Budget 2013-14: Quick View and Expert Speak

The Union Budget 2013-14 is out. But, P. Chidambaram has announced that this Budget is not the last word. "The economy is indeed challenged," said Chidambaram and "another set of measures will be announced" when the Finance Bill is passed. So where does this leave us? 

Puneeta Uchil and Grishma Samuel give you the gist of each sector with a focus on expectations, the Minister's proposals and forecasts from industry experts.

by Budget 2013
1 year, 9 months ago
1
From last year's denominations we expected the Finance Minister to try and achieve the fiscal deficit target of 5.3% that he had promised for 2012-13. We also expected the Finance Minister to deliver a reform-centric budget addressing the fiscal and current account deficits in the wake of the sustained country downgrade scare.  Fiscal consolidation to facilitate lower inflation and interest rate cuts and, policy measures and incentives to direct savings towards infrastructure and industrial investment to boost non-inflationary economic growth. Steps towards fiscal consolidation and boosting investment would also be important to attract foreign capital inflows to finance the high Current Account Deficit. In addition, there were expectation for road map for major economic reforms like GST, DTC, land acquisition bill, FDI in insurance and pension. Thought to be a good trigger for the markets, did it fulfill the bill? Was it disappointing? Did the finance minister do anything to prop up growth?

This budget was full of growth because expenditures as we maintained at 30% growth. See two weeks back everybody was worried that the Finance Minister is cutting expenditure and that will have an impact on the growth both in consumption investments and now when he has maintained expenditure at 30%, people are saying oh! the quality of budget is not that great. So maintaining expenditure was pro growth.
says Akesh Arora, Managing Director and Head of Research, Macquarie Capital Securities. He further adds:
Number two, he has done three important things. One is 15% investment allowance for companies doing capex in FY14 and FY15. Speaking to corporates, a lot of them were really excited about this because this alone can add around 2.5% to IRR of the companies and actually shaves off 5% from the project cost immediately. So it is a big positive and I will not be surprised if capex really picks up dramatically in the next two years as people and corporates move in to take advantage.
And..
Number three is that he has earmarked funds for 3000-km of road to be awarded in the next six months. There were concerns about private companies being able to finance roads under private participation. So the government moving in and marking budgetary support gives us lot of surety on that big infrastructure space. Finally, he has raised that limit to 50,000 crore for tax-free bonds, which should also give levy for NHAI, railways, power ministry etc. to raise funds. So overall may be this issue was not really highlighted yesterday because of the focus on the 90 A rule etc. But this budget is excellent in terms of pushing growth and we should see results coming through in the next few months.
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2

The most awaited outcome for the banking sector were initiatives towards curbing
the high fiscal deficit. The Union Finance Minister has earmarked the fiscal deficit at 4.8% as opposed to the expected 5.3%. There were also expectations regarding capital infusion plans for the public sector banks, allowances for NAPs to be provided as an expense for tax liability, and tax exemption of interest from fixed deposits with tenure of three years and above, but no specific proposal addressing them came about in the Budget. 

There were other proposals affecting the banking sector that were unforeseen, like the proposal to introduce a Commodities Transaction Tax at 0.01% of the value of the contract. Then there was the news that the interest subvention scheme for ST crop farmers is to be extended to the private SCBs as well. There were incentives for new home loans in that a fresh home loan of less than Rs 25 lacs, can claim an extra deduction of Rs 1 lac in interest, over and above the 1.5 lacs, but only for the first year i.e  year 2013-14. Also, inflation linked bonds are to be introduced, which will help investors to continue seeing returns despite fiscal turbulence.

Private sector banks have been given a level-playing field vis-a-vis the public sector banks,

said Chanda Kochhar of ICICI Bank.

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3

While every sector can absorb new investment, it is the infrastructure sector that needs large volumes of investment,” Union Finance Minister said emphasizing on the need to create “new and innovative instruments to mobilize funds” for meeting investments targets in infrastructure sector. The Minister announced plans for new industrial corridors, ports, national waterways.

In order to sustain a healthy GDP growth rate, the government was expected to continue its focus on higher spending on the sector. A new policy, wherein IIFCL is going to offer credit enhancement to 3,000 kms of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh will be awarded in the first 6 months of 2013-14.


Further clarity on Land Acquisition Bill was expected, as acquisition and environmental permissions were the biggest bottlenecks toward timely implementation of projects. The budget was expected to focus on funding for infrastructure projects by channelizing long-term, low-cost funds into the sector. And rightfully, the Minister said that Infrastructure Debt Funds(IDF) will be encouraged, the corpus of Rural Infrastructure Development Fund(RIDF) is to be raised to 20,000 crores, the taxes on interest long term infrastructure bonds in foreign currencies from non-resident investors is to be reduced, and 5,000 crores is given to NABARD to finance construction for warehousing. The government is also going to constitute a regulatory authority for the road sector, and has set up the CCI(Cabinet Committee on Investment) to monitor investment proposals as well as projects under implementation.

The challenge always has been to convert some of these targets like
3000 kms of new roads into implemental plans,

said R Shankar Raman of L&T.

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4

The FMCG sector has witnessed volume growth and price hikes, which offset higher cost  pressures to a large extent. Thus, acquisitions made over the past few years have boosted performance of FMCG players. Major announcements expected in the budget were: a hike in the overall excise duty rates which is current at 10% and hike in excise duty on cigarettes.


The Minister announced that service tax would be applicable to all A/C restaurants, irrespective of whether they serve alcohol or not. Also, 'zero excise duty route', as existed prior to Budget 2011‐12, is being restored with respect to branded ready-made garments and made ups. A GST map was also laid down. And finally the excise on cigarettes increased 18% on all segments except below 65mm.

...implementation of GST will help the trade which will make taxes uniform and can also help to reduce prices. Today, we do not launch some products in certain markets where the VAT rates are high as it would increase prices,

said CavinKare CMD CK Ranganathan, who also feels measures to control inflation will help to reduce commodity cost thereby giving some cushion to input cost and profitability.

Any steps to boost the agrarian economy which can drive consumption will help the FMCG industry,

said Dabur India CEO, Sunil Duggal.

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5

The overall growth expectation for the automotive sector was 5%, 16% and 14% for passenger vehicles, commercial vehicles and two-wheelers, respectively. The interest rates were expected to moderate going forward, providing relief to automakers.The Minister announced an increase in excise duty to 30% on non-taxi SUVs in 27% bracket, which was as expected, to reign in the widening fiscal deficit.


He also proposed to increase tax rate on payments of royalty/technical fees to nonresidents from 10% to 25%. Custom duty was hiked from 75% to 100% on luxury cars (CIF value above USD40k) and from 60% to 75% on bikes above 800cc engine capacity. In contrast, the excise duty on truck chassis reduced from 14% to 13%.

Don't agree with excise duty hike on SUVs. Diesel tax not being implemented is very good news for the sector. I would rate budget as 7.5/10,

said Pawan Goenka of Mahindra and Mahindra.

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6

The budget states that there is not much that can be done to cut down on import of
oil and coal as that would adversely impact the automobile and power  industries, which is already reeling under extreme pressures. This has resulted in further increasing the prices of diesel, kerosene and LPG. It was also expected that the policy on Shale gas, based on revenue sharing will be announced and blocked NELP blocks will be cleared. The budget showed a positive outcome for the upstream companies like Reliance, ONGC. There has been no announcement to abolish import duty on LNG. This is positive for refining companies IOCL, BPCL, HPCL, MRPL, RIL as the current duty differential of 2% is maintained. There will be an nvestment allowance of 15% on new plant & machinery acquired and installed in FY14 and FY15, and worth INR 1bn and above.


This can be positive or negative under different circumstances. It is positive if the fields are producing fields and could be negative otherwise,
  said Sanjay Grover, leader (oil and gas practice) at audit and consulting firm Ernst and Young Pvt. Ltd.
The profit-sharing model is where all the confusion arises as it’s always linked to cost recovery. And this leads to involvement of the DGH (Directorate General of Hydrocarbons, the upstream regulator) and CAG (Comptroller and Auditor General, who has discretionary powers to audit performances of companies working with the government). We’ve seen this in the last one year and a half,
said an oil and gas veteran who has worked at Reliance and IndianOil.
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7

The budget has announced an increase in the healthcare expenditure from INR 30,000 crores to INR 37,330crores (increase of 24%). There has been an overall increase in expenditure to 21,200 crores under National Health Mission. This includes both rural and proposed urban mission. This has been seen as a positive as compared to the expectations from the budget. There has been no announcement regarding an increase in weighted deduction on R&D. there has been a negative impact of 0.4% increase in Minimum Alternate Tax (MAT) rate to an extent that domestic accounts for 40% of total business. 


An important expectation from the budget was to remove excise duty disparity between API and formulations, however there has been no announcement on the change in the duty structure. In terms of health insurance, the budget has announced more insurance penetration in Tier‐II cities without prior approval of IRDA and health cover under social security package for unorganized sector. There has been an increase in surcharge from 5% to 10%. This has resulted in an increase in tax rate by 1%, which gives a negative impact as most profit comes from domestic business. 

The current provisions for deduction u/s 35(2AB) are restrictive in nature, so as to cover only expenditure incidental to research carried on at the in-house R&D facility. All expenditure related to research carried on in the in-house facility i.e. clinical trials, bioequivalence studies, regulatory and patent approvals should be eligible for weighted deduction, even if these activities are carried outside the approved R&D facility including overseas expenditure,

said the FICCI.

Considering the fact that private sector serves 75% of the healthcare diagnostics (BSE 0.96%) responsibility for the country, the Union Budget has yet again missed the opportunity to recognize the role of the private sector,
said, Dr. Sanjeev Chaudhry, managing director, SRL Diagnostics.

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8

There has been a basic customs duty of 2% levied on steam/ thermal coal and additional duty of customs called countervailing duty (CVD) on it has been increased to 2%. Power Purchase Agreement (PPAs) have a clause to pass on such increase in cost to procurers. However, this is negative for developers having merchant contracts such as JSW Energy and PTC India. Sec 80 IA benefits have been extended and Dividend Distribution Tax (DDT) will be exempted for dividend from foreign companies by another year, which is expected to be positive on some lines.

 

The budget did not include any major announcement from the Power sector apart from the private-public partnership (PPP) framework with Coal India which is expected to boost coal volume. As compared to the pre-budget expectations, there were no announcements on coal price pooling and SEB restructuring. The industry had expected a five-year increase in the subset clause which was extended by just one year.

The announcement to equalise the custom and CVD for steam and bituminous coal used in thermal power generation at 2 per cent is welcome as this provides clarity to otherwise claims that got raised by Customs department,
Tata Power Managing Director Anil Sardana said.
The move is a little amusing as the country has huge deficit in coal and the government is trying to minimise cost by augmenting coal supply through various steps for domestic production as well as opting for price pooling of domestic and imported coal ,

said Adani Group Chairman Gautam Adani, given the fact that the country is facing coal shortage.

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9

The real estate sector expected the budget to give the affordable housing segment an
infrastructure status however, the current standard operating procedures will continue and there has been no significant announcement. In addition to this, there have been no announcements in terms of giving the real estate sector an industry status, implementation of Real Estate Investment Trusts (REITs) for small investors to invest in real estate assets and in exempting small houses (under‐60 sq.m carpet area) and special housing zones from paying tax. There has been an additional interest deduction of INR100,000 for housing loans up to INR2.5mn taken for first home from the period 1.4.13 to 31.3.14.


A surcharge of 10% has been levied for persons whose taxable income exceeds INR10mn per year, and an Urban housing fund of INR 20bn will be set up by NHB. The new budget states that TDS will be deducted at a rate of 1% for transfer of immovable property (other than agriculture land), where the consideration exceeds INR5mn and houses above 2,000 sq ft or above INR 1 crore will have a lower abatement of 70% against 75%.

This would mostly be helpful for people who want to buy a house in smaller cities or distant suburbs where the ticket size is lower,
said Niranjan Hiranandani, chairman of the Hiranandani Group on the budget’s extention of an additional benefit of Rs 1 lakh on home loans up to Rs 25 lakh for first time property buyers.
Effectively, this translates into an increase in service tax outflow, which means that luxury housing will now become even more expensive,

said Anuj Puri, chairman & country head, Jones Lang LaSalle India on the budget’s announcement that the rate of abatement on homes and flats of more than 2,000 square feet or costing Rs 1 crore and above has been reduced from 75% to 70%.

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10

We give you industry experts who speak on the importance of financial planning as it is the only way to get total value from the budget.


Investors will witness some incremental changes as far as their investment plans are concerned in the coming financial year following the announcement of the Union Budget 2013-14. These will not mean a major deviation from their existing plans though they will be able to make use of some additional options in their investment mix. One bit of good news is that the investors will have a choice of tax free infrastructure bonds for one more year as there has been a permission given for the issuance of these bonds. The individual can choose this as a long term option for parking their funds for 10 to 15 years and this will not have an adverse tax impact because of the fact that the income will be tax free in their hands. 
The Rajiv Gandhi Equity Savings Scheme (RGESS) has also witnessed some small changes wherein the income limit for being eligible for the scheme has been raised to Rs 12 lakh. At the same time the benefit can be claimed over a period of three years as compared to the one year time period that exists currently which means that the investor can actually phase out their investments to suit their requirements. The choice of instruments in the scheme has also been increased as equity oriented funds have been
included in the eligible list of investments which will help the investor to choose a fund as per their liking.

says Arnav Pandya, a financial planner.

If Palaniappan Chidambaram’s eighth Budget has not set the markets on fire, it can be easily explained: his first goal was to avoid doing damage to investor confidence, which is what his predecessor managed to do. And unlike his own 2008 budget, which set the stage for the economy’s long-term slide and made inflation intractable, Budget 2013-14 has taken the middle path of low ambition and low risk. There is thus nothing in it to excite anybody, not even his
own party. He has delivered on his promise of providing a “responsible” budget, which the markets misunderstood to mean something that will send the adrenalin pumping. That was not on, and the FM restrained himself from any dose of excess populism. 
A lo-calorie budget is not meant to energise anybody. It is meant to get the fat down. 
If the markets are moping right now, with the Sensex and Nifty heading south, it’s because Chidambaram has already given them enough room for optimism before the budget. The markets wanted more of the same, but he could not oblige.

says R Jagannathan, Editor, Firstpost at Network 18.

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10
Sections
1116
Views
1. Overview: Expectations in a nutshell
2. Banks: Were their wishes granted?
3. Infrastructure: Did their roads lead to Rome?
4. FMCG: To Retail or Not to Retail?
5. Automobiles: Who's in the driving seat?
6. Oil and Gas: What is their fate?
7. Pharma: The Right Medicine?
8. Power: How much power will they have?
9. Real Estate: Do they get the deal?
10. Fiscal Management for 2013-14
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