Union Budget 2008-09: Analysis and Outlook
Crisil Research
Review 2007-08
Growth: Marginal moderation in growth
After two years of over 9.0 per cent GDP growth rate, economic growth is expected to slow down to 8.7 per cent in the current fiscal. Although the economy grew at 9.3 per cent in the first quarter of the year, in the second and third quarters GDP growth at factor cost slowed down to 8.9 per cent and 8.4 per cent, respectively. In spite of an impressive Kharif season, agriculture is expected to grow only at 2.4 per (CSO advance estimates). The production of certain industrial sectors slowed down due to a decline in consumer demand as a result of the monetary tightening measures of the RBI and exports demand slowdown as a result of the appreciation of the currency.
Inflation: Supply-side concerns to persist
Inflation based on wholesale price index, stayed within the RBI's target range of 5 per cent for this fiscal, following monetary tightening measures. With the exception of July, inflation fell every month till November. Subsequently, inflation moved in the upward direction. The average inflation for the year is expected to settle at 4.4 per cent in 2007-08 as compared to 5.4 last year. A favourable monsoon, together with measures like duty cuts, and a ban on exports and future trading of crops helped ease supply and prices of food articles. The prices of the fuel group, although kept decelerating during the first half of the fiscal, started to pick up in response to the surge in international crude oil prices.
Interest rates: Softening of rates expected
Apart from the CRR hike by 150 bps to 7.5 per cent and increase in the repo rate by 25 bps to 7.75 per cent, the other policy rates, viz, reverse repo and bank rate were kept unchanged at 6.0 per cent during 2007-08. In addition, the ceiling on the MSS, necessary for sterilisation operations, was also raised for four times to Rs. 2,500 billion. These steps were clearly indicative of the monetary tightening stance of the RBI in the wake of excess liquidity. As a result, the liquidity overhang eased partially and hence resulted in the hardening of the yields across all categories.
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Highlights |
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Nominal GDP growth is assumed to be 13 per cent in 2008-09 |
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Along with the RBI, the finance ministry would work to moderate capital flows |
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Revenue deficit for 2008-09 is 1 percent of GDP, a decline of 0.4 percentage points from 2007-08 revised estimates |
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Fiscal deficit to be less than the FRBM mandate - 2.5 per cent of GDP |
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Tax/GDP increases from 9.2 per cent in 2004-05 to 12.5 per cent in 2007-08 |
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43 per cent and 27.1 per cent growth in personal income tax and corporate tax, respectively in 2007-08. |
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National Rural Employment Guarantee Scheme (NREGS) to be implemented in all 596 rural districts with a provision of Rs. 160 billion |
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JNURM allocation increased by 25.2 per cent - to Rs. 54.8 billion |
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Allocation for Bharat Nirman to be raised to Rs 31,280 crores |
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Huge bonanza for education sector - 16 central universities, 3 IITs, 2 IISERs and 2 schools of planning and architecture |
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Health insurance for unorganised sector - Rs. 30,000 for every BPL unorganised sector worker |
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Public Distribution Scheme (PDS) through smart cards to be launched on a pilot basis in Haryana and.Chandigarh |
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Tax of short term capital gains increased to 15 per cent from 10 per cent |
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No change in peak customs duty while general CENVAT reduced from 16 to 14 per cent |
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No change in the peak rate of customs duty barring reduction in few cases |
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Automobile industry to get a boost through reduction in excise duty |
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Banking cash transaction tax withdrawn from April 1, 2009 |
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Commodities transaction tax to be introduced on the lines of securities transaction tax |
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Income tax slabs changed. New slabs will be: 10 per cent for Rs. 1.5 lakhs - Rs. 3.0 lakhs, 20 per cent for Rs. 3.0 lakhs Rs. 5.0 lakhs and 30 per cent for income above Rs. 5.0 lakhs. |
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Threshold limit for exemption from personal income tax increased to Rs. 1.5 Iakh, for women it is Rs, 1.8lakh |
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Complete loan waivers for marginal and small farmers that were overdue till December 31,2007 and one time settlement scheme for other farmers with 25 per cent rebate
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Central Plan Scheme Monitoring System (CPSMS) to be put in place under the aegis of the Planning Commission for the effective monitoring, evaluation and accounting of various central and state level plans. |
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Overall fiscal trends
The positive impact of buoyant tax collection - with significantly higher than expected revenues - is clearly visible in the revised fiscal accounts for 2007-08. As a result, fiscal deficit at 3.1 per cent of GDP is expected to improve upon the budgeted target of 3.3 per cent for the current fiscal. The fiscal numbers look good, compared with budget estimates, largely due to considerably higher corporation and personal income tax collection. Personal income tax revenue saw an unprecedented growth of over 43 per cent and corporate tax collection grew by over 27 per cent in 2007-08. Although the advanced estimates of CSO peg GDP growth at 8.7 per cent in 2007-08 - marginally lower than what the government had anticipated, the tax collection continued to grow. The growth momentum picked up in 2003-04 and, since then, has remained on course. The economy clocked an average 8.75 per cent during 2003-04 to 2007-08. This has resulted in considerable revenue buoyancy for the government - both via the direct and indirect tax routes.
Although industrial growth slowed down in 2007-08 as compared to the previous fiscal, a key source of indirect tax revenue for the central government, gross tax revenue grew by 25 per cent this year. However, additional service segments are now being brought into the services tax fold, the service tax collection grew by 32.6 per cent this fiscal.
| (Rs. billion) |
2006-07 |
2007-08 |
2007-08 |
2008-09 |
| Actuals |
BE |
RE |
BE |
| 1. |
Revenue Receipts |
4343.9 |
4864.2 |
5250.98 |
6029.35 |
| |
2. Tax Revenue
(net to centre)
|
3511.8 |
4038.7 |
4317.73 |
5071.5 |
| |
3. Non-Tax Revenue |
832.1 |
825.5 |
933.25 |
957.85 |
| 4. |
Capital Receipts
(5+6+7)
|
1490.0 |
1941 |
1842.75 |
1479.49 |
| |
5. Recoveries of Loans |
58.9 |
15 |
44.97 |
44.97 |
| |
6. Other Receipts |
5.3 |
416.5 |
361.25 |
101.65 |
| |
7. Borrowings and other
liabilities
|
1425.7 |
1508.5 |
1436.53 |
1332.87 |
| 8. |
Total Receipts (1+4) |
5833.9 |
6805.2 |
7093.73 |
7508.84 |
| 9. |
Non-Plan Expenditure |
4135.3 |
4754.2 |
5018.49 |
5074.98 |
| |
10. On Revenue Account
of which |
3721.9 |
3835.5 |
4129.75 |
4483.52 |
| |
11. Interest Payments |
1502.7 |
1590 |
1719.71 |
1908.07 |
| |
12. On Capital Account |
413.4 |
918.8 |
888.74 |
591.46 |
| 13. |
Plan Expenditure |
1698.6 |
2051 |
2075.24 |
2433.86 |
| |
14. On Recenue Account |
1424.2 |
1743.5 |
1756.11 |
2097.67 |
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15. On Capital Account |
274.4 |
307.5 |
319.13 |
336.19 |
| 16. |
Total Expenditure |
5833.9 |
6805.2 |
7093.73 |
7508.84 |
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18. Revenue Expenditure |
5146.1 |
5579 |
5885.86 |
6581.19 |
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19. Capital Expenditure |
687.8 |
1226.2 |
1207.87 |
927.65 |
| 20. |
Revenue Deficit |
802.2 |
714.8 |
634.88 |
551.84 |
| |
As a percentage of GDP |
1.9 |
-1.5 |
1.4 |
1.4 |
| 21. |
Fiscal Deficit |
1425.7 |
1509.5 |
1436.53 |
1332.87 |
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As a percentage of GDP |
3.5 |
3.3 |
3.1 |
2.5 |
| 22. |
Primary Deficit |
-77.0 |
-80.5 |
-283.18 |
-575.2 |
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As a percentage of GDP |
-0.2 |
-0.2 |
-0.6 |
-1.1 |
| Source: Union Budget 2008-09 |
Since 2003-04, central government finances have improved gradually. On the expenditure side, non-plan expenditure overshot by 5.6 per cent, while planned spending was 1.2 per cent higher than that budgeted. Although revenue and fiscal deficit as a percentage of GDP fell as compared to last year, in absolute terms revenue deficit was around 11 per cent more than that budgeted. Fiscal deficit also exceeded the budget target by 4.8 per cent. Similarly, the trends in revenue and capital expenditure are not particularly encouraging. While revenue expenditure overshot the budget target by 3.8 per cent, capital expenditure fell short by 1.2 per cent.
Growth assumptions
The budget assumes nominal GDP growth of 13 per cent for 2008-09. Under - the assumption of 4.5 per cent inflation, real GDP growth in this scenario would be 8.5 per cent. Under the assumption of normal monsoons and only a marginal slowdown in industry and services, 8.5 per cent growth remains within reach.
Neither the budget nor the three accompanying documents provide sectoral growth patterns, which are critical for judging the veracity of revenue buoyancy assumed in the 2008-09 budget. Under the assumption of normal monsoons, the GDP in agriculture can be assumed at its long term average growth of 3 per cent per annum. Assuming the buoyancy in services to moderate marginally as a result of slowdown in global demand, about 10.3 per cent growth is feasible. The industrial growth required to deliver about 8.5 per cent real GDP growth during 2008-09 would be around 8.3 per cent.
What has the budget done for growth?
Given the current domestic and international economic scenario, a further moderation of growth is expected in 2008-09. Since the parliamentary election is due in the current year, it is no surprise that the government initiated measures to sustain the growth rate of the economy. The budget in particular has provided support to education and agriculture sectors. The budget also recognised that inflation remains a concern as the supply-side pressures in the form of international oil price and food price continue to increase.
The policy challenge would be to ensure that the economy retains its current growth trajectory, without letting inflation get out of control.
Summary
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The economy will continue to grow over 8 per cent in 2008-09, but moderation in the current fiscal is expected. |
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Addressing supply-side inflation concerns will be of crucial importance. |
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Investment, both public and private will continue to increase as a share of GDP, but their growth rate would moderate. |
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Further growth can be sustained only with addressing infrastructural bottlenecks and skilled labour supply shortfall, which are posing supply-side constraints on growth. |
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Public investment in agriculture and in rural development, particularly in the health and human services and infrastructure sector will need to be increased further to reduce infrastructural bottlenecks and make growth more inclusive. |
Infrastructure - Where are we?
Unprecedented robust growth in the last half-decade despite inadequate infrastructure underlines the urgent need for speed in meeting large infrastructure requirements of the nation. The service and industrial sectors' ability to overcome major infrastructure bottlenecks so far has resulted in an average 8.7 per cent growth in the period. Of course, had growth in infrastructure over the past few years been faster, the overall rate of growth would have notched up even more. But is this sustainable? Perhaps not, as the opportunity cost of lack of sufficient infrastructure could be as severe as loss of competitiveness for business of all sizes in every segment, due to high transaction and transport costs. Moreover, it diminishes domestic business climate and impedes accessibility to domestic and international markets. But how far has this year's budget gone to address this requirement?
Growth
Total |
Agriculture |
3.0 |
Indian economy is expected to grow around 8.5 per cent during 2008-09 compared to 8.7 per cent (CSO advance estimate) during 2007-08 as the monetory tightening undertaken over the last 2 years and world economic slowdown are expected to moderate the overall demand situation. fiscal stimulus provided in the budget world to some extent support the demand. Hence, overall GDP growth is likely to slow down marginally. |
Industry |
8.3 |
Services |
10.3 |
8.5
|
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Inflation |
WPI-
Average |
4.5-5.0 |
Upward pressures particularly from rising international oil and firm food prices are likely to push up inflation next year compared to this current year. |
Interest
rate
|
10-year
G-Sec
(Year-end) |
7.5-7.7 |
We expect the RBI to cut the policy interest rates in the next fiscal year as economic growth slows down. As a result, the market rates would come down compared to the current year and we expect the 10-year G-sec rate to stay within the range of 7.5 to 7.7 per cent. |
Exchange
rate |
Re / US $
(Year-end) |
38.5-
93.0 |
Indian economy is expected to continue to attract foreign inflows as it presents an attractive investment opportunity relative to most other countries. The RBI would continue to intervene in the market to curb volatility and try to moderate the appreciating pressure. |
Fiscal
deficit |
Fiscal
deficit
(as a %
of GDP) |
2.5+1.0 |
Although the official target of 2.5 of GDP might well be achieved, the off-budget items will significantly push up the true fiscal deficit. |
Despite repeated focus on lack of infrastructure over the last few years, Union Budget 2008-09 fails to provide adequate thrust to the sector. Although the total plan outlay has increased by 23 per cent over that of last fiscal year and is 29.5 per cent higher than revised estimates of 2007-08, budgetary support has been notched by a mere 6 per cent. Much of the increment will come in from internal and extra budgetary resources.
Road transportation
National Highways (NHs) account for about 40 per cent of the total traffic on Indian roads. However, they are only about 2 per cent of the total length of roads, which underscores the massive need for NH development. The National Highway Development Programme (NHDP) to construct 33.1 thousand kilometres is under implementation, of which 24 per cent of the project has been completed. The completion ratio in the Golden Quadrilateral is 96.5 per cent and in the North-South & East-West Corridor project is 23.4 per cent. Special attention is being paid to SARDP-NE, programme devised for the North Eastern region. With the target of 300 kms in 2008-09 as compared to 180 kms achieved in 2007-08, the allocation has been boosted by the 19 per cent to Rs 129.6 billion. While most of the project has been financed by the government and through loans from mutli-Iateral organisations, the sub-projects under the Phase 3 & 4 of the project would be taken up on PPP basis (BOT mode).
Implications for Automobile & Allied Sectors
Auto components & Tyres
Auto components industry estimated to grow by 10 per cent in 2007-08
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In 2006-07, the auto component industry grew by 23 per cent to attain a size of Rs 560 billion, in production value terms. The original equipment manufacturer (OEM) offtake, which constitutes 70 per cent of the production, grew by 23 per cent, because of an upturn in the commercial vehicle segment and robust demand in cars and utility vehicles. With rupee appreciation, exports growth has slowed down to 12-15 per cent in 2007-08 as compared to a 30 per cent growth for the last few years (2002-03 to 2006-07). |
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A substantial increase in prices of major raw materials like steel, aluminium and iron has led to a fall of over 120 bps in operating margins over the last 2 years. The players have been unable to pass on the hike in raw material prices fully to the OEMs, thus leading to a pressure on margins. In 2006-07, on an average, industry operating margins were at 14.5 to 14.8 per cent. |
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In 2007-08 and 2008-09, the auto component industry is estimated to grow by 10 per cent and 15-90 per cent, respectively, in production value terms. A decline in offtake from the commercial vehicle segment and a stable growth in cars and utility vehicles have led to the lower offtake in 2007-08. However, we expect growth rates to improve in 2008-09.
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Raw material costs are expected to remain firm in 2007-08 and hence, margins will continue to remain under pressure. Nine monthly results for 2007-08 indicate a fall in operating margins of 60-80 bps with raw material prices remaining firm. |
Tyres offtake growth in 2007-08 estimated at 6 per cent
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CRISIL Research estimates overall tyre off-take to grow at 6 per cent in 2007-08. The slowdown in growth is attributed mainly to estimated decline in OEM demand in MHCV segment and MHCV tyre exports due to increasing radialisation in export markets. |
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Natural rubber prices decreased by about 9% in the first half of 2007-08, but increased by around 10 per cent in the third quarter. We expect average natural rubber prices in 2007-08 to be at the same level as 2006-07. |
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Operating margins improved significantly in the first half of 2007-08 due to higher price revisions and decline in natural rubber prices. Despite a subsequent increase in natural rubber prices, we estimate a 200 bps improvement in operating margins in 2007-08 over previous year.
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Budget Impact – Positive
Auto components to benefit mainly through budget thrust to OEMs
Auto parts: Company impact
| Company |
Impact |
Impact factors |
| Bharat Forge Ltd |
|
C |
| Bosch Ltd |
|
C |
| Amtek Auto Ltd |
|
C |
| Sona Koyo Steering Systems Ltd |
 |
C |
| Sundaram Fasteners Ltd |
|
C |
Tyres: Company impact
| Company |
Impact |
Impact factors |
| Apollo Tyres Ltd |
|
B, C |
| Ceat Ltd |
|
B, C |
| Goodyear India Ltd |
|
B, C |
| JK Industries Ltd |
|
B, C |
| MRF Ltd |
|
B, C |
Impact Factors
|
| A. |
Excise duty has been cut on auto components from 16 per cent to 14 per cent. While the benefit from reduction in duties would be entirely passed on to OEMs, components deriving higher proportion of sales from the replacement segment, such as bearings, batteries, brake linings, will see margin improvement, as they would retain the benefit.
|
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| B. |
The excise duty cut on tyres from 16 per cent to 14 per cent will profit tyre manufacturers as more than 60 per cent of the sales are derived from replacement segment where the benefit from excise duty cut is not expected to be passed on. |
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| C. |
The expected increase in demand for small cars and two-wheelers, on account of a cut in excise, will have a positive impact on sales of auto components and tyres to OEMs.
|
Product
category |
2007-08 (E) |
2008-09 (E) |
| |
Voloume
Growth % |
Growth drivers |
Growth
% (E)
|
Growth drivers |
Cars & utility
vehicles |
12 |
Income Growth, rising
consumer spending and
new model launches |
16 to 18 |
Robust growth in exports and
new model launches. |
| Two-wheelers |
-8 |
Slowdown in
disbursements and rise
in overall interest rates. |
5 to 7 |
Marginal growth in motorcycles
on a reduced base and growth
in ungeared scooters due to
increasing consumer
preference |
Commercial
vehicles |
5 |
Growth in redistribution
segment, sustained
economic growth, and
increased demand from
construction and mining
activities |
10 to 11 |
Lower base of 2007-08,
continuation of high growth in
redistribution segment and
demand from construction
and mining activities |
| Tractors |
-2 |
Tightening of credit by
financial institutions and
inventory correction |
0 |
Rising share of exports in
total sales |
| Automobiles: Tariffs% |
Customs |
Excise |
| 2007-08 |
2008-09 |
2007-08 |
2008-09 |
New cars
- Completely knocked
down units (CKD)
- Semi-knocked down
units (SKD)
- Specified small cars1
- Others |
10.3
61.8
61.8
61.8
|
10.3
61.8
61.8
61.8 |
-
-
61.5
24.7 |
-
-
12.4
24.7 |
| Secondhand cars |
103.0 |
103.0 |
24.7 |
24.7 |
Utility vehicles
- 6-12 seater
- 12 seater and above2 |
10.3
10.3
|
10.3
10.3 |
24.7
16.5 |
24.7
14.4 |
| Two-wheelers |
61.8 |
61.8 |
16.5 |
12.4 |
| Trucks (LCVs & MHCVs) |
10.3 |
10.3 |
16.5 |
14.4 |
| Buses (LCVs & MHCVs) |
10.3 |
10.3 |
16.5 |
12.4 |
| Tractors |
20.6 |
20.6 |
- |
- |
| Steel items |
5.2 |
5.2 |
16.5 |
14.4 |
| Pig iron |
5.2 |
5.2 |
16.5 |
14.4 |
| Engine & Engine Parts |
7.7 |
7.7 |
16.5 |
14.4 |
Drive transmission,
steering, Suspension
& Braking parts |
10.3 |
10.3 |
16.5 |
14.4 |
| Electrical Parts |
7.7 |
10.3 |
16.5 |
14.4 |
1 Specified small cars include cars with length not exceeding 4000mm and engine capacity not exceeding 1200cc for petrol cars and 1500 cc for diesel cars.
2 Excluding driver |
Automobiles
Divergent growth trends across segments
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In 2007-08, the total automobiles market size (including exports) is expected to touch Rs. 1,290 billion, a growth of 4.3 per cent over 2006-07. |
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Tighter credit disbursement and rising interest rates have resulted in a drop in sales of two-wheelers and, tractors. Commercial vehicles have witnessed a mixed trend - while MHCV sales have registered a decline, LCVs are reporting strong growth. Growth continues to be healthy for cars and UVs as well due to rising incomes and new model launches. |
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| ▪ |
Margins of two-wheelers and tractors have come under pressure due to a decline in volume, rise in input costs and impact of rupee appreciation on export realisations. Car manufacturers reported a marginal decline in margins primarily on account of rising input costs. However, commercial vehicle manufacturers have shown an improvement in margins due to an increase in product prices.
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| ▪ |
In 2008-09, automobile sales are expected to grow by around 12 per cent in value-terms, driven mainly by favourable demographic trends, anticipated growth recovery in commercial vehicles and robust export growth. |
Budget Impact - Positive; Neutral for Tractors
Company Impact
| Company |
Impact |
Impact factors |
| Maruti Suzuki Ltd |
|
A, B |
| Tata Motors Ltd |
|
A, B |
| Ashok Leyland Ltd |
|
A |
| Bajaj Auto Ltd |
|
A, B |
| Hero Honda Motors Ltd |
|
A, B |
| Mahindra & Mahindra Ltd |
|
A, B, C |
Impact factor
|
| A. |
The cut in excise duty on two-wheelers and small cars, from 16 per cent to 12 per cent, will have a marginally favourable impact on demand since we expect manufacturers to pass on the benefit to end-customers. Excise duty cut on commercial vehicles from 16 per cent to 14 per cent, and buses from 16 per cent to 12 per cent, will increase the margins of commercial vehicle players since they are likely to retain the benefit.
|
|
| B. |
Two-wheeler and cars demand is expected to rise on account of the increase in disposable income due to alteration in income tax slabs. |
|
| C. |
The waiver of loans for small and marginal farmers will have a neutral impact on tractor sales.
|
Overall Impact on Automobile & Allied Sectors
Auto components & Tyres - Marginally positive
The reduction in excise duty rate from 16 per cent to 14 per cent would be positive for some auto component manufacturers. While the benefit from reduction in duties would be entirely passed on to OEMs, components deriving higher proportion of sales from the replacement segment, such as bearings, batteries, brake linings, would retain the benefit. The tyres sector is also expected to benefit from the excise duty cut, since over 60 per cent of the sales are to the replacement segment. The thrust to small car and two-wheeler demand, due to the reduction in excise duty, will have a positive impact on componentsales to OEMs.
Automobiles - Marginally positive
We expect small car manufacturers also to pass on the benefit, resulting in a marginally favourable impact on demand. However, commercial vehicle manufacturers may increase their margins by retaining the benefit.
The waiver of loans for small and marginal farmers will have a neutral impact on tractor sales.
Oil and Gas - Marginally positive
The imposition of a 5 per cent customs duty on naphtha for the manufacture of polymers is expected to marginally improve refining profits (Rs. 7-8 billion). Further, a reduction of 2.5 per cent in customs duty on project imports is likely to reduce capital costs of players in the industry. The replacement of ad-valorem portion of the excise duty (6.2 per cent) on unbranded petrol and diesel by an equivalent specific duty of Rs. 1.35 per litre will be revenue neutral. However, this is expected to act as a cushion against the cascading effect of any change in international prices on domestic prices for the consumer.
Other changes such as the reduction in peak excise duty (by 2 per cent) and CST (by 1 per cent) are also expected to be revenue neutral for the sector, as they are likely to be passed on to the customer.
Roads - Neutral
The Government has enhanced the allocation for National Highway Development Programme (NHDP), from Rs. 109 billion in 2007-08 to Rs 130 billion in 2008-09, an increase of 20 per cent on year-on-year (y-o-y). Although, this is higher than the increase of 9 per cent, y-o-y, in 2007-08 (allocation of Rs. 99 billion in 2006-07), it is in line with the stated requirement of Rs. 1.6 trillion for the phases in action of NHDP for the next 5 years.
In spite of the Union Budget stating that under Bharat Nirman (PMGSY) programme, 17 habitations are connected through all-weather roads each day, as against the target set of 20,071 habitations for 2007-08, only 17 per cent had been achieved until December 2007.
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