source in KG basin and the existing allocation may get hampered if the output is reduced further. This is likely to necessitate higher import of gas and investment in THE overseas companies with firm tie-up for gas.

The steps the Government takes to bring urea under NBS scheme and move towards the direct transfer of subsidy to the farmers would remain crucial.

Duty Structure
Customs Duty (%) Urea DAP Complexes Rock Phosphate Before 10% 5% 5% 5% After 10% 5% 5% 5% Impact Excise Duty (%) Urea DAP Complexes Rock Phosphate Before Nil Nil Nil Nil After Nil Nil Nil Nil Impact

38

Proposal and Impact

Budget proposals Impact on the industry

Eligibility of capital investment in the The proposal would boost up investment in the fertilizer sector under viability gap funding sector and would see more private participation under the scheme of support to public private partnership Reduction of withholding tax on interest Would bring down the effective rate of interest payments on external commercial on the ECBs and would make projects more borrowings from 20% to 5% viable Increase in investment linked deduction of The proposal would make capital investment capital expenditure from 100% to 150% more attractive with better returns to equity Import of equipment for fertilizer plants, for The tax exemption would reduce the landed cost initial setting up or substantial expansion, to be of equipments and encourage investments fully exempt from customs (5% earlier) duty for three years Proposal to implement direct transfer of If implemented, would reduce the working-capital subsidy to the farmers in phases requirement of fertilizer companies, save their interest costs and improve their capital structure. It would also benefit farmers and would reduce expenditure on subsidies by encouraging judicious use of fertilizers Increase agricultural credit by `1 lakh crore Fertilizer demand would to get a fillip on account of cheaper and easy credit availability to the to `5.75 lakh crore in FY13 Interest subvention for short term crop loan farmers at 7% and an additional subvention of 3% for prompt paying farmers Proposal to allocate `10,000 crore to NABARD for refinancing the regional rural banks to in-turn extend short term crop loans to the small and marginal farmers

39

Impact on companies
Company IFFCO GSFC Ltd. GNFC Ltd. Tata Chemicals Ltd. Impact Comments The budget proposal would increase the demand for fertilizers on the back of cheaper farm credit. While the direct transfer of subsidy, if implemented, would have favourable impact on interest cost and improve their capital structure. The budget proposal makes a conducive environment for capital expenditure, however, the extent of gas availability would remain crucial for new capital investment decisions. The budget remained silent regarding bringing the subsidy on urea under NBS scheme leaving a cloud of uncertainty.

Nagarjuna Fertiliser and Chemicals Ltd.

40

FMCG AND CONSUMER DURABLES

Industry Snapshot

NEUTRAL

The Indian consumer goods industry remains highly fragmented and is classified into two major segments namely, consumer durables and Fast Moving Consumer Goods (FMCG), which comprises a wide array of products. The Indian FMCG sector is the fourth-largest sector in the economy accounting for 5% of the total factory employment in the country. The industry is mainly driven by changing demographic pattern, increasing disposable income, entry of new players, greater product awareness and affordable pricing/financing options which is leading to robust growth of the consumer durables industry. Penetration level of consumer goods in rural areas comprising 70% of Indias population is still low indicating the untapped market potential. Wider marketing and distribution network remains key to increase penetration and market share. Challenges faced by the industry are adverse monsoon (at times), spurious products, illegal imports, cost escalation, intense competition, high advertisement cost and complex distribution system besides the recent economic slowdown.

Duty Structure
Customs Duty (%) LCD/LED panel Memory card components for mobile handset Before 5 5 After Impact 0 0 Excise Duty (%) General Mfg Processed Soya Before 10 10 After 12 6 Impact

Proposal and Impact

Budget proposals
Increase in standard excise duty from 10% to 12% Excise duty on 130 consumer items have been increased from 1% to 2%

Impact on the industry With higher competition in most segments, it will be difficult for companies to pass on the higher duty to consumers. Hence, margins will be impacted.

41

Budget proposals Increase in Tax Slabs

Impact on the industry Higher disposable income in the hands of consumers will be positive to FMCG and consumer durable industry

Impact on companies
Company Nestl Impact Comments Custom duties on certain products like probiotics and coffee vending machines have been reduced from 10% to 5% which is offset by rise in excise duty. Decrease in excise on certain food products like processed soya from 10% to 6% being offset by increase in general excise duty from 10% to 12%. Rise in excise duty cannot be easily passed on to consumers given high competition Rise in excise duty cannot be easily passed on to consumers given high competition

HUL

Blue Star Eureka Forbes

42

GEMS AND JEWELLERY

Industry Snapshot

NEGATIVE

India is the world's largest processing centre for G&J and the industry contributed approximately 17.5% to the total export earnings of the country during FY11.

In FY11, the G&J domestic market size was valued at approximately US$27.5 billion and exports amounted to US$43.14 bn. CARE Research expects sale of domestic G&J sector, to grow by approximately 15% CAGR till FY2016 and G&J export market to grow at 12% CAGR during the same 5 year period.

The key drivers for growth in the domestic market will be higher disposable income, rising young population with the urge to spend, higher number of working women and conscious marketing efforts of the companies. Consumption growth will come from metropolises and Tier-I and II cities.

Duty Structure
Customs Duty (%) Gold bars & gold coins (` per 10 gm), Platinum Silver (` per kg) Non Standard Gold C&P Coloured gemstones Before 2 After 4 Impact Excise Duty (%) Gold bars & gold coins (` per 10 gm) Silver and articles of silver Gold and articles of gold Before 2 After 3 Impact

6 5 0

6 10 2

1 1.5

0 3

43

Proposal and Impact

Budget proposals Increase in custom duty on gold bars, coins and gemstones alongwith refined gold Custom duty on polished colored gems has been introduced at 2% and on platinum it has been increased to 4% from 2% earlier Impact on the industry The GJ products would become more expensive and would impact purchasing power of the consumers as prices are already high of these products.

Impact on companies
Company Impact Gitanjali Gems Titan Industries Comments Though the companies will pass on the increased duty, purchasing power of the consumers would be impacted due to already high prices of these products and high inflation. Sales volumes could see slight impact.

44

HOSPITALS
Industry Snapshot

POSITIVE

The Indian healthcare industry is estimated to be valued at `2.8 tn in size in FY11, growing at a 5-year CAGR of 13.1% p.a. The hospital industry accounts for roughly 70% of total healthcare market. The Indian hospital industry can be broadly categorized as 1) highly fragmented in nature due to large presence of unorganized players, 2) capital-intensive with long gestation period, 3) positive supply-demand fundamentals, 4) favourable government policies and 5) attractive business model for long-term investors with project IRR of 15-17%. Indian government targets to increase the share of public expenditure on health to at least 2.0%2.5% of GDP by the end of 12th five year plan (FY13-17) from the current level of around 1.3% of GDP, which is well below the emerging market average of 3.0%. The government has used its own resources to focus on delivery of effective and affordable healthcare services to the vulnerable sections of population by setting up primary clinics in rural areas, while encouraging private sector to meet the growing demand of quality health services in the form of favourable investment policies. Organized corporate hospitals form <10% of private healthcare market due to absence of any enforcement of minimum standards of healthcare service delivery by the government.

Duty Structure
Customs Duty (%) Medical Equipments Before 7.5 After 7.5 Impact Service Tax (%) Hospitals Before Exempt After Exempt Impact

Proposal and Impact

Budget proposals Increase in central government expenditure on Health and Family Welfare by 21.6% to `30,702 crore Impact on the industry 92.5% of the total allocated amount will be utilized for revenue purpose (such as upgradation of existing facilities/infrastructure) while the remaining 7.5% will be used for building new infrastructure

45

Budget proposals Increase in investment-linked deduction of capex from 100% to 150% u/s 35AD

Impact on the industry At present, the government allows 100% deduction of capex (excluding cost of land, goodwill and financial instruments) for setting up a new hospital with at least 100 beds anywhere in India under Sec 35AD. The proposed increase in investment-linked deduction is expected to boost more private investment into the sector.

Impact on companies
Company Impact Fortis Healthcare Apollo hospital Comments The increase in investment-linked deduction of capex from 100% to 150% will positively benefit the company on the ongoing/new capex plan The increase in investment-linked deduction of capex from 100% to 150% will positively benefit the company on the ongoing/new capex plan

46

LOGISTICS & WAREHOUSING

Industry Snapshot

NEUTRAL

Indian Logistics industry is highly fragmented and can be classified into seven broad categories: rail freight, Container Freight Stations/ Inland Container Depot, Multi-modal Transport Operator, coastal shipping, trucking, warehousing and express logistics. However over the past few years the concept of third party logistics (3PL) have evolved which involves bundling of various logistics services such as warehousing, inventory management, transportation, freight forwarding and packaging. The domestic logistics industry is growing at 8-10% per annum and is currently estimated at USD 225 billion. The warehousing segment which forms an important constituent of logistics value chain is dominated by small players with limited capacity. As of March 2011, India has a warehouse space of around 1800-2000 million sq ft. However, most of the warehouses in India are small in size- between 5000 to 25,000 sq ft as compared to 2,50,000 to 1 million sq ft in the US or Western Europe. The overall cost of the logistics in India is estimated to be 13% of GDP. This is on the higher side as compared to 8-9% of the GDP in US. The reason for the same being structural inefficiencies resulting from poor infrastructure, inconsistent tax system, rail haulage rates, wastages in truck transport due to congestion, octroi duty on truck transportation and no tax incentives. The major growth drivers for the sector would be increasing investment in warehousing, CFS/ICD and Multimodal Logistics Park, reduction of documentation and introduction of GST (Goods and Service Tax), uniform toll policy, granting of infrastructure status to the sector as a whole etc.

Duty Structure
Service Tax (%) Service Tax Before 10% After 12% Impact

47

Proposal and Impact

Budget proposals GST introduction timeline not announced Investment linked tax deduction of capital expenditure at an enhanced rate of 150% as against the current rate of 100% for cold chain facility and warehouses (including CFS/ICD) Impact on the industry The expected benefits to the industry remains delayed. Expected to draw fresh investments from unconventional sources thus enhancing the storage capacity. Big boost to grain storage capacities

Central assistance of `18,500 crore (over a Expected to expedite the work on the same, period of 5 years) to be provided to the Delhi improving the transportation efficiency. Mumbai Industrial Corridor. Several measures to increase investments in Reduction in transportation bottlenecks roads

Impact on companies
Company Continental Warehousing Corporation (Nhava Sheva) National Collateral Management Services Impact Comments Enhanced benefits deductions for investment linked

Boost to grain storage capacities with enhancement of investment linked deduction on capital expenditure and funding available to warehouse receipts. Rise in service tax rate is expected to affect the profitability

Agility Logistics

48

MEDIA AND ENTERTAINMENT

Industry Snapshot

POSITIVE

Media and Entertainment industry is highly fragmented and is classified into various segments namely, Television, Print, Film, Radio, Music, Out of Home, Animation and VFX, Gaming and Digital Advertising. As per FICCI KPMG Report, Media and Entertainment industry grew at 11.7% yoy in 2011 to `728 bn backed by digitalisation, increasing penetration in Tier 2 and Tier 3 cities, regionalisation and new media business. Television (45%), Print (29%) and Film (13%) continue to be the major contributing sectors to the industry. The advertising segment, which is a key contributor to the M&E industrys revenue (41%), grew at 13% yoy in 2011 to `300 bn wherein Print Segment accounts for 46% of the advertising pie. Industry is estimated to grow at CAGR of 14.9% (2011-2016) driven by strong growth in segments like gaming, digital advertising, Radio and Animation & VFX. However similar to the past trend, Television (CAGR growth (2011-16)): 17% and Print (CAGR growth (2011-16)): 9% followed by Film (CAGR growth (2011-16)): 10% shall continue to dominate the sector. Going forward, the potential for advertising spends remains strong and is expected to grow at a CAGR of 14.3% (2011-2016) to reach `586 billion in 2016. Some of the key growth drivers for the sector are increasing Digitalisation due to changing regulatory policies, Regionalisation, New Media and Social Media. Challenges for the sector (like piracy and inadequate industry measurement systems) leading to revenue leakages are being addressed albeit gradually.

Duty Structure
Service Tax (%) Service Tax on copyrights relating to recording of Cinematographic films Before 10 After 0 Impact

Proposal and Impact

Budget proposals Impact on the industry

Service Tax exemption on copyrights relating Lower cost for various players in the value chain to recording of Cinematographic films of Film Industry

49

NON-FERROUS METALS
Industry Snapshot

POSITIVE

Uncertainty on the debt crisis of the European Union and the expectations of a slowing demand in China and the other emerging economies continued to hog the outlook of the non-ferrous metals industry in the second half of CY11. However, the onset of new year brought about increased optimism to the base metals industry mainly encouraged by the improving economic data from the US and China along with some stringent measures by the European Union. Fundamentally, prices of all base metals depend upon the rate of demand growth and the underlying inventory position of a particular base metal. Going forward, CARE Research foresees demand for all base metals is likely to stabilise on the back of an improvement in demand from the Chinese and the US markets. Demand from other Asian countries excluding China and the European Union continues to vary widely on the back of changing economic and political condition. CARE Research expects prices of all base-metals will continue to remain volatile on the back of the ongoing macroeconomic development in the Euro zone, Chinese economic outlook and the strengthening of the US dollar vis-a-vis the other major currencies in the world.

Duty Structure
Customs Duty (%) Before After Impact Bauxite 5 5 Aluminium Scrap Alumina Caustic Soda Aluminium Ingots Copper Concentrates Copper Scrap Refined Copper 5 5 7 5 2 5 5 5 5 7 5 2 5 5

Excise Duty (%) Before After Impact Alumina 10 12 Caustic Soda Aluminium Ingots Copper Concentrates Refined Copper Zinc Concentrates Refined Zinc Lead Concentrates 10 10 10 10 10 10 10 12 12 12 12 12 12 12

50

Customs Duty (%) Before After Impact Zinc Concentrates Refined Zinc Lead Concentrates Refined Lead Non-Coking coal Petroleum Coke Calcined Petroleum Coke 2.5 5 2.5 5 5 2.5 0 2.5 5 2.5 5 0 2.5 0

Excise Duty (%) Before After Impact Refined Lead Non-Coking Coal Petroleum Coke Calcined Petroleum Coke 10 0 10 10 12 0 12 12

Proposal and Impact

Budget proposals Increase in Excise Duty from 10% to 12% on all non-ferrous metal products. Relaxation in Customs Duty for thermal coal from the existing 5% to Nil and nickel ore and concentrates from 2.5% and 7.5% to Nil Impact on the industry Increase in excise duty is likely to be completely passed on to the end-users, owing to the positive demand-supply outlook. Relaxation of Customs Duty on coal from the existing 5% to Nil is likely to reduce cost of captive power generation plants. Further relaxation in customs duty for nickel ore and concentrate will prove beneficial in importing cheaper raw material requirements.

Impact on companies
Company Sterlite Industries India Ltd. Hindalco Ltd. NALCO Hindustan Zinc Ltd. Impact Comments Complete pass through of rise in Excise duty and partial benefits in cost reduction to the extent of imported coal if any. Complete pass through of rise in Excise duty and partial benefits in cost reduction to the extent of imported coal if any. Complete pass through of rise in Excise duty and partial benefits in cost reduction to the extent of imported coal if any. Complete pass through of rise in Excise duty and partial benefits in cost reduction to the extent of imported coal if any.

51

OIL AND GAS

Industry Snapshot

NEGATIVE

Oil & Gas sector is dominated by few players mainly Public Sector Undertakings. The sector primarily consists of three segments namely Exploration & Production aka upstream, Refining and Marketing. The sector caters to the energy needs of the economy and hence is directly linked to the economic activity of any country or region. It is a highly regulated sector and operated primarily by government-promoted companies. Prices of sensitive petroleum products are regulated by government hence oil marketing companies incur huge under-recoveries. The 9-month under-recovery reported at the end of December 2011 was `97,313 crore. The continued incurrence of under-recoveries by Oil Marketing Companies OMCs is adversely affecting their financial and liquidity position.

Borrowing of OMCs (in thousand crores)

Source: RAJYA SABHA STARRED QUESTION NO. 126

Our economy is highly dependent on imported crude oil for various petroleum products as the domestic crude oil production merely accounts for 20 per cent of the consumption. This makes us further vulnerable to not only international crude oil prices but also to exchange rates. Falling output of indigenous natural gas has made us more dependent on the international markets for LNG imports. The dependency on LNG is paralyzed by infrastructure bottlenecks such as regasification capacity. Diesel contributes to around 40 per cent of all petroleum products in India followed by LPG and Petrol. India possesses excess refining capacity and therefore exports petroleum products except for Liquefied Petroleum Gas wherein we are in deficit and import LPG.

52

Duty Structure
Customs Duty Liquefied Natural Gas LNG Cess on Crude Oil Imports Before 5% 2,500/MT After Nil 4,500/MT Impact

Proposal and Impact

Budget proposals Oil & Gas pipeline infrastructure eligible for viability gap funding Removal of 5 per cent custom duty on LNG imports Increase in cess on imported crude oil from `2,500/MT to `4,500/MT Impact on the industry The proposal would act like a catalyst thereby increasing investments into the pipeline infrastructure. Currently, regasification capacity is in deficit i.e. there is ample demand for imported LNG. Hence removal of custom duty would not have any impact on the current situation. India is heavily dependent on imported crude oil. The proposal would adversely impact on both refiners as well as marketers. The exporters would not be able to pass on the cess to importers as prices of petroleum products are determined in International markets. Further, the budget was not able to throw light on much awaited petroleum product pricing mechanism. The present opaque pricing mechanism of petroleum products would adversely impact the industry considering the mounting subsidies on the back of increasing crude oil prices. The new cess rate on imported crude oil would only amplify the worsening situation.

Impact on companies
Company Impact Petronet LNG Reliance GAIL Comments Removal of 5% customs duty on LNG will have neutral effect on the company as it is already running full capacity. Largest refinery and biggest importer of crude oil would be adversely impacted by the increase in cess on imported crude oil. GAIL, the major gas transporter would slightly benefit from the proposed inclusion of pipeline infrastructure in viability gap funding. There was no solution to the core problem of acquisition of land for laying pipelines.

53

PAPER AND PAPER PRODUCTS

Industry Snapshot

NEGATIVE

India is the 15th largest paper manufacturer in the world, accounting for around 2.5% of the worlds output. Demand for paper sector is closely-linked to economic activity as demand has grown at an average of 0.9x multiple of GDP in the past 5 years. The industry can be broadly characterized as 1) capital, energy and water intensive, 2) highly fragmented structure and 3) poor economies of scale due to use of obsolete technology. Raw-material, energy and stores and spares (including chemicals) forms about 75-80% of the total operating costs for the paper industry. India is selfsufficient in most paper segments, except for newsprint and higher grades of P&W papers. The country imports roughly 35% of coated woodfree paper demand and 50% of newsprint demand. On the raw-material front, the industry imports roughly 33% of its pulp requirement (both wood and recycled) to meet the domestic demand. The industry has experienced a very sharp fall in margin in FY12 due to imbalance of demandsupply fundamentals and significant increase in raw-material and fuel costs. The domestic paper producers are finding difficult to pass on the costs due to significant increase in domestic capacity and increase in imports. As per the recent statistics, paper imports as a percentage of consumption has increased from 22% in March 2011 to 31% in July 2011.

Duty Structure Finished goods

Customs Duty (%) Paper & Paperboard Newsprint Before 10 After 10 Impact Excise Duty (%) Paper & Paperboard Newsprint Before 5 5 After 6 6 Impact

Exempt Exempt

54

Duty Structure Raw-material

Customs Duty (%) Wood Pulp Wastepaper Coal Before 5 2.5 5 After 5 0 0 Impact

Proposal and Impact

Budget proposals Increase in excise duty from 5% to 6% Impact on the industry Paper players may face difficulty to pass on the entire increase in excise duty to end customers due to excess supply over demand Profitability of the paper industry will be adversely impacted as the impact of increase in excise duty on chemicals and other inputs would more than offset the benefit from exemption of custom duty on waste paper and coal

Increase in excise duty on chemicals & other inputs from 10% to 12% and decrease in custom duty on wastepaper/coal from 2.5%/5% to nil

Increase in budgetary allocation for education Will positively impact the demand for printing and writing papers by 21% to `74,000 crores in FY13

Impact on companies
Company Emami Paper Impact Comments The impact of hike in excise duty from 5% to 6% on finished products and increase in excise duty on chemicals & other inputs from 10% to 12% would more than offset the benefit of exemption of custom duty on waste paper and coal Margins would be adversely impacted due to retention of import duty on finished products and wood pulp, hike in excise duty on finished products and other inputs

BILT/JK Paper

55

PHARMACEUTICALS
Industry Snapshot

NEUTRAL

The Indian Pharmaceutical Industry (IPI) has a market size of `117,860 cr as on March 2011 and is expected to grow at a CAGR of 13.4% between FY10 and FY15E.

The branded generics dominate about 90% of the total sales which includes the OTC segment and the remaining 10% constitutes of commodity generics. Going forward, CARE Research believes there will be increased demand of drugs for lifestyle related diseases such as oncology, obesity, respiratory, cardiovascular, CNS diseases and immune system disorders given rapid urbanization and increase life-expectancy.

Indian pharma industry exports to more than 200 countries including highly regulated markets like the US and Europe. Export market which constitutes 41% of the total IPI sales in FY2011 has shown a robust growth rate of approximately 19% y-o-y over the 5-year period ending FY2011. Contract Research & Manufacturing Services is also considered an important growth driver for pharma exports

CARE Research expects this positive trend in the Indian pharmaceutical industry to continue in the coming years on the back of its manufacturing prowess coupled with a large domestic market having strong macroeconomic growth, expansion of healthcare infrastructure (private and public), rising incidence of chronic diseases and healthcare penetration to the extended urban and rural regions.

Duty Structure
Customs Duty (%) Bulk Drugs & Vaccines Formulations Medical Devices Before After Impact 5 10 5 5 10 5 Excise Duty (%) Bulk Drugs & Vaccines Formulations Medical Devices Before After Impact 10 5 0 12 6 0

56

Proposal and Impact

Budget proposals Extended the weighted deduction on R&D expenditure to 200% for in-house research for the next five years till FY2017 MAT announced for partnership units Impact on the industry Positive for the companies as this would widen the scope of R&D in the industry Negative for companies that have partnership unit, as it would result in higher tax outflow.

Impact on companies
Company Sunpharma Industries Dr. Reddys Cadila Healthcare Impact Comments The share of profit from the partnership unit holding 97.5% (approximate 30% of Sunpharmas revenue) would witness additional tax burden. Extension of weighted R&D deduction till FY17. The share of profit from the partnership unit holding 96% (approximately 20% of Cadilas revenue) would witness additional tax burden. Extension of weighted R&D deduction till FY17. Excise duty increase on bulk drugs and formulation would be passed on to innovator companies

Ranbaxy Lab Divis Lab

57

POWER
Industry Snapshot

POSITIVE

Historically, Indian power sector commissioned only half the targeted capacity addition for most of the 5-year plans. However, with private sector entry, the country added ~52.6GW in 11th Plan (v/s initial target of 78 GW) till February, 2012. At this juncture, the Indian Power sector is grappling with twofold problems-1) financial distress of distribution companies leading to inability to pay and 2) fuel shortages leading to capacity under-utilization. The power sector is facing acute coal shortage as domestic coal production grew only at 4.6% CAGR during FY09-11, vis-a-vis a demand growth of 6.6%. The 12th Plan capacity addition is expected to be 76GW, with ~60GW as coal based. However, the existing and upcoming power plants are likely to face acute coal shortage due to Coal Indias inability to ramp up coal production in the near to medium term. The power distribution companies are under severe financial distress on account of 1) nonrevision of power tariffs by most of the state distribution companies for several years 2) nonpayment of subsidies by respective state governments 3) consistently high Aggregate Technical and Commercial losses (AT&C) and 4) excessive cross subsidization leading to power purchase costs higher than revenue. Resultantly, the state distribution companies are facing problems in paying dues to generators. Few of them are also asking for restructuring of loans.

Duty Structure
Customs Duty (%) Liquefied natural gas (LNG) Steam coal Sintered natural uranium dioxide/Sintered uranium dioxide pellets (U-235) Raw material and intermediaries required for Wind turbine rotor blades Before 5.0% 5.0% 7.5% 7.5% After Nil Nil Nil 5.0% Impact

58

Proposal and Impact

Budget proposals Impact on the industry

External Commercial Borrowings (ECB) to The private and public power producers can avail be allowed to part finance Rupee debt of benefit of comparatively cheaper ECB loans to existing power projects. reduce overall financing costs. Extension of sunset clause of tax holiday for power sector u/s 80IA (4)(iv) upto March 31, 2013. Additional 20% depreciation on new plant for the initial year. With lot of power projects expected to slip from 11th Plan (March, 2012 dead line), the extension of 80IA sunset clause offers opportunity for power developers to commission power plants in the next year and avail the benefit. Additional benefit of 20% additional depreciation to benefit power producers with competitive based power projects.

Credit enhancement and take-out finance by This is expected help banks as take-out financing IIFCL for easing access of credit to will lower power exposure for the banks and will infrastructure projects. create opportunity for fresh power sector lending by them. Tax free bonds of `100 bn to be allowed for It is expected to reduce cost of rupee based financing infrastructure projects in 2012-13. funding to the power sector.

Impact on companies
Company NTPC, Adani Power, Tata Power, JSW Energy, GMR Infra, GVK Power and NPCIL Impact Comments The companies with imported coal based projects are expected to benefit from coal and R-LNG customs duty exemption. NPCIL importing uranium is also expected to benefit from lower cost of imported uranium. The customs duty on raw material for rotor blades and other intermediaries is reduced to 5% to improve local wind turbine manufacturing competitiveness.

Suzlon and Enercon (India)

59

REAL ESTATE
Industry Snapshot

POSITIVE

The real estate industry in India is highly fragmented with most of the real estate developers having region-specific presence. Besides, the industry is highly cyclical and is susceptible to a number of risks including interest rates, demand-supply, regulatory approvals, continued inflationary scenario, escalating commodity prices, changing macroeconomic scenarios, etc.

Post June 2008 downturn, the industry has already seen a sharp fall in the demand with correction in prices; however, the demand stabilised with spurt in the prices which rose to predownturn levels.

Presently, the industry is once again marred by slump in demand mainly due to high level of prices, higher interest rates, lack of ready inventory (in some pockets), slowdown in the approvals and concerns over the overall economic condition.

The industry is facing issues on the funding part as well due to reluctance of the banking sector to lend to the sector, high-priced private equity funds and slowed down cash flows due to hampered project execution because of rising costs, labour shortage and dampened demand.

Further, the global economic meltdown has resulted in corporates adopting a cautious approach leading to restrained demand for commercial space, whereas the concerns over income levels in the inflationary scenario as well as FDI in single brand retails is holding up the demand for the retail real estate.

Duty Structure
Excise Duty (%) Steel Retail - Price below `190 per 50 kg bag - Price above `190 per 50 kg bag 10% ad-valorem+`80 10% ad-valorem+`160 12% ad-valorem* + `120 Before 10 After 12 Impact

* An abatement of 30% has been notified on the Retail Sale Price of cement.

60

Proposal and Impact

Budget proposals Impact on the industry

Increased provision to Rural Housing Fund from The measures announced in the budget `3,000 crore to `4,000 crore indicate continued support to the low-cost Continuation of interest subvention scheme for and affordable housing sector. Continuation of interest subvention for home loans upto home loans upto `15 lakh, `15 lakhs and increased limit of home loan Exemption from service tax for the construction under priority lending and increased services to low-cost housing. provision by `1,000 crore for Rural Housing Fund is expected to boost demand Increase in the investment-linked deduction of for affordable housing. Further, the capital expenditure on low-cost housing to 150% exemption of the construction services from 100% from service tax, increase in the investmentSetting up of Credit Guarantee Trust Fund to linked deduction and mechanism to ensure ensure better flow of institutional credit for smooth flow for housing loan augurs well for the sector. housing loan The proposal for raising funds through Increase in limit of indirect finance under priority ECB as well as reduction in the withholding sector from `5 lakh to `10 lakh tax on interest payments on ECB would External Commercial Borrowings (ECB) for low- lower the cost of funds for the developers. Developers catering to the affordable housing segment therefore will be Reduction in withholding tax on interest payments benefited. Increase in tax slab, being on ECB from 20% to 5% for three years for marginal, may not have any impact on the affordable housing sector while increased excise duty on steel, if passed on to the developers, would Increase in income-tax slab increase cost of construction. cost housing

Impact on companies
Company HDIL Tata Housing Development Company Ltd Ashiana Housing Limited Impact Comments The real estate industry has been under pressure for quite some time due to lack of falling demand and funding issues leading to stressed cash flow. Besides, the high prices as well as increased mortgage rates have had an adverse impact on the affordability of the buyers. The budget proposals augur well for the low-cost / affordable housing segment as it proposes to lower the cost as well as funding issues.

61

ROADS AND HIGHWAYS

Industry Snapshot

POSITIVE

Road transport plays a pivotal role in the economic development of the country. In India, roads carry about 65% of the total freight traffic and 80% of the total passenger traffic. Currently, India has an extensive road network of about 4.2 million km the second largest in the world. The road network in India comprises of National Highways (NHs), Expressways, State Highways, District roads and Rural roads. NHs and state highways together constitute about 5% of the total road network in the country while 95% comprises rural and district roads. Over the years, Government of India (GoI) has emphasized on enhancing countrys road network through various programs like National Highway Development Project (NHDP), Pradhan Mantri Gram Sadak Yojna (PMGSY), Special Accelerated Road Development Programme for the North-Eastern Region (SARDP-NE) etc. The road sector witnessed investment to the tune of about `1,271 bn during the Tenth Five Year Plan. The expected investment in the Eleventh Five Year Plan is more than two times the investment achieved in the road sector during the previous Plan. In the Twelfth Five Year Plan, the investment in the road sector will be more than `6,000 bn, almost 2.2 times over that in the Eleventh Five Year Plan. Apart from NHDP, state projects are likely to drive the investments in the road sector as the focus of state governments on strengthening the road infrastructure has gathered momentum with the rise in the economic activity. However, the execution concerns are likely to persist on account of perennial problem of land acquisition.

Duty Structure
Excise Duty (%) Cement Retail - Price below `190 per 50 kg bag - Price above `190 per 50 kg bag 10% ad-valorem + `80 per tonne 10% ad-valorem + `160 per tonne Bulk Cement Steel 10% ad-valorem 10% 12% ad-valorem* 12% 12% ad-valorem* + `120 per tonne Before After Impact

* An abatement of 30% has been notified on the Retail Sale Price of cement.

62

Proposal and Impact

Budget proposals Target of awarding 8,800 km of road projects under NHDP in FY13. The increased allocation towards road projects Allocation of the Ministry of Road Transport and continued focus on speeding up the and Highways for road development has been project awarding will favorably impact roads increased by 14% to `25,360 crore. and highway industry. Allocation towards the PMGSY has been increased by 20% to `24,000 crore. To extend the issuance of tax-free bonds by NHAI aggregating `10,000 crore in the next fiscal. ECB to be allowed for capital expenditure on the maintenance and operations of toll systems for roads and highway projects. The rate of withholding tax on interest payment on ECB is proposed to be reduced from 20% to 5% for the next three years. The import duty exemption on specified equipments imported for road construction to be extended to contracts awarded by Metropolitan Development Authorities. Impact on the industry

The easy availability of funds and relaxation in ECB norms will augur well for the sector and is expected to accelerate the pace of road project awarding.

Impact on companies
Company IRB Infrastructure Ltd. ITNL Ashoka Buildcon Ltd. Impact Comments The continued focus of the government on road infrastructure development and speeding up the road project awarding will be beneficial for the companies in the road sector.

63

SHIPBUILDING
Industry Snapshot

POSITIVE

The shipbuilding industry is highly co-related with the developments in the global shipping industry therefore any slowdown in the shipping industry adversely affects the prospects of the shipbuilding industry. The vessels constructed by the shipyards can be broadly classified into: wet bulk, dry bulk, containerships, offshore and specialised vessels. The Indian shipbuilders occupied 6th rank in the list of orderbook by the builder country as on February 29, 2012 accounting for 1.36% of the global orderbook (in CGT). Correspondingly, the orderbook of Indian shipbuilders aggregated 3.01 mn dwt with 168 vessels on order as on February 29, 2012. The Indian shipbuilders specialise in the construction of offshore vessels. However, the size of the dry bulk vessels as against the offshore vessels in terms of carrying capacity (i.e. dwt) being high, the former vessel category constituted approximately 87.5% of the Indian orderbook on the said date. In terms of the number of vessels on order, the Offshore and Specialised vessels accounted for 38.7% of the total orderbook as on February 29, 2012. Indian Shipbuilding industry stands affected, post expiry of the Shipbuilding subsidy scheme and with no announcement of the renewal of the said scheme; the Indian shipyards are rendered cost ineffective as compared to their global peers. Further, the absence of infrastructure industry status to the industry renders the industry in a disadvantageous situation as compared to the major global shipbuilding nations such as S. Korea, China etc.

Duty Structure
Customs Duty (%) Duty on sale of ships Capital goods imported for shipbuilding Import against EPCG licence Before 14.71 After 14.71 Impact Excise Duty (%) Procurement of capital goods Procurement of raw materials, equipment and components from indigenous sources Before After 16 16 Impact

28.63

28.63

16

16

64

Customs Duty (%) Other taxes (%) Withholding tax on interest payment on ECBs

Before Before

After After

Impact Impact

Excise Duty (%)

Before After

Impact

20

Proposal and Impact

Budget proposals Reduction in withholding tax on interest payments on External Commercial Borrowings (ECBs) from 20% to 5% for a three year period. Impact on the industry The proposal would incentivise the Indian yards especially the private sector yards to raise low cost funds from the foreign destinations with the interest rate regime in the country currently at its peak.

Impact on companies
Company ABG Shipyard Bharati Shipyard Pipavav Defence and Offshore Engineering Pvt. Ltd. Impact Comments The reduction in the withholding tax on interest payments on External Commercial Borrowings (ECBs) would have minimal impact on the private Indian shipbuilders with the foreign borrowings of the players remaining very limited. However, the announcement would encourage the shipbuilders to raise funds through ECB, in case of any capex, in the near future in view of the high interest rate regime currently in India.

65

STEEL
Industry Snapshot

NEUTRAL

CARE Research foresees the domestic steel industry growth to be muted in the short term as concerns over economic slowdown are expected to prevail for a while. Nevertheless, these concerns are expected to fade away in the medium term. We estimate domestic demand for finished steel to grow at about 8-10% during FY13. In line with the growth in domestic demand, domestic finished steel capacity is also likely to increase at a similar pace. While the global supply of steel will continue to adjust itself with the change in global demand, we expect the global demand for finished steel to grow at around 5%. New policy measures on the mining sector from the Australian and Indonesian government continue to remain a major threat for the global base metal manufacturing industries. In addition, the domestic steel industry is highly dependent on imported thermal and coking coal and the finished steel prices are determined based on the landed cost of imports. Hence currency fluctuations in either direction tend to influence the industrys profitability. CARE Research expects prices of key raw materials to correct in FY13 compared to the average prices recorded in FY12. Owing to the continued oversupply situation in the global steel industry, prices of finished steel products are also likely to remain under pressure. Margins are expected to be subdued owing to the time lag between corrections in raw material and finished steel prices.

Duty Structure
Customs Duty (%) Before After Impact HR Coils Bars and Rods Alloy Steel Pig Iron Sponge Iron Steel Melting Scrap Iron Ore 5 5 5 5 0 2 5 7.5 5 5 5 0 2 5 Excise Duty (%) Before After Impact HR Coils Bars and Rods Alloy Steel Pig Iron Sponge Iron Steel Melting Scrap Iron Ore 10 10 10 10 10 10 10 12 12 12 12 12 12 12

66

Customs Duty (%) Before After Impact Coking Coal (< 12 % ash content) Coking Coal (> 12 % ash content) 0 0

Excise Duty (%) Before After Impact Coking Coal (< 12 % ash content) Coking Coal (> 12 % ash content) 0 0

Proposal and Impact

Budget proposals Increase in Excise Duty from 10% to 12% for all steel products Increase in Basic Customs Duty from existing 5% to 7.5% for all flat and non-alloy steel products. Reduction in Basic Customs Duty for capital goods/equipments required for setting up or expansion of iron ore pellet/beneficiation plants from 7.5 to 2.5% Export duty on Chromium Ore and concentrates being enhanced from `3,000 per tonne to 30% ad valorem Impact on the industry Increase in excise duty is likely to be partially passed on to the end-users owing to the current slowdown in demand for steel products. Proves beneficial for the domestic steel industry as the move is likely to restrict cheaper steel products imports especially from China. The move is likely to benefit players largely into the backward integration process of setting up iron ore pellet/beneficiation plants, which can further benefit players in using lower FE content iron ore. Indirect curb on exports of chromium ore by increasing the export duty is likely to increase the raw material availability to the domestic steel producers.

Impact on companies
Company SAIL Ltd. Tata Steel Ltd. JSW Steel Ltd. Essar Steel Ltd. Bhushan Steel Ltd. Impact Comments Increase in Excise Duty is likely to be partially passed on. Reduction in Customs duty on thermal coal and selective capital goods and increase in export duty for chromium ore is likely to increase cheaper availability of raw-materials. Increase in customs duty on flat and nonalloy steel products also remain beneficial for the companies.

67

TEA-COFFEE
Industry Snapshot

POSITIVE

The Indian tea industry is a 176-year-old industry, with an estimated market size of `19,500 crore. The industry presently employs nearly 35 lakh workers, of which approximately 13 lakh are employed directly in the tea plantations, wherein women constitute almost half the workforce. The tea output in India gradually increased in the calendar year (CY) 2011 at 988 mn kgs, registering 2.3% year-on-year (y-o-y) growth. In CY10, India ranked second in production and consumption after China and fourth in terms of exports. CARE Research expects the recently witnessed positive trend in tea output in CY11, to continue at a CAGR of 0.4% from CY12 to CY14. The domestic tea consumption is also likely to increase from 837 mn kgs in CY10 to about 920 mn kgs by the end of CY14, thus posting 4-year CAGR of 2.4%. Coffee is the second-most traded commodity in the world after crude oil. In coffee season (October to September) CS 2010-11, India produced 3.02 lakh tonnes of coffee, most of which was grown in the southern states of Karnataka (71%), Kerala (22%), and Tamil Nadu (6%). Coffee is cultivated on nearly 4.05 lakh hectares in India, and 70% of production is grown on small farms that own an area lesser than 10.12 hectares. The coffee output is expected to subsequently increase to 3.62 lakh tonnes by the end of coffee season CS 2013-14, at a CAGR of 6.2%, owing to increase in coffee cultivated area from the present 4.05 lakh hectares to 4.2 lakh hectares by the end of CY14. Coffee consumption is expected to improve at a 4-year CAGR of 6.4% from 1.08 lakh tonnes in CY10 to 1.38 lakh tonnes in CY14.

Duty Structure
Customs Duty (%) Machinery for coffee harvesting, processing, packaging, bagging, etc Coffee vending and brewing machine Before After Impact 7.5 5 Excise Duty (%) Coffee & tea pre mixes Before After Impact 1 2

10

68

Proposal and Impact

Budget proposals Impact on the industry

Nominal excise duty of 1% increased to 2% on Increase in excise duty to marginally increase 130 items that include tea and coffee pre-mixes. their prices. This would have no major impact on the companies and would be passed on to consumers. Reduction in customs duty on coffee plantation, Will result in marginal cost savings for coffee processing and packaging machinery from 7.5% plantation, processing and packaging to 5% companies. Reduction in customs duty on coffee vending and Will result in marginal cost savings for the brewing machinery from 10% to 5%, with companies operating in coffee vending and concessional custom duty of 2.5% on parts/ coffee outlets. components thereof.

Impact on companies
Company Gujarat Tea Processors & Packers Ltd. (Wagh Bakri Tea Group) Tata Coffee Ltd. Impact Comments Increase in excise duty on tea pre-mixes to 2% would have minimal impact as prices would be passed on. Reduction in customs duty on coffee plantation, processing and packaging machinery will result in marginal cost savings. Increase in excise duty on coffee pre-mixes to 2% would have minimal impact as prices would be passed on. in customs duty on coffee plantation and machinery, in addition to coffee vending and brewing machinery will result in marginal cost savings for the company across its business units. Increase in excise duty on coffee pre-mixes to 2% would have minimal impact as prices would be passed on.

Amalgamated Bean Coffee Trading Company Ltd.

Reduction processing

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TELECOM
Industry Snapshot

NEUTRAL

Within 15 years of inception, India has emerged as the second largest wireless subscriber base in the world after China, a success story, probably, unmatchable in the world. Telecom industry has flourished mostly on account of growth in wireless telephony (which stands at 96% of total subscribers), with wireline subscribers declining over the years. Overall teledensity in India is 74% with the respective teledensities for urban and rural area being 161% and 36%. Indian telecom sector accommodates both GSM and CDMA technologies, though CDMA accounts for just over 12% of total subscriber base. Wireless subscriber base in India grew at a CAGR of 50% in the five years, taking the wireless teledensity in India from 18% in FY07 to 74% today. In the last few years, subscribers in the rural areas have grown faster (CAGR of 70% over the last 5 years) as compared to the urban areas (CAGR of 42%). Increased competition in the sector resulted in decline in Average Revenue per User (ARPU) declining at more than 20% CAGR in the last five years. In the last 23 years, revenue growth has slowed- down to high single digit. Tariffs have halved since fresh licences were issued in 2008 taking the profitability southwards. After the spectacular performance for more than a decade, subscriber growth has been shrinking in the last few months, with net subscriber addition declining from 23 million in November 2010 to just 3 million in November 2011. CARE Research believes that subscriber growth will be sluggish in the next couple of years, due to factors like saturation in urban areas, expected rise in tariff, increased uncertainty in the sector leading to reduced expansion plans by the operators etc. With the uncertainty surrounding the cancellation of 122 licences by the Supreme Court, CARE Research believes that tariffs will reverse the trend inching-up marginally and as a result Average Revenue per User (ARPU) will see a marginal improvement over the next 2-3 years. Overall, the sector will see marginal improvement in operating profitability in the next 2-3 years.

Duty Structure
Customs Duty (%) Memory Cards Before After Impact
5 0

Excise Duty Before (%) Cellular Phones 1

After 1

Impact

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Proposal and Impact

Budget proposals Impact on the industry Telecom towers will be eligible for It will boost penetration of telecom infrastructure in Viability Gap Funding rural areas, bringing in additional subscribers from the uncovered areas. Service Tax increased from 10% to 12%. It will be passed on to the customer partly or fully.

Memory cards are exempted from the Mobile phone prices will come down marginally. customs duty.

Impact on Companies
Company Bharti Airtel Rcom Idea Cellular Indus Towers GTL Infra American Towers Impact Comments Viability Gap Funding for telecom towers will help in increasing rural penetration as the rural teledensity is just 37%. On the other hand increased service tax will increase the cost of telecom services to the customer, which might as well reduce the chances of tariff hikes. Viability Gap Funding for telecom towers will help in building telecom infrastructure in rural areas offering an avenue for growth given that the urban areas almost have oversupply of towers.

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TEXTILES
Industry Snapshot

NEUTRAL

The Indian textile industry is one of the major sectors of Indian economy and contributes almost 14 per cent of Indias industrial production, 4 per cent of National GDP and almost 17 per cent of India's export earnings. The textile industry is the second-largest employer in the country after agriculture and provides employment to close to 35 million people. The Indian textile industry can be divided into a number of segments such as cotton, silk, woolen, readymade, jute and handicraft. As per the annual report 2010-11 of Ministry of Textiles, the size of Indian textile sector is expected to be USD 55 billion. Further, during FY12, the textile exports are expected to remain in the range of USD 28-30 billion. The textile exports are estimated to be around USD 18 billion upto November 2011. The Indian Government had sanctioned a budget of `19.72 billion for FY12 under its restructured TUFS scheme, but the interest waiver scheme was not taken advantage of by the industry, which was already facing severe cash crunch. As of February 28, 2012, only `1.4 billion of subsidy has been availed. Overall demand outlook for the textile industry for FY13 is expected to remain moderate; with volatile commodity prices and exchange rate being key challenges for the industry. Participants who are well placed in value chain and have control over their debt levels may witness improved performance. Prospect of cotton spinning units is expected to improve with decline in cotton prices leading to a revival in demand for cotton yarn and consequent increase in capacity utilization across the cotton textile value chain. Further, with increasing urbanization, growing households and increasing disposable income, the domestic demand for denim fabric is also expected to remain healthy going forward. However, with the US and EU accounting for more than 70 per cent of Indian apparel exports, the concerns over the economic health of these countries would put pressure on the Indian apparel exporters in the medium term. Man Made Fibre (MMF) industry is expected to grow at a moderate 5-6 per cent in the medium term. However, recent increase in input prices owing to the increase in crude oil prices and the stabilization of cotton prices may limit the envisaged growth prospects of the MMF industry.

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Duty Structure
Customs Duty (%)
Raw cotton Cotton Yarn Cotton Fabric Purified Terepthalic Acid Mono Ethylene Glycol Polyester Chips Polyester Staple Fibre Viscose Staple Fibre DMT Manmade Yarn Manmade Fabric Branded RMG

Before 0 10 10 5 5 5 5 5 5 5 10 10

After 0 10 10 5 5 5 5 5 5 5 10 10

Impact

Excise Duty (%)

Raw cotton Cotton Yarn # Cotton Fabric # Purified Terepthalic Acid Mono Ethylene Glycol Polyester Chips Polyester Staple Fibre Viscose Staple Fibre DMT Manmade Yarn Manmade Fabric Branded RMG

Before 0 5 5 10 10 10 10 10 10 10 10 10

After 0 6 6 12 12 12 12 12 12 12 12 12

Impact

# Optional and Concessional

Proposal and Impact

Budget proposals Hike in standard excise duty from 1%, 5% and 10% to 2%, 6% and 12% on various items Impact on the industry The hike in excise duty on cotton-based products from 5% to 6% is not expected to have any significant negative impact on cotton textile players since the excise duty on cotton-based products is concessional and optional. The hike in excise duty on textile products other than cotton-based products from 10% to 12% is expected to increase the cost of production for non-cotton textile players.

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Budget proposals Hike in excise duty on branded readymade garments from 10% (with 55% abetment) to 12% (with 70% abetment)

Impact on the industry The hike in excise duty on branded readymade garment from 10% to 12% coupled with an increase in abetment from 55% to 70% would result in a net decline in effective excise duty from 4.5% to 3.6% which is expected to result in marginal benefit to readymade garment manufacturers. With falling cotton prices and proposed reduction in effective excise duty, the prices of cotton-based branded readymade garments is expected to come down which would lead to boost in demand.

Exemption of customs duty for new automated shuttle looms

The exemption of new automated shuttle looms from customs duty is expected to boost investments and capacity addition in weaving and garment sectors which may increase competition considering the fragmented nature of the industry.

Note In Union Budget 2012-13, the government has announced a financial package of `3,884 crore for waiver of loans of handloom weavers and their cooperative societies.

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Impact on companies
Company Alok Industries Ltd Impact Comments Its presence across the textile value chain and its integrated operations would enable Alok Industries Ltd. to pass on the excise duty hike to its customers. Falling cotton prices and proposed reduction in effective excise duty on readymade garments is expected to have a positive impact on Arvind Ltd. since Arvind Ltd. derives majority of its revenues from denim and garment segments With hike in excise duty on man-made fibre coupled with recent increase in crude oil prices, it is expected to limit its ability to pass on the increase in cost of production to end users. With falling cotton prices, revival in demand and its established position in domestic cotton yarn manufacturing segment, Nahar Spinning Mills is expected to maintain its leadership position in the segment. Raymond Ltd. derives majority of its revenues from shirting fabric (cotton based) and branded readymade garments & apparels. Since the excise duty on cotton based products is concessional and optional and the effective excise duty on branded readymade garments is proposed to be reduced from 4.5% to 3.6%, it is expected to have favourable impact on Raymond Ltd. Recent hike in crude oil prices has resulted in an increase in cost of raw material for RSWM Ltd. since its major raw materials are crude oil derivatives. This coupled with proposed hike in excise duty from 10% to 12% is expected to further increase in cost of production for RSWM thereby putting pressure on its margins. With falling cotton prices, revival in demand and Vardhman Textile Ltd.s established position in domestic cotton yarn manufacturing segment, it is expected to maintain its leading position in the segment. With falling cotton prices and Welspun India Ltd.s established market position in home textile segment, it is expected to maintain its market position.

Arvind Ltd.

Garden Silk Mills Ltd.

Nahar Spinning Mills Ltd.

Raymond Ltd.

RSWM Ltd.

Vardhman Textiles Ltd.

Welspun India Ltd.

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