Impact Analysis of Union Budget Proposals 2007-08

ICRA

AUTO

Proposals

▪	Weighted deduction on in-house R&D expenditure extended for five years
▪	Reduction of peak customs duty from 12.5% to 10% (on components)
▪	Increased allocation for farm credit and road projects
▪	CST reduced to 3%.

 
Impact

▪	Minor reduction in peak customs duty is positive for companies with high import content in vehicles.
▪	Extension of weighted average deduction on R&D would benefit OEMs, who on an average allocate 1-2% of sales towards R&D.
▪	Thrust on infrastructure development and road construction would benefit commercial vehicle segment.
▪	Two-wheeler industry, strongly dependent on rural demand, would benefit from thrust on agriculture sector. Higher budgetary allocation towards farm credit to support financing of agricultural equipment is positive for tractor manufacturers.

 
AUTO ANCILLARIES

Proposals

▪	Peak custom duties reduced to 10%.
▪	Weighted deduction on in-house R&D expenditure extended for five years.
▪	CST reduced to 3%.

 
Impact

▪	Peak customs duty has been reduced by 2.5% while the customs duty on select raw materials was reduced in January 2007; thus, the effective duty protection has been maintained. However, competition from cheaper import has been on the rise for select components like wheels, steering parts for commercial vehicles, etc. The reduction in peak duty is on expected lines, especially considering the FTAs that have been signed with various ASEAN countries. This would also help in improving the competitiveness of the Indian automobile industry in general.
▪	Reduction in CST rate would bring in marginal savings in raw material costs. Most suppliers have their manufacturing units located in the same state as OEM's; thus, impact of CST reduction on finished goods is neutral for most players.
▪	Extension of benefits on R&D investments for 5 years will benefit the industry, where established players spend around 1.5%-2.0% of revenues on R&D.

 
BANKS

Key Proposals

▪	Farm credit target up by 18% to Rs. 2.25 lakh crore
▪	RRBs to open more branches; mobilise NRE/FCNR deposits; can also take recourse under SARFAESI
▪	Dividend Distribution Tax on money market/liquid funds increased to 25% from 12.50%
▪	Govt buying RBI's stake in State Bank of India
▪	Limit for banking cash transaction tax raised.

 
Impact

▪	Banks to continue extending credit to the agriculture sector.
▪	Stronger RRB's can increase their scale of operations helping government in its financial inclusion programme and extending rural credit. Would incur incidental expenses and promoter banks may have to increase support to RRBs.
▪	Competition from mutual funds likely to decline as the tax arbitrage gains have been significantly squashed, Could help in better growth in deposits with favourable impact on deposit costs for banks.
▪	SBI now gets more levy to mobilise equity capital as the GOI holding can go down up to 51% as compared to the minimum RBI stake of 55%. Proposal is positive for SBI.
▪	The raise in the limit for banking cash transaction tax to improve operational ease for depositors and the banks.

 
CAPITAL MARKETS

Proposals

▪	Allow short selling settled by delivery, and securities lending and borrowing to facilitate delivery by institutions.
▪	Corporates can issue exchangeable bonds.
▪	Make PAN the sole identification number for all participants in the securities market.
▪	Setting up of an autonomous Debt Management Office.

 
Impact

▪	Short selling in the equity markets and introduction of securities lending and borrowings will enhance price discovery.
▪	Companies can now leverage by issuing bonds against their holdings in group companies leading to greater acceptability of such instruments.
▪	No need for multiple identifications numbers. Will reduce confusion in the markets.
▪	With setting up of an autonomous Debt Management Office, the RBI can now focus on its role as a regulator of the Indian banking sector.

 
CEMENT

Proposals

▪	To reduce excise duty from Rs. 400 per MT to Rs. 350 per MT on cement which retails upto Rs.190 per bag. At higher MRP, the excise duty will be Rs. 600 per MT.
▪	The railway budget announced 5% cut in freight rates for diesel, petrol and a 6% reduction in limestone. Also, commodity based tariff policy from April on an experimental basis for major commodities will be introduced.
▪	Increased allocation for infrastructure investments (Power, roads, rural infrastructure).
▪	CST reduced to 3%.

 
Impact

▪	With strong demand, the increase in excise duty (Rs. 10 per bag), to some extent may be passed on to the consumers (except in certain markets in South, where price may be reduced).
▪	The continued thrust on infrastructure development will provide impetus to the healthy growth in demand, protecting the bottomline of cement companies to an extent.
▪	The reduction in the CST and in freight rates on diesel and limestone will be marginally positive for some companies:

 
OIL & GAS

Proposals

▪	Reduction in ad-valorem excise duty on MS & HSD by 2% to 6%.
▪	Reduction in Central Sales Tax (CST) by 1%.
▪	Declared goods status under Section 14 of the CST Act for ATF supplied to all aircrafts with a maximum takeoff mass of less than 40,000 kg, which was earlier applicable only for Turbo Prop Aircraft.
▪	Full excise exemption for bio-diesel
▪	Sec 80IA benefits for cross country gas pipelines, which start functioning after April 1, 2007, provided it is approved by the Petroleum and Natural Gas Regulatory Board and one-third of its capacity is available on common-carrier basis.

 
Impact: Positive

▪	Reduction in excise duty on MS & HSD will help reduce the under-recoveries of oil marketing companies (OMCs) by around 45 paise per litre at the current level of prices.
▪	Reduction in CST by 1 % will help both OMCs as well as stand alone refineries by cutting under-recoveries on account of irrecoverable taxes in inter-state sales of petroleum products.
▪	Section 80lA benefit will help lower the transmission tariff for all the future pipeline projects executed by GAIL, RGTIL and GSPL.
▪	Hike in dividend distribution tax and cess will impact many of the large companies who are traditionally high dividend paying companies.
▪	Excise exemption for bio-diesel will give a fillip to this nascent industry.
▪	Declared goods status for the expanded range of aircraft will enable lower ATF prices through lower sales tax.

 
POWER

Proposals

▪	Efforts to award at least two more UMPPs by July 2007 (seven overall).
▪	Restructuring APDRP to cover all district towns with population of over 50,000 and increase in allocation from Rs. 650 Crores to Rs. 800 Crores.
▪	Increase in allocation under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) from Rs. 3,000 Crores to Rs. 3,983 Crores.
▪	Examine recommendations of Deepak Parekh committee of using forex reserves for funding infrastructure projects.

 
Impact

▪	Positive for equipment suppliers in generation, transmission and distribution in view of the expected increase in investments.
▪	The increased coverage of APDRP may result in loss reduction for the state sector utilties, which would positively impact all players in the sector.
▪	The extent to which long term finances become available for the sector as a result of the policy pronouncements made remains to be seen.

 
PETROCHEMICALS

Proposals

▪	Reduction in peak rate of customs duty from 12.5% to 7.5% on most products.
▪	Reduction in import duty on PSF, PFY & Polyester Chips to 7.5% from 10% earlier.
▪	Reduction in import duty on PTA, DMT & MEG to 7.5% from 10% earlier.
▪	Reduction in excise duty on benzene, used for the manufacture of caprolactam, from 16% to 12%.
▪	Reduction in import duty on methanol to 7.5% from 10%.
▪	Accelerated Irrigation Benefit Programme revamped to cover more irrigation projects.

 
Impact

▪	Reduction in import duty on PSF & PFY will negatively impact the profitability of standalone polyester producers, even after taking into account the decline in duty for the fibre intermediates. Reduction in import duty on other chemicals to negatively impact the producers' profitability. Even for the integrated producers, petrochemicals margins will be reduced because of the net duty decline.
▪	Additional emphasis on irrigation to positively impact the demand for PVC pipes & fittings.

 
ROADS & PORTS

Proposals

▪	Examine recommendations of Deepak Parekh committee of using forex reserves for funding infrastructure projects.
▪	Higher budgetary support to 'Bharat Nirman' (increase by 31 %).
▪	Increase in NHAI Outlay from Rs. 9,945 crore to Rs. 10,667 crore.
▪	Thrust on Public Private Participation (PPP). To set up a revolving fund with a corpus of Rs. 100 crore to quicken project preparation.
▪	Initiatives to reduce Cement Price.
▪	Mutual Funds can open dedicated Infrastructure Funds.

 
Impact

▪	The increased thrust on PPP and increased outlay under Bharat Nirman and NHAI could favourably impact the pace of project execution.
▪	The efficacy of the measures which have been announced to rein in cement prices remains to be seen.
▪	The extent to which long term finances become available for the sector as a result of the policy pronouncements made is also uncertain at this stage.

 
STEEL

Proposals

▪	Import duty on seconds and defectives of steel reduced from 20% to 10%.
▪	All coking coal made fully exempted from import duty.
▪	Iron ores and concentrates of all sorts to attract an export duty of Rs. 300/MT.

 
Impact

▪	Cheaper landed cost of seconds and defectives following the proposed reduction in the import duty may not have any impact on auto industry as the industry does not use seconds or defective steel. It will have an unfavourable impact on the smaller players in steel industry, through.
▪	However, elimination of import duty on coking coal is a positive for the sector since coke/coking coal accounts for a large component of production costs.
▪	The imposition of export duty on iron ore would benefit non-integrated prodwcers, to the extent that it may act as a dampener on exports of iron-ore.