Tightrope walking

Every year, as the annual Budget draws closer, expectations across all sections of the society start building up. This year too, it is no different. What is different this time, though, is that the finance minister has a tightrope to walk on.
 
On one hand, global as well as domestic economies (including corporate earnings) are heading for a slowdown leading to an added element of uncertainty, whether India will be able to sustain its gross domestic product (GDP) growth rate of 8-9 per cent seen in the past three-four years.
 
In effect, it also indicates a potential slowdown in revenue collections for the government. On the other hand, with inflationary pressures (higher prices of agri-produce, crude oil and other commodities), many are expecting duties to be lowered or at least, rationalised.
 
The industry is thus hoping for initiatives or steps that will help ease the cost pressures, while simultaneously providing thrust to growth. The third aspect comes from the political side. With many states headed for elections this year and national elections scheduled for 2009, there are expectations that the Budget will also contain populist measures.
 
In short, look forward to goodies for the aam admi through higher allocation for social sectors like health, education, rural upliftment and so on.
 
For India Inc, where many sectors are facing a slowdown or negative growth (two-wheelers and consumer goods) and cost pressures are on the rise, the expectations are high. Since many industries are in the midst of creating new capacities, it is equally important that the Budget continues to emphasise on sustaining growth rates.
 
Among sectors that are expected to receive higher attention include infrastructure (power, roads and ports), agriculture, labour-intensive and/or export-oriented industries like textiles, pharmaceuticals and auto components. 
 
INDIA INC'S WISHLIST
Expectations

Impact and Beneficiaries

Agriculture
Remove 5% import duty on LNG; bring VAT at 4% on natural gas Positive for urea and nitrogen-based fertiliser companies
Rationalise input prices; tax benefits for new projects Attract new investments and capacities 
Cut in excise duty on pesticides from 16% to 8% Positive for Aries Agro, Monsanto. Would lead to increased pesticide usage
Excise reduction of 67% on molasses to Rs 250/ tonne  Positive for sugar producers having large ethanol capacities
Auto Sector
Cut excise duties on bigger cars and utility vehicles from 24% to 16%, from 16% to 12% on two wheelers Benefits likely to be passed on to consumer and will improve sales volumes
Companies: M&M, Maruti Suzuki, Hero Honda, Bajaj Auto
Tax concession on technology imported by auto component companies Will boost indigenous research activity and benefit auto component sector
Banking
Reduction in lock-in period from the current 5 to 3 years on term deposits under section 80 (C) To make deposits attractive and solve banks' asset liability mismatch
Companies: Large public sector banks such as SBI, PNB and Canara Bank
Exemption of interest income from deposits; restoration Sec 80L  
Increase ceiling for TDS on FDs from Rs 5,000 to Rs 10,000  
Increase in interest subsidy on farm loans from 2%  Will help achieve higher agricultural growth. All PSBs to benefit 
Interest earned on infrastructure lending to be exempted  Lending to infrastructure sector will become attractive and PSBs will benefit
Capital goods and Engineering
Continuation of reforms and higher allocation for the power sector, road segment, mine allocation Help the sector in creating better demand outlook. Companies in the power equipment, mining and construction equipment sectors to benefit
Reduction in peak import duties of 10% for construction equipment Marginally negative, as the companies will be able to import at lower rates
Excise duty on power equipment may be reduced from 16 to 8 %. Help companies to cope up with the rise in raw material prices
Extension of subsidy for shipbuilding industry enjoying 30 % export subsidy expired in August 2007) Positive if extended
Companies: ABG Shipyard, Bharati Shipyard
FMCG
VAT on biscuits to be reduced from 12.5% to 4%. Also biscuits irrespective of the retail piece should be fully exempt from excise duty Will make biscuits cheaper
Companies: Britannia, ITC
Lowering of duties on inputs like vegetable oil and palm oil To reduce input costs Companies: Godrej Consumer, HUL
Reduction on dividend distribution tax Positive, especially for companies with high dividend payout ratio. 
Information technology
Extension of tax exemption for STP units beyond 2009 Positive for most IT companies 
Relax Rs 10 crore limit for facilities on advance tax payments  Faster tax collections, simpler administration for software companies
Relax FBT provisions, treat BPOs at par with IT companies Avoid taxation of genuine business expenditure, simpler tax structure
Waiver on taxing of ESOPs Simpler tax structure to attract talent
Infrastructure
Hike investments in road, mining, port, water, oil & gas Positive for all the companies engaged in the construction
Reintroduction of the tax sops under section 10(23G) Help in mobilising funds
Reduce customs duty under project imports from 7.5% to 5% Latest technology at lower rates
Some clarification on section 80IA The benefit is given to the developers and may be extended to contractors as well
Metals 
Cut excise from 16% to 8% on long steel products Positive for manufacturers and thus also help construction companies
Scrap 5% customs duty on coke and refractories Positive for major companies in the context of rising coal and refractory prices. 
Scrap 5% custom duty on import of scrap Positive, due to rising prices of scrap
Increase export tax on iron ore Positive for steel companies outsourcing iron ore
Infrastructure status for captive mining Benefits will accrue for the next 10 years and encourage new capacities
Oil and Gas
Exemption of 12.36% service tax for E&P activities  To attract investments and reduce costs for Cairn, ONGC and RIL
Infrastructure status to E&P; extend tax holiday 10 yrs for discoveries  
Excise duty cut on petrol and diesel  To reduce the burden on HPCL, BPCL and IOC
Reduction of customs duty on various petroleum products including LNG To reduce the prices of final products
Sales tax cut in gas and LPG from about 20-29% to flat 4% Increase in consumption of gas to benefit GSPL and IGL 
Pharmaceuticals
150% deduction for demerged or independent R&D units Will promote research and IPR activity and benefit pharma majors
Include clinical trials and patent filing under R&D expenses  
Power 
Extension of 80IA benefits to UMPPs till 2017  It will benefit UMPPs as most of these projects are coming after 2010
Exempt transmission cos associated with UMPP from import duty  This will help faster and cost effective execution of the UMPP projects
Tax exemption for power infrastructure bonds  Will bridge funding gap for 78,000 MW of new capacity under 11th plan
ECB norms relaxed for the power companies Help companies to raise cheaper funds
Cut in excise on power equipment from 16% to 8% Help power companies to source power equipment at lower prices
Textiles
Hike TUF allocation by 175% to Rs 110 billion in 11th plan  Will help achieve economies of scale and benefit cotton yarn, fabric players
Cut excise duty on textile machinery from current 16% Will encourage modernisation and improve efficiency
Increase in duty drawback rate from 11% Make Indian textile exports competitive
Cut import duty on cotton; rationalise excise on man-made yarn Will reduce input costs and bring man-made yarn on par with cotton
 
While the Budget may not end up appeasing everybody, if it can manage to strike a balance namely, sustain growth, address inflationary issues, push tax reforms further, provide reasonable emphasis to social sectors, as well as agriculture without compromising on fiscal discipline, it will be an achievement. To know more on what the industry expects and the sectors that stand to gain, read on:
 
Agriculture
 
The budget is expected to be positive for the sector by way of creation of infrastructure like water resources, availability of funds, procurement centers, warehousing, power, etc, aimed at improving output. Hence, better prospects for companies in the irrigation, seeds and fertilizer segments.
 
Regards rising input costs, the fertiliser companies are expecting important changes with respect to availability of gas and other inputs at cheaper prices. Secondly, to reduce India's dependence on imports, there is a need to attract investment with an aim to create fresh capacities, hence, the expectation of tax incentives.
 
Apart from fertiliser, the sugar companies are expecting a reduction in excise duty on molasses that will help reduce the cost of producing ethanol and improve production for blending with petrol.
 
Auto and Auto components
 
The auto and auto component sectors have been reeling under the combined assault of higher interest, raw material costs and a stronger rupee. Commercial vehicles and two wheelers have borne the brunt of this, as banks shut off the credit tap while buyers postponed their purchases.
 
Softening of interest rates and reduction in excise duties could bring down costs for the customer and boost sales of vehicles across segments, thus helping both, auto makers and component players. Little wonder, the industry hopes that excise duties on bigger cars and utility vehicles will be brought at par with smaller cars to 16 per cent, while excise duty on two wheelers will be cut from 16 per cent to 12 per cent.
 
Banking and NBFC
 
The overall situation in the banking industry seems to be satisfactory except lower credit growth and asset-liability mismatch (proportion of deposits more than five years in total deposits is very less at 8.3 per cent). Thus, there is a need to make long-term deposits more attractive. Further, resources have to be channeled to agriculture and infrastructure sectors, if higher GDP growth is to be achieved.
 
For non-banking finance companies (NBFCs) catering to the needs of the housing and infrastructure sectors, there is a need to reduce cost of funds. Housing finance companies (HFCs) are hoping that they be allowed to borrow through external commercial borrowings (ECBs) and infrastructure finance companies are expecting the removal or reduction of 20 per cent withholding tax on payment of interest on ECBs.
 
Capital goods and Engineering
 
Capital goods sector will be the key beneficiary of increased spending and incentives for the infrastructure sector and robust industrial capex. Higher budgetary allocation of funds for different schemes such as APDRP and RGGVY, and segments like power, transports, ports and mining augur well for the sector. It is expected that some relief, to help offset rising raw material prices, will be provided by way of reduction of custom duty on metals like aluminium, zinc and steel alloys. This will help lower costs for the industry.
 
Cement
 
Last year's move of introducing a dual excise duty structure, aimed at putting a lid on cement prices, backfired as companies resorted to raising prices due to higher input costs. In this scenario, moving back to a simplified structure by rationalising the excise duties is not ruled out.
 
With costs rising, a reduction in limestone royalty (currently Rs 67 a tonne) and a waiver of the extant 5 per cent import duty on coal and pet coke is expected. Should that happen companies which rely on imported coke should benefit.
 
FMCG
 
For the fast moving consumer goods (FMCG) sector, maintaining profitability became a challenge due to cost pressures on inputs like wheat, milk, vegetable oils and palm oils even as demand was robust. Companies partially passed on the price increases to the consumers with some even sacrificing a bit of volume growth. The soaps category saw a volume de-growth of 5 per cent in the last quarter following the 10 per cent hike in product prices over the last six months.
 
Little wonder that most of the expectations pertain to lowering duties. That apart, incentives for promoting the cold-storage infrastructure, essential for development of food processing sector, are also expected.
 
Information technology
 
The Indian software and information technology (IT) industry have been in the dumps over a large part of the past year. Although issues like the rising rupee, imminent US slowdown and manpower (availability and costs) are playing spoilsport, the industry seeks some relief through extension of the Software Technology Parks of India (STPI) scheme, which would prolong their tax holiday.
 
Besides this, a reduction in the scope of fringe benefit tax (FBT) and a waiver from taxes on equity stock option plans (ESOPs) may help companies add a bit to their fledgling bottom lines.
 
However, since IT companies already have high profit margins, and they have been enjoying tax benefits since a decade now, chances are that these demands may not be fulfilled. For BPOs, their demands include rationalisation of FBT to levels at with par with IT companies.
 
Infrastructure
 
With higher allocation for infrastructure projects from 5 per cent of GDP to 9 per cent by 2012 planned, companies operating in the space as well as catering to the needs of the infrastructure sector stand to gain. However, some issues need attention. These include, focus on funding issues like increasing Viability Gap Funding (VGF) and help financing critical, long-gestation and financially less viable projects.
 
Further, there are hopes of re-introduction of tax sops, with an aim to attract higher investments. Besides, the industry is also expecting more clarity on the section 80IA (benefits given to the companies engaged in infrastructure development) and extension of the same to the contractors as well.
 
Metals
 
Amid concerns over the rising iron ore and coal prices, companies not having captive resources are hoping that the custom duty on the coke and refractories to be scraped besides, more restrictions on the export of iron ore. In finished products, a reduction in excise duty on long steel products (used in construction) is also expected. This should help partly offset the pressure on account of rising input costs.
 
Oil & Gas
 
The high subsidies that companies like ONGC, HPCL, BPCL, IOC and GAIL have to bear, have negated the benefits of the bullish global oil scenario. The small price hikes for diesel and petrol and the issue of oil bonds have not helped the oil refining and marketing companies (OMCs) much, as their under-recoveries still stand at a huge Rs 92,000 crore. Moreover, the need to speed up exploration and production (E&P) activities is desired.
 
Pharmaceuticals
 
Hit by rupee appreciation and price erosion, large Indian pharma companies are looking at various ways of enhancing revenues—by looking at European and less regulated markets, conducting joint research trials and outsourcing arrangements with large multinational pharma companies.
 
Their demands pertain to tax concessions for R&D units and treatment of expenses relating to clinical trials and product patents as R&D expenses. Should these be accepted, it will be positive for companies, which have a higher spending on ANDA, IND and DMF-– all procedures to register a product in regulated markets. CRAMS players, too, will be helped by this immensely.
 
Power
 
If the government's target of 'power for all' and the rising demand for power is considered, then, power could be among the few focus areas. Broadly, the industry is expecting more fund allocation for ongoing schemes such as APDRP and RGGVY besides, a greater degree of commitment through further reforms.
 
For easy access to funds, the industry has proposed tax free power bonds, priority lending status for power sector, relaxation of ECB norms and extension of tax benefits till 2017 for UMPPs.
 
To address the supply constraints for key equipments, a cut in custom duty on power and transmission equipment is proposed. Besides, a reduction in excise duty on power equipment will also help lower equipment. On the raw material front, tax incentives for captive mining and, policy initiatives for easy availability of feed stocks have been proposed.
 
Textiles
 
The rise in the value of the rupee has adversely impacted the competitiveness and profitability of Indian textile industry-one of the top export contributors and the second largest employer. While operating margins of top exporting companies has eroded, the country's total exports to the US during April-October 2007 have declined by 3.2 per cent in value terms.
 
Thus, there is a need to achieve scale, modernise existing machinery and improve cost-efficiency in order to be globally competitive. Moreover, there is also a need to reduce the input costs for both cotton textile and man made fibre industry.