pre-budget analysis 2011-2012

8/7/2019 Pre-Budget Analysis 2011-2012

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EditorialIndia had waved the tide of the global slowdown through its robust policies and has continued to maintain animpressive growth even in hard times. To rise to the challenge of being one of the worlds economicsuperpowers, India needs to grow faster. The Union Budget 2011 to be announced on 28 th Feb, 2011 could bethe perfect catalyst. However, supply side inflation and corruption scams have engulfed the economy in therecent times. Also with absence of one time revenues such as 3G, Wimax License fees, there is pressure on the

Government to reduce the fiscal deficit and charter the path of fiscal consolidation. With elections in 5 statesthis year, four UPA ruled, social expenditure on schemes such as NREGA and food security is likely to increase.The Government is likely to increase its spending towards education, infrastructure and technology that couldgive a multiplier effect to the economy to sustain higher GDP in the coming years. On the taxes front, the roll-out of the GST in April 2011 could also have a significant impact on the manufacturing sector and redefinesupply chain and logistics in the country.

We, the students of SCMHRD, take immense pride in presenting to you our pre-budget analysis of 2011. Anoverview of key sectors, in cluding last years highlights and this years expectations have been covered. Weinvite your valuable comments and suggestions at [email protected].

Sectors CoveredBUDGET AT A GLANCE ................................................................................................................................................ 3

TAXATION ................................................................................................................................................................... 4

POLITICAL AFFAIRS ..................................................................................................................................................... 6

AGRICULTURE ............................................................................................................................................................. 7

BANKING & FINANCIAL SERVICES ............................................................................................................................... 9

DEFENCE ...................................................................................................................................................................12

AUTOMOTIVE ...........................................................................................................................................................15

EDUCATION ..............................................................................................................................................................17

PHARMACEUTICAL ....................................................................................................................................................18

INFORMATION TECHNOLOGY & INFORMATION TECHNOLOGY ENABLED SERVICES ...............................................20

TELECOM ..................................................................................................................................................................22

RETAIL .......................................................................................................................................................................24

ENERGY & PETROLEUM ............................................................................................................................................25

POWER ......................................................................................................................................................................27

INFRASTRUCTURE .....................................................................................................................................................30

CEMENT ....................................................................................................................................................................33

COAL & MINING ........................................................................................................................................................34

STEEL .........................................................................................................................................................................36

ABOUT FINANCE CLUB ..............................................................................................................................................38

ABOUT SCMHRD .......................................................................................................................................................39


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BUDGET AT AGLANCE

Union budget 2011-2012 marks the last year of the 11 th five year plan and the finance ministry hassomething to smile about! It has done well on therevenue side in the current financial year. It hasmanaged to effectively auction and raise Rs. 1.3lac crore from the 3g telecom licences. This wasmore than 3 times the revenue it had budgeted.Also the disinvestment process is on track withthe government having achieved more than half of its target of Rs. 40,000 crore and with a fewmore IPOs and FPOs in the pipeline it isexpected to reach its goal.

On the tax revenue front the government hasachieved exemplary results having already rakedin about 72% of the 7.45 lakh crore target and thisbuoyancy in tax collection has enabled it to raiseits tax collection target to 7.82 lakh crore. Whilethe direct tax collection has been raised from Rs4.30 lakh crore to Rs 4.46 lakh crore, the indirecttax collection estimate has been hiked from Rs3.15 lakh crore to Rs 3.36 lakh crore.

All this obviously has an impact on thegovernments fiscal deficit target. PranabMukherjee the finance minister had projected afiscal deficit of 5.5% sharply lower than 6.8% theprevious year. With this strong pattern of fundsinflow, it may actually be possible to cut thedeficit even beyond the target requirement. Thisaugurs very well and may actually result in anupgrade in the countrys rating from the currentBBB status.

Also the forex position of the country is quitecomfortable at $299.39 billion for week endedJanuary 21. This was mainly due to theappreciation/depreciation of non US currenciesheld in the foreign currency assets reserves.

For this budget the finance ministers problem isnot from the revenue side but actually how to usethese funds and allocate appropriately to thevarious schemes launched by the government. Webelieve that this being the last year of the 11 th fiveyear plan there is very little chance of any majorscheme being launched by the government. Thefinance ministry which invites request proposalsfor allocation of funds for various schemes from

the other ministries has turned down at least 15of them. We expect further consolidation in thealready launched programs, especially 2 of theflagship programs of the UPA regime, theMahatma Gandhi National Rural EmploymentGuarantee Scheme (MGNREGS) which has been

extremely popular amongst the masses and mayreceive an increase in its budget (upto Rs.64,000crore from 39,100 crore) and the second is theSarva Siksha Abhiyaan for imparting knowledgeand increasing enrolment in schools.

We expect the Finance Minister to act like theConservative head of the family who knows thefamily has had a good year yet wants to go slowon the spending. There are indications that theMr. Mukherjee will announce a partial roll back of the Rs. 20,000 crore stimulus package announcedin 2009 with the economy doing well and this isfurther expected to increase the governmentsrevenue for the next fiscal. He has specificallyasked exporters to fight their own battles andstop looking for financial incentives from thegovernment. Exports have already reached USD164.7 billion during April-December 2010-11 andaccording to Commerce Ministry's assessmentthey may well touch USD 215-220 billion by theend of the fiscal.

One of the major problems of this governmenthas been its ability or rather inability to tackleinflation especially food inflation which was at arecord high of 17% in Jan11. The RBI ha s triedcontaining it by hiking interest rates for a record 6times last year and the government on its part hasrestrained itself from hiking diesel prices as theyhave a direct impact on the food prices. Alongwith this it has banned exports of some key foodproducts like onions and we believe Mr.Mukherjee will provide more sops to agriculture

this year to ease supply side constraints.

The GDP growth rate for the current fiscal stoodat 8.6% led by a strong recovery in the agricultureand allied activities from 0.4% last year to 5.4% in2010-11 according to Advance Estimates releasedby the Central Statistical Organisation. It isexpected that the government will unveil somemeasures to boost infra projects further andstrengthen economic growth.

Ashish Ranjan

Charul Mahajan

Chintan Shah


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TAXATIONBUDGET 2010 - 2011ANNOUNCEMENTS AND IMPACT

The Budget for the year 2010 11 was termed bythe Finance Minister to be a budget for the AAMAADMI. The hike in the exemption limit,reduction in corporate taxes, no talk withdrawalof the fiscal stimuli of these steps desired oneoutcome i.e. increase in spending andconsumption on the back of greater disposableincome in the hands of the people. However, theincrease in spending has had an unintendedconsequence inflation. Politically, it may proveto be very costly for the government as in thepast, Indians have little tolerance to double digitinflation. The last time there was double digitinflation, it led to the formation of the NavnirmanMorcha in Ahmedabad, leading to the countdownto imposition of the Emergency. Keeping this inmind along with the dire predictions of food riotsengulfing the world as made by variousinternational organisations, the politically astuteFinance Minister will have to make this yearsbudget more counter inflationary than he wouldhave liked. It may be possible that he will take tosteps that may hurt growth in the short term.

DIRECT TAXES

Specific Announcements

Deduction for investment in notified long terminfrastructure bonds has led to channelizationof personal savings into productive nationalassets. This is far more direct participation of people in infrastructure than routing theseinvestments through banks, mutual funds, orother market participants.

Reduction of corporate surcharge by 2.5% hasput more money in the hands of thecompanies to expand their productive capacityand enhance their productivity.

Increase in Minimum Alternate Tax (MAT) to18% for companies under its provisions has ledto greater revenue and the extension of theperiod over which the set off can be availedhas also benefitted the companies.

The tourism sector related benefits will have adeep imprint on how India emerges as a touristdestination in the future. The benefits beingextended to small sized 2 star hotels will lead

to a large number of budget hotels and roomsbecoming available for tourists.

The extension of the period of completion forreal estate and housing projects came as alifeline to the beleaguered sector, sufferingfrom the credit crunch and fall in housing

prices then. Today its prospects are muchbrighter.

Increase in limits of compulsory audit andpresumptive taxation has been arationalization step and also a boom for thebeneficiaries, who can avoid all the paperworkthat came along with the compliance with theearlier limits.

Exemption of LLPs from Capital Gains hasbrought more clarity to the sunrise sector of business organizations with respect to its

taxability.

EXPECTATIONS FROM BUDGET2011 - 2012

It has been repeated so many times, for so manybudgets, that it has become a clich. But it oughtto be said that the Finance Minister, through hisbudget, will set the ball rolling for streamlining thetaxation laws. Since there is broad consensus onthe intention of the Direct Tax Code (DTC) and the

Goods and Services Tax (GST), he has theadditional advantage of knowing the destination.

Income Tax Personal Income Taxes The Finance Minister has

made it very clear that the DTC, in its currentform, will be the legislation to replace the ossifiedand leaky Income Tax Act, 1961. Budget 2011 12gives him the opportunity to adjust the direct taxslabs accordingly in such a way that migration tothe DTC at the time of implementation is easierand hassle free. Thus, the basic exemption limitmay be enhanced from Rs. 1.6 lakh to Rs. 1.7 or1.8 lakh. It will be a windfall if the exemption limitis directly enhanced to Rs. 2 lakh, but that seemsunlikely as some fiscal leeway for a politicalgesture at the time of introducing the DTC willalso have to be budgeted for!Corporate Income Taxes There may be somedetailed tinkering in the form of some deductionsand exemptions being withdrawn and thesurcharge may be reduced by a further 2.5% to5%. To compensate for the net losses on accountof these changes, Minimum Alternate Tax may beincreased from its current 18%.


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Capital Gains Tax

The capital gain taxes are unlikely to betouched.

Even the synchrony between the DividendDistribution Tax and Short term capital gains

tax may be left untouched.

Since the DTC leaves the long term capital gainexempt, the Budget is unlikely to change thestatus quo.

The exempt exempt regime in mutual funds,by which neither the mutual fund nor the unitholder pay any tax on the dividend receivedfrom the mutual fund or capital gains fromtransfer of units is likely to continue.

In an investor friendly move, this budget mayseriously consider the possibility of giving

similar exemptions to long term capital gain byway of transactions in unlisted securities. Thebenefits are twofold it brings abut parity inthe securities transactions and avoids any taxhassles like the ones affecting Vodafone andRanbaxy.

Income from other Sources The scope of income from other sources may beexpanded to include interest received fromaccounts held in foreign countries in foreign

currencies, so as to have a trail of money stashedabroad.

INDIRECT TAXATION

Specific Announcements

The budget of last year witnessed a first timein the history of Parliament a walkout by theentire opposition in protest against theintroduction of this one amendment increasein excise on petroleum refined products andimposition of custom duties on crude. This wasdone primarily to raise revenue, but with anincrease in crude prices these duties haveyielded more than required revenue. But, withthese prices being passed down by the oilcompanies to the final consumer, prices havebeen on a spiral all across.

SSIs being allowed to pay excise duties on amonthly rather than a quarterly basis is anadministrative convenience given to them,considering that small entities would find iteasier in their liquidity management. Besides,permitting them full credit of excise duty paid

on capital assets in one go, will also serve theirinterests.

Stress in ecological alternatives and intentionto incentivize their use vis a vis the existingproducts was also visible in the budget.Proposals for duty reductions for Soleckshaw,

electric cars, LED lights, radar blades of windenergy generators, machinery of solar powerunits, and imposition of cess on coal to createa corpus for the National Clean Energy Fundwill widely help the cause of those seeking toprovide alternatives to existing energy sources.

To mitigate impact of rising gold prices ongovernment revenue, the modification of excise from ad valorem basis (8%) to specificRs. 280 per 10 grams on gold was made, andhas been beneficial for the gold jewels sector.

Agriculture was given special well deservedand much desired focus, and the growth rate isexpected to cross more than 5% aided by agood monsoon.

Attempts to create better storage and a coldchain received a fillip following theannouncement to grant project status andconcessional import duty of 5% for machinesinvolved therein and refrigerated vans andtrucks being fully exempt from customs

Budget 2010 brought forward a windfall for

mobile phone users. Not only was 3G spectrumauctioned in FY 2010 11, but also dutyexemptions were extended on parts of batterychargers and headphones. Also, the exemptionfrom special duty has been extended.

As an incentive to reduce costs for therecession hit gems polishing sector, theBudget reduced basic customs duty. This led tocost reduction, making the industry morecompetitive globally.


The government is already battered by a stealthilyrising inflation. Besides, it desires theimplementation of the GST by next financial year.In such a situation, the Finance Minister is unlikelyto increase any of the indirect taxes.

The government may reduce the customs dutyon crude and excise duties on petroleum, asthis step will have an accelerating effect of calming input and transport costs across theeconomy in times of very high inflation. Also,the rationale of raising revenue by imposing


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these increases in the previous years budgethas also diminished due to higher thanexpected revenue realization.

The median excise rate may be retained at10%, which prior to the fiscal stimulus was12%. Though the Finance Minister would want

to withdraw the stimulus, the inflation maystop him in his tracks.

The Central Sales Tax rate is likely to bereduced from 2% to 1%, though the FinanceMinister has the elbow room to abolish itcompletely, though in that case, thecompensation to the states will double.

The Finance Minister may bring some moreservices under the tax net.

ASSESSMENT PROCEDURES AND

OTHER ISSUESThe Budget is likely to extend the application forthe STPI Scheme, set to expire on 31 st March,2011. However, the applicability of the schememay be reduced to only the younger and smalland medium sized players in the SoftwareIndustry, while making the older and largerplayers pay tax as per the provisions of the Act.

Due to the public outrage over corruption, theFinance Minister may be constrained to announcesome steps to better the governments image.One step could be to enhance the scope of wealthtax to include assets hitherto beyond the scope of wealth. Such assets may be cash lying in foreignbank accounts, houses bought in foreignterritories, etc.

The Finance Minister may also announce anincrease in number of tax processing centres likethe one in Bengaluru, to enable faster processingof returns and speedier refund payments.

There may be an increase in the threshold limitbelow which the re assessments will not benecessary. Also, the limits for assessing returns byCommissioners and above may be enhanced.

The Income Tax Dept. is falling short of staff, dueto higher packages being offered to the officers.To combat such attrition, the Finance Minister isexpected to announce a new scheme of hiringstaff for the Depts.

Jatin Gajwani

Rishabh Baid

POLITICAL AFFAIRS

EVENTS EXPECTED IN 2011

State Assembly elections to 5 states (Tamil Nadu,Kerala, Assam, Pondicherry and West Bengal) areexpected to be held in May 2011. This coupledwith coalition compulsions will lead to someelection centric populist announcements in theBudget.

The Congress is on the upswing in Kerala andPondicherry.

The DMK, already battered by the arrest of Former telecom Minister A. Raja may not bevery demanding, and may settle for anannouncement of a desalinization plant inTamil Nadu or monetary relief for the LankanTamils by the Indian Government.

Assam already has its politics churning,through the release of the ULFA leaders andmay not need a dose of economic populism,save for some money for flood control inAssam.

The Trinamool Congresss leader MamataBanerjee will also want to demonstrate herclout with the centre, by getting some WestBengal specific announcements made by theFinance Minister, who, incidentally, is also anMP from the state.

EVENTS EXPECTED BEYOND 2011

Elections to Punjab, Uttarakhand, Uttar Pradesh,Manipur, and Goa are scheduled in 2012. TheUttar Pradesh elections in May 2012 and theCongresss strategy to court the Muslims there astheir vote bank means that there additionalfinancial provisioning for the proposals of theSachar Committee report.

Food Subsidy - The insistence of the foodsecurity bill by National Advisory Council (NAC)led by Sonia Gandhi, means there will be somecommitment in the budget towards foodsubsidy reform by better targeting. A schemeto integrate the Unique Identity Number intofood scheme may be announced. With foodsubsidy likely to touch Rs. 1 lac crore,rationalization of the subsidy is goodeconomics and required for the hour, but maynot be forthcoming due to lack of political will.


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Railways budgetary support MamataBanerjee will present what seems to be herlast Railway Budget as a UPA ally, if she movesto the Writers Building, replacing the LeftFront in West Bengal. Due to cost escalation of various projects, 6 th pay commission load, and

no possibility of raising passenger fares orfreight rates in a politically surcharged andinflationary environment, the gross budgetarysupport demanded by the Railways has goneup to Rs. 39,600 crore, up from Rs. 15,875crores in 2010-11. In all likelihood, theRailways will even get it so that it can be morepopulist.

Indexation of NREGA Wages, another keydemand of the NAC likely to be met is to indexMahatma Gandhi National Rural Employment

Guarantee Scheme Wages to the inflationindex. Even this measure is likely to cause anincrease in spending in range of Rs. 7,500crores to 8,000 crores.

Oil prices- Goldman Sachs' 2008 forecast of oilcrossing $ 200 per barrel may come true thisyear, looking at the precarious politicalposition of the Middle East. The Jasmine bloomof Tunisia seems to have spread its fragranceto Egypt and Jordan, and may spread itsfragrance to other oil producing countries in

the region and possibly, beyond. In thispolitically sensitive and oil producing region,such events may disrupt the productionschedules and delivery of oil across the world.Such instability could drive up the oil prices.Thus, India would have to factor that in and inan already high inflationary economy.

The Finance Minister is likely to consider thiswhile evaluating the proposal to reduce theexcise and customs duties on crude andpetroleum. This, coupled with better thanexpected revenue collection may lead to theFinance Minister letting the oil companiesreduce their under recoveries on account of subsidies, without increasing the retail price.

Lastly, it is expected that the Budget will contain aspecific road map about setting up of a Debtmanagement office. There is sufficient case forthe Budget to make it optional for the states tojoin in initially, but participation of all borrowersand lenders be sought over the medium and longterm so as to make the debt management officenot merely functional, but also effective.

Jatin Gajwani

AGRICULTURE

Agriculture is the dominant sector of Indianeconomy, which determines the growth andsustainability. About 65% of the population stillrelies on agriculture for employment andlivelihood. It accounts for 14.6 percent of thecountrys gross domestic product in 2010 -11 and10.23 percent of the total exports (provisional).India holds around 1% of the global trade-in agri-commodities. With the ongoing trade negotiationsunder the WTO, Indian Agriculture needs toreorient its outlook and enhance competitivenessto sustain growth from a demand side. For thispurpose, agricultural reforms are required.

According to the GDP data released by the CentralStatistical Organization (CSO) on November 30,2010, the country's farm sector grew by 2.5 percent and 4.4 per cent each in the first twoquarters of the current fiscal, against 1.9 per centand 0.9 per cent, respectively, in the same period,previous year.

An amount of US$ 19 billion has been allocatedfor the Ministry of Agriculture during the EleventhFive Year Plan. India's agriculture and allied sector

grew by 3.8 per cent in the first six months of thefiscal (2010-11), against one per cent in the year-ago period on the back of better Kharif cropoutput.

Capital investment in agriculture has increasedfrom US$ 1.2 billion in 2007-08 to US$ 3.26 billionin 2010-11 (inclusive of State Plan SchemeRashtriya Krishi Vikas Yojana), as per a Ministry of Agriculture press release dated August 3, 2010.

BUDGET 2010 - 2011ANNOUNCEMENTS AND IMPACT

Provision of US$ 86.9 million to extend thegreen revolution to the eastern region of thecountry comprising Bihar, Chattisgarh,Jharkhand, Eastern Uttar Pradesh, West Bengaland Orissa and a Provision of US$ 43.4 millionfor sustaining the gains already made in thegreen revolution areas through conservationfarming, which involves concurrent attentionto soil health, water conservation andpreservation of biodiversity . But only Rs 400crore have been set apart for this initiative


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which seems too little for a task of suchmagnitude, involving as many as six states.

Provision to organize 60,000 pulses and oil-seed villages in rain-fed areas in 2010-11; toprovide an integrated intervention for waterharvesting, watershed management and soil

health to improve productivity of the dry landfarming areas. Merely Rs 300 crore has beenearmarked in the Budget for this purpose.

What needs to be realised is that most of theinterventions needed for stepping up theproductivity of pulses and oilseeds in non-irrigated areas such as water harvesting,watershed management and soil healthimprovement are cost-intensive and need tobe taken up on a large scale.

Under the Agricultural Debt Waiver and Debt

Relief Scheme (2008), time frame for therepayment of the loan has been extended tillJune 30, 2010 from six months up to December31, 2009 .

In addition to the 10 mega food park projectsalready being set up, the government hasdecided to set up five more such parks .External commercial borrowings are to beavailable for cold storage or cold room facility,including for farm level pre-cooling, forpreservation or storage of agricultural and

allied products, marine products and meat.

The underlying objective of the four-prongedstrategy outlined in the Budget speech forspurring agricultural growth is, obviously, toaddress the supply side constraints that havesent food prices soaring in recent months. Theplan has measures to

Boost agricultural production;

Reduce wastages in the food supplychains right from the field to the marketand further on to the dining table;

Lend adequate credit support to thefarmers for investing in raising farmoutput; and

Promote the food processing sector tofacilitate both waste reduction and valueaddition of the farm produce.

As a major initiative to tame food inflation,Finance Minister Pranab Mukherjee hasindicated opening up of the retail chain tointroduce greater competition with theultimate goal of decreasing the considerabledifference between the farm gate prices,wholesale prices and retail prices. But he failedto list concrete measures that the government

proposes to take to bring about this much-needed reform. However, it does propose ameasured step in this direction by offeringconcessions on import tariff for mechanizedfarm produce handling systems at mandilevels; construction of cold storages and

facilities for chilling, and refrigeratedtransportation of perishable farm producefrom farms to the mandis and retail outlets.

The Budget proposes restoration of soil healththrough conservation farming involvingminimum tillage and ecological balancethrough biodiversity preservation. But, when itcomes to fund allocation, it has clubbed thesetasks with another even more ambitiousmission of imparting climate resilience toagriculture and has provided a meagre Rs 200

crore for all of these.EXPECTATIONS FROM BUDGET2011 - 2012

With inflation topping the government agenda,particularly, the food products inflation, toprevent the inflation from becoming broad-based, the focus might be on policies to boostagricultural productivity, irrigation andimprove agricultural marketing.

The governments biggest welfare program

could see an almost 60 per cent increase infunding. The forthcoming Budget is likely tomake a provision of Rs 64,000 crore for theMahatma Gandhi National Rural EmploymentGuarantee Scheme (MGNREGS) in 2011-12,against Rs 40,100 crore in the current fiscal.The huge increase in outlay will be mainly onaccount of two factors: Linking wages underthe scheme with the consumer price index(CPI) for agriculture labour; and a marginalincrease in the number of working days

guaranteed under the program.

Even as the government tries hard torationalize its subsidy payout and evenmulls direct cash transfers to targetedbeneficiaries the subsidy bill on fertilizers islikely to rise by 60 per cent for the currentfinancial year. This is despite the decontrol of complex fertilizer prices under the nutrient-based subsidy (NBS) regime from the beginningof this fiscal. The subsidy bill is expected to risesharply due to a rise in demand and higher

prices. It is expected to stand somewherebetween Rs 80,000 crore and Rs 83,000 crore.


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Buoyed by its success in increasing pulsesproduction in India through effectiveimplementation of National Food SecurityMission (NFSM), the government is likely tobring production of millet and fodder underthe missions ambit in the forthcoming Budget .

The public and private sector investment inagriculture should increase to about US$ 40billion.

The Planning Commission is working on anambitious action plan to boost secondaryagriculture, which includes value-addition tofarm products, in the 12th Five Year Plan(2012-17). It could be worth more than US$21.3 billion.

Aniket Dahasahasra

Nishtha Agarwal

BANKING &FINANCIALSERVICESThe Indian Banking & Financial Services Sector,the backbone of the economy, has gainedimmense recognition for its strength, particularlyin the wake of the global financial crisis, whichpushed its global counterparts to the brink of collapse. The industry played a key role in avertingthe financial crisis from reaching disastrousproportions in the country. It has played a crucialrole in the socio-economic development of thecountry and is expected to continue to besensitive to the growth and development needs of all the segments of the society.

INDUSTRY OUTLOOK & CURRENTSCENARIO

Banking Industry

After a difficult FY09 Indian banks managed togrow their balance sheets in FY10 albeit at a loweraverage rate than that projected by the RBI. Themonetary stimuli i.e. reduction in repo rate, cashreserve ratio (CRR) and statutory liquidity ratio(SLR) offered to the banks by the RBI early in thefiscal made it easier to sustain margins. Indianbanks grew their advances and deposits by 16.9%YoY and 17.2% YoY respectively in FY10. Thegrowth was mainly driven by the expansion in lowcost deposits (CASA) and growth in agriculturaland large corporate credit.

Also, the Cabinet, on December 1, 2010 approvedto provide an additional amount of US$ 1.33billion, in addition to the US$ 3.32 billion alreadyprovided in the Budget 2010-11, to ensure Tier ICRAR (Capital to Risk Weighted Assets) of allPublic Sector Banks (PSBs) at 7 per cent and also


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to raise Government of India holding in all PSBs to58 per cent. It also approved that the exactamount, mode of capitalization and other termsand conditions would be decided in consultationwith the banks at the time of infusion. Theproposed capital infusion would enhance the

lending capacity of the PSBs to meet the creditrequirement of the economy in order to maintainand accelerate the economic growth momentum.

However, higher delinquency levels in retailcredit and debt restructuring are worrying factors.Rating agency CARE has pegged Indian bankingsectors gross non -performing assets (NPAs) at 3.5per cent of gross advances by March 2011.Further the macroeconomic scenario, risinginterest rate due to high inflation, will putpressure on the profitability of banks.

Insurance Industry

The insurance sector plays a critical role in acount rys economic development. It acts as amobilize of savings, a financial intermediary, apromoter of investment activities, a stabilizer of financial markets and a risk manager. The industrywas opened up for private players in 2000, andhas seen tremendous growth over the pastdecade with the entry of global insurance majors.

The US$ 41-billion Indian life insurance industry iscurrently the fifth largest life insurance market,and is growing at a rapid pace of 32-34 per centannually. According to data released by theInsurance Regulatory and Development Authority(IRDA), Life insurance companies have witnessed a70 per cent jump in new premium collectionduring the first five months of the financial year.The number of players during the decade hasincreased from four and eight in life and non-lifeinsurance, respectively, in 2000 to 23 in life and

24 in non-life insurance (including 1 inreinsurance) industry as in August 2010.

However, the recent guidelines for capping thecommission payable to agent, to bring intransparency, may lead to reduction in growth of insurance companies in the short-term.


RBI is considering giving some additionalbanking licenses to private sector players. NonBanking Financial Companies could also be

considered, if they meet the RBIs eligibilitycriteria.

Rs.16, 500 crore provided to ensure that thePublic Sector Banks are able to attain aminimum 8 per cent Tier-I capital by March 31,2011.

Government to provide further capital tostrengthen the Regional Rural Banks (RRBs) sothat they have adequate capital base tosupport increased lending to the ruraleconomy

Appropriate Banking facilities to be providedto habitations having population in excess of 2000 by March, 2012.

Insurance and other services to be providedusing the Business Correspondent model. Bythis arrangement, it is proposed to cover

60,000 habitations.

Augmentation of Rs.100 crore each for theFinancial Inclusion Fund (FIF) and theFinancial Inclusion Technology Fund, whichshall be contributed by Government of India,RBI and NABARD.

The finance minister has made the acquisitionof intellectual property by Indian firms simplerand easier by completely liberalizing thepricing and payment of technology transferfee, trademark, and brand name and royalty

payments. These payments can now be madeunder the automatic route.

The establishment of the Financial Stability andDevelopment Council will help inter-regulatoryco-ordination while the Financial SectorLegislative Reforms Council will provide anoutline for the expected reforms in this sector.

Regulatory framework for the financial sectorto be strengthened: Apex level financialstability & Development council to be set up.

Increase in interest subvention from 1% to 2%

for the farmers who pay as per repaymentschedule, extension of debt waiver and debtrelief scheme for farmers extended by sixmonths to June 30, 2010.


The formal and final guidelines regarding whoshould be allowed to set up new banks andwhat should be the terms and conditions

should be announced in the Budget speech.

Guidelines for extending the geographiccoverage of banks and improving access to


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banking services should be unveiled in thebudget.

Framework for minimum capital for newbanks, the promoters contribution, minimumand maximum caps on the holding of promoters and others, foreign shareholding,

business model and whether industrial housesand NBFCs (non-banking financial companies)could be allowed to run banks should bepresented.

The limit for housing loan of Rs 250,000 (i.e. Rs150,000 towards interest on loan and Rs100,000) towards principal repayment) shouldbe increased to at least Rs 500,000 i.e. Rs300,000 towards interest and Rs 200,000towards principal loan repayment. Further thislimit of Rs 200,000 should be exclusively for

repayment of principal on home loan as thepresent limit of Rs 100,000 u/s 80C, whichincludes principal home loan repayment isalready overcrowded with other categories.This will encourage the people to have a houseof their own.

A group to look into a possible amnestyscheme to bring into the mainstream of theeconomy black money stashed abroad shouldbe setup.

Foreign direct investment (FDI) norms for

convertible instruments, to encourage greaterprivate equity (PE) participation and venturecapital deals in the country should be relaxed.Under the present policy, the pricing of all thecapital instruments that are issued to foreigninvestors must be decided upfront at the timeof issue. However, this would deprivecompanies of getting a better valuationafterwards in case of better performance.

Roll back of Rs 1,500-crore export sops whichwere set aside since the Budget 2009-10 as

additional incentives to exporters to help themarrest the decline in overseas shipments. Theschemes which should be rolled back includeinterest subvention scheme, status holderincentive scheme and possibly the 2% bonusgiven to select sectors under the focus productscheme (FPS).

Significant measures to deepen the corporatebond market should be announced. Among theseveral measures on the governments agendais allowing banks to provide guarantees for

bonds issued by companies which could act asa catalyst for corporate fund raising. The

current cumulative sub-ceiling on investmentsin corporate debt is $0.5 billion.

The Government should increase the FDI limitin insurance sector from 26% to 49%. It wouldhelp customers with better products, moreoptions and better service levels from

insurance players.It would also help increase the much-neededpenetration levels for insurance in the country.

The lapsed Pension Fund Regulatory andDevelopment Bill (PFRDA), earlier introducedin March 2004, can be reintroduced. ThePFRDA Bill seeks to allow at least 26 per centFDI in pension funds and would also let theminvest overseas. More importantly, it wouldgive a legal backing to the interim regulator the PFRDA.

LIC Act amendment Bill, to increase the capitalbase of public sector insurer LIC to Rs 100crore from the current Rs 5 crore, should bepassed.

Securitization and Reconstruction of FinancialAssets and Enforcement of Security Interest(SARFAESI) Act can be tabled. It aims to allowseizure of assets from defaulting borrowers tohelp banks reduce non-performing assets.

Amrita Diwan

Amritansh Rastogi

Nishant Kumar

Tithi Mukherjee


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DEFENCEIn the Union Budget of 2010-11, expenditure of about USD 195 million had been earmarked forcivil aviation and about USD 32.04 billion fornational defence including research anddevelopment. Of this, USD13.04 billion was to bespent on acquisitions for new weapons systemsequipment and services. The defence budgetaccounts for about 13.5% of the total CentralGovernment expenditure and about 2% of theGDP. If the scope of national defence is enlargedto national security, it would include expenses forcivil defence, security aspects of the Departmentof Space, Atomic Energy, expenditure of theMinistry of Home Affairs, which roughly accountfor about 24% of total Government budget andabout 3.2% of GDP. India is likely to spend USD120 billion in the next plan period (2012-17), thelatter coinciding with the last phase of Indiasambitious military modernization plan. Indiaplans to spend at least $30 billion until 2012 tomodernise the military with an immediatepurchase of 126 war jets costing $12 billionfollowed by ships, submarines, artillery and otherhardware in coming years.

Many of the assets India is acquiring are at the

leading edge of technology, including 180 SukhoiSu-30MKI aircrafts, Scorpene class submarines,advanced Russian T-90 main battle tanks andstate-of-the art information and communicationsystems. More than USD 42 billion in totaldefence expenditure is targeted by 2015, of whichapproximately USD 19.20 billion would beexpected to be spent on capital equipment for theDefence Armed Forces.

The parallel challenge for India in meeting its

policy objectives will be expanding its indigenousproduction capabilities at the same time asmeeting its ambitious acquisition agenda.Historically, India has imported more than 70 percent of its defence assets, most notably fromRussia, on which it continues to have a strongreliance. Over the past decade the Ministry of Defence has implemented a series of reforms toits procurement policy framework with the aim of reversing this historical spending pattern,including the introduction of offsets requirements

for designated equipment.Discussions on increasing FDI cap has been going.Recently, the Department of Industrial Policy and

Promotion had suggested FDI cap in defencesector to be raised to 74 per cent saying 100 percent overseas investment would be desirable.

KEY DRIVERS AND CHALLENGES

The key drivers of Indian aerospace and defenceindustry are high domestic demand, offset policy,cost advantages, talent base and leveraging ITcompetitiveness. There are challenges too, likeinfrastructure, State Border entry permits,customs clearance- required for both export andimport. The Indian defence industry also facesexport bans by countries limiting the transfer of knowledge and technology to foreign countries.As a consequence, reliance on imports is stillexpected to continue, particularly where theequipment has a high level of technologysophistication.

REGULATORY MEASURES

India has been increasingly moving towards amore open-market economy, reducing historiccontrols on foreign trade and investment. Somekey regulatory measures which are expected toundergo changes:

To increase FDI limit in defence sector from

existing 26% to 49% and finally to 74%.

To give soft credit lines which will encouragethe infusion of capital in this industry byprivate players as this industry demands largeupfront investments and a longer gestationperiod as there are greater opportunities forIndian defence industry to work withpartnership or in collaboration with overseascompanies, thus enabling them to havebroader market access due to Indias ambitiousmilitary plan.


The export of aerospace and defence goodsshould be incentivized by giving tax exemption forfew years. Certain defence manufacturing areaslike Himachal Pradesh, Uttaranchal, and NorthEastern States should be exempted from tax onprofits. For domestic manufacturers supplying tothe defence establishment, the Government mayconsider granting exemption from customs duty,excise duty, State specific value added tax (VAT)central sales tax (CST) and service tax on inputs/


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capital goods/ input services and outputs.Following key points to be noted in 2010:

Transport of goods by rail service taxexemption to defence/ military equipments;

To allow 100% FDI in defence special economiczone units.

Service tax is applicable on input services likeengineering, technical know-how etc whereasexport of services to foreign companies are notsubject to service tax (export of Servicescriterion on provided from India and usedoutside India proposed to be deleted byFinance Bill, 2010 but is still prevalent).

Similarly Indias maintenance, repair andoverhaul (MRO) industry believe that the taxregime should change in order to encouragethe opportunity available to India inpositioning itself as an MRO hub to the world.

After the introduction of defence Offset Policy,India is gradually becoming a key outsourcinghub for the global defence industry, increasingthe offset provisions to 30%.

The government is seeking to establish a newclass of domestic private enterprise, theRaksha Udyog Ratnas (RURs), which wouldenjoy the same tax treatments as incumbentpublicly owned firms (the Defence PublicSector Undertakings).


Projected Expenditure

The fiscal deficit had been projected as 5.5percent of GDP in 2010-11 against 6.9 per centduring the preceding year. The rolling targets forfiscal deficit are pegged at 4.8 per cent and 4.1per cent for 2011-12 and 2012-13, respectively.The expenditure on Defence comes under NonPlan expenditure. The Thirteenth FinanceCommission has observed that there existsconsiderable scope to improve the quality andefficiency of defence expenditure throughincreased private sector engagement, importsubstitution and indigenization, improvements inprocedures and practices and better projectmanagement, within the parameters of Government of Indias policy. Efforts in thisdirection will further expand the fiscal spaceavailable for defence spending.

The Ministry of Finance had projected a growthrate of 7 per cent per annum for defence revenueexpenditure. Capital expenditure is projected togrow at 10 per cent per annum. The resultantprojection for overall annual growth rate of defence expenditure works out to 8.33 per cent

The faster growth of revenue expenditure isprimarily due to the hefty increase in pay andallowances flowing from the implementation of Sixth Central Pay Commission (CPC). Followingmeasures are required to downsize the revenueexpenditure:

Defence transformation through technologicalimprovements is the need of the hour. Further,the three Services need to be integratedthrough reorganisation of higher formations

and through joint training and jointprocedures, which will ensure coherence andsynergy.

In the case of transportation, expenditurecould be reduced by making more use of railways facilities instead of road transport.

Defence should adopt Project Managementapproach for inducting complete systems orsetting up facilities to enhance operational

readiness on a life cycle basis.

The requirement of existing service logisticsand maintenance infrastructure could bereduced by adopting performance basedlogistics (PBL) strategy for system support,already adopted in the USA as a result of whichthe availability and reliability of systems hadimproved. The PBL has been found to be a farmore cost effective solution than in-houselogistics and maintenance management.Further, modern supply chain managementtechniques need to be employed to reducestorage echelons and inventory holding, bymaking more use of ICT.


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Table 1: Projected revenue expenditure by each servicedivision (USD million)

2010-11

2011-12

2012-13

2013-14

2014-15

Total2011-2015

Revenueexpenditure 18990 20319 21742 23264 24892 109207

Army (53%) 10065 10769 11523 12330 13193 57879

Navy (16%) 3038 3251 3479 3722 3983 17473

Air Force(31%) 5887 6299 6740 7212 7717 33854

(Assuming no hefty pay hike and %contribution of army, navy and air force same as that of capital expenditure of Table 1)

The Defence Services capital expenditure budget

is expected to achieve a compound annual growthof 10 per cent from 2011 to 2015 (as shown intable 1). Taking account of inflation, however,tempers the estimate of the overall opportunity;when accounting for Indias inflation rate, the realgrowth in Defence Service capital expenditure isexpected to be marginal over the next two yearsbefore increasing to a real growth rate of about5.3 per cent from 2012 to 2015. This represents amarginal slow down in budgeted expenditurefrom the past decade (CAGR of budgeted

expenditure of 13.8 per cent from 2003-2010).Given the fact that the modernisation programmeof the armed forces largely depends on capitalacquisitions, it boils down to how capital budget isallocated.

Table 2: Projected capital expenditure by each Servicedivision-wise

Table 3: Expenditure on defence by GOI (all figures are in USDbillions)

THREATS

Indias overall military strategy is shaped by arange of ongoing and emerging issues in theregion. This includes conventional threats andborder disputes with China and Pakistan, growing

concerns about terrorism from non-state andstate-sponsored groups, and the ongoing MaoistNaxal insurgency.

Reports of the growing strategic relationshipbetween China and Pakistan (for example, theChinese proposal to establish foreign militarybases in Pakistan) are also a cause for concern.These issues are further complicated by theongoing relationship between Pakistan and theUnited States, primarily due to the ongoing UnitedStates military presence in Afghanistan.

Abhimanyu Garg

Amrish Agarwal


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AUTOMOTIVE

Indian automobile market is one of the fastestgrowing automobile markets in the world. It has

continuously been clocking an average growthrate of about 25% y-o-y. It employs almost 10.7million people (directly and indirectly) and is animportant sector for the economy. Theimportance of the sector to the economy can begauged by the fact that the government hadimplemented a focused Auto Mission Plan 2006-16. It assumes special importance by the fact thatit is closely tied to heavy industries (read steel),intellectual pool (read technological know-howand R&D), infrastructure (read superior road

network) and growth in consumer purchasingpower (read growth in middle class and ruralmarkets).

BUDGET 2010 - 2011ANNOUNCEMENTS

The Finance Minister in his Union Budget 2010speech announced implementation of new tariffson cars and other vehicles. Below is the list of Union Budget 2010 Automobiles sectorannouncements:

10% tariff imposed on small cars which until

now benefited from the 8% excise tariff.

Excise duty on SUV and MUV vehicles

increased by 2% i.e. from 20% to 22%.

Benefit of weighted deduction for

expenditure on in-house R&D is proposed tobe increased to 200% from existing 150% forcompanies engaged in the business of manufacture or production of automobiles(including automobile components), helicopterand aircraft

Electric vehicles made eligible to excise duty

at 4% against the previous 8%.

Full exemption from custom tax on electric

automobiles and on its components.

Concessional tax on Solar power rickshaws

due to removal of excise tariff on solar panels.

Truck refrigerated units for manufacture

would be exempt from excise duty.

Small cars will continue to get excise duty

relief of 4%

Excise duty on two-wheelers slashed from10% to 8%

IMPACT

The following were the salient features in Budget-2010 in relation with the auto sector:

Increase in excise duty Excise duty was increased from 8% to 10% forsmall cars and 20% to 22% for SUVs and MUVs.The automobile industry immediately passedon the increase to the customers withsignificant hikes in the prices. Buying andmaintaining a car or bike became costly with ahike of 2% in the excise Duty which hadalready led to an immediate andcorresponding increase in the prices of automobiles and component.

Increase in weighted deduction to 200% forexpenditure on in-house R&DThis increase in the weighted deduction from150% resulted in giving a boost to domesticcompanies that rely heavily on in-house R&Dand encouraged a lot of investment into thetechnology development in India. This was oneof the important steps taken with a long-termperspective.

Relaxation of custom duty and tax on electricautomobiles and componentsThis was a relaxation of 4 % and helped thecompanies that have eco-alternatives to theirpetrol and diesel variants. This also openeddoors for variants from MNCs to be broughtinto India.

Continuation of excise duty relief on smallcarsThe continuation of 4% excise relief for smallcars was in line with the expectations of thegrowing segment in the domestic market. Thishelped small car manufacturers keep the priceslow.

Hike in excise duty on petrol and dieselThis hike made it dearer for the consumers tooperate automobiles, but did not see anysignificant drop in the growth of the sector assuch.

Hike in excise duty on steel by 2%The increase in excise duty on steel made thecost of raw-materials higher for producers.This effect was not fully passed on to theconsumers till August 2010. September 2010saw marginal hike in the prices as the raw-material cost rose further.

Increase in funds for infrastructure growthThe allotment of road transport was increasedto Rs.19, 894 crore against the previous Rs.17,


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520 crore. This is a long-term incentive for theauto industry.

Reduction in excise tariff on electric carsThe improvement in Excise tariff on electriccars helped the manufactures to accessCENVAT credit and avail for tax exemptions on

customs tariff on electric cars components.

Removal of central excise duty on Electric carand vehicles The Finance Minister had provided fullexemption from central excise duty for electriccar and vehicles which offer eco-friendlyalternative to petrol or diesel vehicles.Companies who have launched their electriccar received high benefit from this. Maruti hasEeco and Hyundai with i10 electric version gotthe benefit of exemption of central excise

duty.


India is already the seventh largest vehiclesproducing nation in the world. According to Ernst& Young forecasts, Indian automotive market willhave the highest CAGR (at 14%) between 2009and 2020. The industry is also looking at investingUS$ 17.12 billion in fresh capacity in the next fouryears. India is already the second-largest small carproducing hub in the world.All these can be continued and improved by givingthe following stimulus in the Budget of 2011:

Supply related incentives o

Reduction in excise duty on steelThis will augur well for both theinfrastructure and automobile sectors. Theincrease witnessed last year should berolled back by at least 1%.

o

Continuation of tariff cuts to domesticplayersDomestic firms were given a tariff reduction in 2010. This should becontinued as most of the low-cost autosegment will be served by domesticplayers like Mahindra & Mahindra andTata.

o

Reduction in capital costs in terms of setting-up plantsWith a number of foreign players enteringIndia to setup production facilities, thebudget should provide for incentives interms of land-subsidies/ special economiczones where such plants can be set-up.

o

Increased weighted deduction on acquiredR&DAs foreign firms set shop in India with localproducers, it is important that suchdeductions be increased to help in themigration of technology.

Demand related incentives o

Marginal reduction in excise duty onvehiclesThe increase of 2% in excise duty resultedin sharp increase in prices. The duty shouldbe marginally reduced to encourage higherconsumption.

o

Incentives for rural marketsAs the rural market slowly becomes high-demand center for small cars and vehicleslike tractors, the budget should decrease

duties on such vehicles. This will help spurthe demand.o

Incentives for switching to cleanertechnologyBharat Stage-IV norms are already in-forcein 13 cities and Bharat Stage-III in the restof the country. Consumers should not facesteep increase in price if the market has tokeep up with the technology changes andthus, this switch should be given dueimportance.

o

Easy financing termsAutomobile financing should be madeeasier with lesser interest values andhigher loans amount slabs.

o

Continued focus on infrastructure upgradationAllocation to roadways should bemaintained at current level and levels of agricultural allocation and schemes likeNREGA should be increased to encouragethe high demand growth in tier-III andrural areas.

Harshbir Singh

Kishore Shivtarkar

Mohit Sudan


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EDUCATION

The size of the education sector is expected todouble to US$ 50 billion by 2015 with the rise in

government expenditure along with an increase inmiddle-class income. The size of the educationsector currently is pegged at US$ 25 billion, withhigher education market estimated at US$ 15billion. The government is planning to spendabout five per cent of gross domestic product(GDP) in the next five years on education.


Following announcements were made in theeducation sector:

Planned allocation for school educationincreased by 16 per cent from Rs.26,800 crorein 2009-10 to Rs.31,036 crore in 2010-11.

In addition, States will have access to Rs.3,675crore for elementary education under theThirteenth Finance Commission grants for2010-11.

Integrated Child Development Services:Government is committed to universalization

of the Integrated Child Development Services(ICDS) Scheme. By March 2012, all servicesunder ICDS would be extended, with quality, toevery child under the age of six.

Student Loans to Weaker Sections: To enablestudents from economically weaker sections toaccess higher education, a scheme to providethem full interest subsidy during the period of moratorium has been proposed. It will coverloans taken by such students from scheduledbanks to pursue any of the approved courses

of study, in technical and professional streams,from recognised institutions in India. It isestimated that over 5 lakh students wouldavail of this benefit.

Aligarh Muslim University has decided toestablish its campuses at Murshidabad in WestBengal and Malappuram in Kerala. Rs.25 croreeach have been allocated for these twocampuses.

Female literacy: The low level of femaleliteracy continues to be a matter of grave

concern. It has, therefore, been decided tolaunch a National Mission for Female Literacy,with focus on minorities, SC, ST and other

marginalised groups. The aim will be to reduceby half, the current level of female illiteracy, inthree years.

IMPACT

E-Learning: Mr. Kapil Sibal has announcedgovernment's plans to launch a scheme, whichwould bring in information, communicationand technology (ICT) into elementaryeducation. The scheme would focus on thedevelopment of e-contents which would beused by students at primary and upper-primaryclasses for learning purposes.

One Laptop Per Child (OLCP): Mr. Kapil Sibalhas recently unveiled a US$ 35 low-costcomputer in an attempt to revolutioniseclassroom education across the country. Thedevice allows students to write and store text,browse the Internet and view videos, amongother regular features.

Bills introduced in Parliament:

The National Accreditation RegulatoryAuthority for Higher Educational InstitutionsBill, 2010 postulates that every highereducational institution and every programmeconducted by it should require accreditation inthe manner provided in the proposedlegislation.

The Educational Tribunals Bill, 2010 providesfor the establishment of the State EducationalTribunals and the National Education Tribunal.The National Education Tribunal wouldexercise power and authority over any disputebetween a higher educational institution andany appropriate statutory regulatory body andall other matters pertaining to highereducation.

The National Development Council hasapproved setting up of 14 world-classuniversities for innovation across the 11th and12th plan periods on the public privatepartnership model. The innovation universitiesare part of the Ministry of Human ResourceDevelopment's (MHRD) "brain gain" policy toattract global talent and will be set up underthe eleventh plan (2007-12).

Further, the Government has agreed to spendUS$ 675.90 million during the 11th Plan periodfor setting up 13 new Central universities andconverting three existing State universities intoCentral universities.


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Mr Kapil Sibal, Union Minister of HumanResource Development, plans to create anational vocational educational frameworkwithin one year.


Increase allocation towards general education.Last year it was increased by 16% to INR42,036 crores.

Higher allocation of funds for Information andCommunication Technology (ICT) in schoolscovering items that are not currentlysupported, including use of multimedia-basedlearning in classrooms.

Make State governments more accountable fordeploying Sarva Shiksha Abhiyaan (SSA) andimpose penalty if they are found to lapse.

Kendriya Vidyalaya Sangatan (KVS), NavodayaVidyalaya Samiti (NVS) and Madrasas to bepushed towards educational and ICT basedimprovements.

Allow PPP model for growth in educationsector which also allows topline growth forprivate sector companies in this sector.

The DTC conceives of an income-tax levy at the

rate of 15 per cent on the surplus generatedfrom permitted welfare activities, such aseducation. This is a retrograde step that mustbe rolled back, given its apparent conflict withthe objective of enabling universal access toquality education.

Clear and express output and input service taxexemptions to the entire education supplychain are also fiscal measures that needstatutory sanction to reduce the burden of sunken indirect tax cost.

Gunjan Jhunjhunwala

Maitreyee Rishi

Shubhanga Prasad

PHARMACEUTICAL

Indian Pharmaceutical Industry is a classicexample of highly organised sector in India andcaters to 95% of the medical needs of Indiansindigenously. The Indian Patent Act (1970) hadgiven only process patents which encouragedreverse engineering among Indian drugmanufacturers, while Drug Control Price Order(1970) ensured affordability and availability of lifesaving and necessary drugs to general public. TheIndian Pharmaceutical Industry has been growingat a steady pace of 10% for the last few years andit is expected to continue to grow. Total drugproduction in India is done by over 20000 unitsand this industry provides environment to slightlymore than 30 lakh people annually. Indianpharmaceutical Industry is the fourth largest involume term as and 13 th largest in value globally.

In 2005, as per WTO guidelines, India introducedthe product patent act. This coupled with low costproduction in India fuelled MNCs to increase theirequity stakes in their Indian Partners. This hasdefinitely affected the Indian reverse engineeringprocess but by now Indian producers haveadopted an increasing global view of their

operations by setting manufacturing andmarketing JVs internationally, strengtheningbrand franchises, and building world class facilitiesfor world drug production. This has renewed thefocus on R and D and discovery of new molecules.Since 2005 till India has filed for 15 productpatents. With the increase in disposable incomeformulations drugs market is expected to rise to25% by 2013.

BUDGET 2010 - 2011

ANNOUNCEMENTS

Weighted tax deduction on expenditureincurred in in-house research anddevelopment activities to 200 per cent

Rate of minimum alternate tax on book profitsincreased from 15% to 18%.

Increase in excise duty on APIs from 8 percentto 10 percent

Rationalization of the customs duty onmedical equipments.

Import duty exemption on the specified inputsfor the manufacturing of orthopaedicimplants. Uniform concessional basic duty of 5


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percent, CVD of 4 percent with full exemptionfrom special additional duty on all medicalequipments and concessional basic duty of 5percent on parts and accessories for themanufacture of such equipment withexemption from CVD and special additional

duty.

The proposed Annual Health Survey whichwould prepare the district health profile of alldistricts is to be conducted in the year 2010-2011. The plan allocation to Ministry of Healthand Family Welfare was increased to Rs22,300 crore for 2010-11.

Rashtriya Swasthya Bima Yojana, which ishealth insurance for people below povertyline, has been extended to more than 20percent of the Indian population covered by

the NREGA (National Rural employmentGuarantee Act) program.

IMPACT

Tax incentives were accepted as a welcomechange but the common sentiment was thatthis was neutralised with the rise in MAT thatwould impact the book profits.

Increase in excise duty on APIs from 8 percentto 10 percent, was a negative impactformulators located in excise free zones asthey would have to buy these APIs at a highercost.

Increase in proposed spending on social sectorwould have an indirect effect especiallybec ause of Indias strong presence in genericdrugs.

Rationalization of the customs duty onmedical equipments will also provide a fillip tothis upcoming sector. Tax incentives for thebusiness of setting up and operating ColdChain infrastructure was a w elcome sign asthis is an integral part of logistics for manybiotech products.

Announcement on the import duty exemptionon the specified inputs for the manufacturingof orthopaedic implants addressed theindustry issue of inverted duty structure incase of orthopaedic implants and medicalequipments and is an impetus towardsindigenous production of these products andmaking the Indian industry compete globally.

The entry of corporate into healthcare, the newtrend of forward integration by manufacturinginto retail is going to make the pharmaceutical

retail the fastest growing segment. With some of the old product patents going to expire soon, therise of biotechnology and bio medical sector,faster paced R and D and infusion of more skilledmanpower, proper infrastructure, and academiccollaboration becomes increasingly important.

The Indian drug and pharmaceuticals segmentreceived foreign direct investment to the tune of US$ 1.43 billion from April 2000 to December2008. Public spending on healthcare is likely toraise from 7 per cent of GDP in 2007 to 13 percent of GDP by 2015. Due to the low cost of R&D,the Indian pharmaceutical off-shoring industry isdesignated to turn out to be a US$ 2.5 billionopportunity by 2012.

The future of the industry will be determined byhow well it markets its products to several regionsand distributes risks, its forward and backwardintegration capabilities, its R&D, its consolidationthrough mergers and acquisitions, co-marketingand licensing agreements.

For the above reasons there are higherexpectations from the investors, manufacturersand even end consumers from the governmentfor this industry.


The industry is in need of greater SOPS, wherea deduction of 200 percent will not suffice.

Tax break for investors to make investments.

Tax deductions to units engaged in ContractResearch and development (R&D).

Full exemption on medical equipments willhelp manufacturers make it available for endusers at a better price.

Increase in healthcare infrastructure, with

creation of focused SEZs, and tax holiday onexports.

The proposed rollout of GST in April 2011 andallocation of funds for the purpose of expeditious regime of GST is also a good stepfor states. Levy of multiple taxes, loss of creditof tax paid, compliance and litigation costassociated with the present tax set up arecausing problems to the Industry.

Government should consider anti-dumpingduty on Chinese Bulk Drug (API) imports andalso provide special incentives for localproduction of API in the SME sector. It shouldincrease duty drawback to encourage use of


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local APIs than imports from China, theChinese manufacturers are heavily subsidizedand is proven to be a disadvantage for IndianManufacturers.

The recent takeovers of Indian pharmaceuticalcompanies by their foreign counterparts, has

raised concerns in the Ministry of Health andWelfare that the research work which isfunded by government institutions would gowaste or be used for producing moresophisticated drugs that would fetch higherprices in the global market. Governmentinstitutions share their R&D for thedevelopment of low cost drugs for diseasesafflicting the poor. Also, in the case of a publicemergency, they may not be available to applyfor compulsory licence and work at a

reasonable cost. Hence the ministry isrequesting a change of FDI policy. Currentlyforeign companies can directly purchase 100%equity in local companies without the consentof Foreign Investment Promotion Board andIndian companies taken over by MNCs hadbeen receiving state grants and taxconcessions.

Samira Vemparala

INFORMATIONTECHNOLOGY &INFORMATIONTECHNOLOGYENABLED SERVICES

The IT sector is a very significant sector as regardsthe economic growth of India. The sector from2009 onwards has totally revamped itself byadopting cost effective techniques, diversificationinto new markets, verticals, businesses; and hasthereby presented itself to its clients as a sectorwith one of the best value propositions ascompared to competitors all around the world.

Indian IT-BPO industry continues to dominate theglobal market place with 51% market share. Itaccounts for over 10% of the total FDI in the lastdecade. In 2010-11, annual revenues from IT-BPO sector is estimated to have grownover US$76 billion compared to China with $35.76billion and Philippines with $8.85 billion.


Minimum Alternate Tax (MAT) rate increasedfrom 15% to 18%.

Calculation of tax exemption for SEZs underthe revised formula was made effective.

The excise duty / Counter Veiling Duty (CVD)exemption in relation to transfer of right touse canned or packaged software, wasextended to all transfer of right to useincluding transactions where such right to useis not for commercial exploitation.

Packaged or canned software intended forsingle use was exempted from service tax.

Certain capital goods and raw materials formanufacture of electronic hardware wereexempted from all customs duties.

Significant increase in plan allocation for schooleducation.
http://en.wikipedia.org/wiki/Information_Technologyhttp://en.wikipedia.org/wiki/Business_process_outsourcinghttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/Philippineshttp://en.wikipedia.org/wiki/Philippineshttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Business_process_outsourcinghttp://en.wikipedia.org/wiki/Information_Technology


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Process of refund of accumulated credit forservice tax was made easy for exporters of ITand BPO services.

Expenditure incurred on approved in-houseR&D, was proposed to be increased to 200%,from the existing 150%.

An increase in the peak rate of excise duty by2% (i.e. from 8% to 10%) was proposed.However, the merit rates of customs duty andservice tax were kept unchanged.

Exemption from excise duty which wasavailable to goods meant for external use withcomputer / laptop as a plug in device waswithdrawn and an excise duty of 4% wasimposed on them.

IMPACT

Minimum Alternate Tax (MAT) rate increasedfrom 15% to 18% : MAT is imposed on profitmaking companies, which do not fall under thetax net because of various exemptions, andmost IT companies fall under category. Thus anincrease in MAT is a dampener for ITcompanies, more so for medium and smallsized entities. Small IT and BPO companies thattypically have tighter cash flows, now have topay a minimum of 18% service tax.

Calculation of tax exemption for SEZs underthe revised formula was made effective :

o

100% income tax exemption for first 5years.

o

50% income tax exemption for next 5years.

o

Income tax exemption for next 5 years tothe extent of profits reinvested(Maximum 50%).

o

This has had a positive impact for largesoftware companies due to their materialSEZ presence.

o

Extension of excise duty/ CVD exemptionon canned/ packaged software: Thisamendment, covering duty exemption oncanned / packaged software, will bebeneficial to end-users of such software.

o

Packaged or canned software intended forsingle use were exempted from servicetax: This would eliminate dual levy of excise duty / customs duty and service taxon such software related transactions andtherefore is a positive for productcompanies.

o

Certain capital goods and raw materialsfor manufacture of electronic hardwarewere exempted from all customs duties:This should provide added incentive tothe IT / Electronic hardware industry.

Significant increase in plan allocation forschool education: This was a welcome changefor education companies such as Educomp,Everonn, Aptech, etc.

Process of refund of accumulated credit forservice tax was made easy for exporters of ITand BPO services: This would benefit those ITand BPO companies which have significantinternational business.

Expenditure incurred on approved in-houseR&D, was proposed to be increased to 200%,

from the existing 150%: This would provideadded incentives for companies to maintaininvestments in innovation and is also expectedto add impetus to further R&D activity.

Increase in the peak rate of excise duty by 2%(i.e. from 8% to 10%) was proposed: Thisincrease in the rate of excise duty has resultedin a corresponding increase in import duty (inlieu of Counter Veiling Duty). As a result of such increase in CVD, the duty rate on importof software has now increased from 8% to

10%, thus, bringing this on par with service taxapplicable on e-downloads. This amendmentwill result in additional cash outflows toimporters of software.

Exemption from excise duty which wasavailable to goods meant for external use withcomputer / laptop as a plug in device has beenwithdrawn and an excise duty of 4% wasimposed levied on them: This would increasethe duty burden on such computer peripherals/ accessories.

EXPECTATIONS FROM BUDGET2011 2012

Excise & Service Tax cut: A higher excise dutyor service tax means a higher outflow of fundsfrom the IT companies. Thus a reduction inthese will be beneficial to them.

Extension of tax exemption for the SoftwareTechnology Parks (STPs): THE STPI Scheme is

lauded as one of the most effective schemesfor the promotion of exports of IT and ITES.


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Apart from exemption from customs dutyavailable for capital goods (with a fewexemptions) there are also exemptions fromservice tax, excise duty, and rebate forpayment of Central Sales Tax. But the mostimportant incentive available is 100%

exemption from Income Tax of export profits,which has been extended till 31st March 2011.A further extension of this was expected in thelast budget but was not announced. Itsexpected in this Financial Budget as well.

Reduction in MAT : In the last budget asagainst peoples expectations the MAT wasfurther increased. The increase in MATresulted in a dampener for the industryespecially the smaller companies and resulted

in tighter cash flows. Thus a reduction in MATis expected at least this year.

Meera Mohandas

Shinoy Xavier

TELECOM

Indian mobile market has undergonerevolutionary change during the past few years tobecome one of the leading mobile markets on theglobal map. The number of mobile subscribersstands at 752.19 million in December 2010. Thissector has become hyper competitive market with~12-13 players. India has lowest Average revenueper user (ARPU) of $3/user/month with highestminutes if usage in the world. The two maintechnological revolutions that powered telecomsector in 2010 were the auction of 3G spectrumand the Mobile number portability (MNP).

The 3G/BWA (Broadband wireless auctions)

auctions held this year helped the governmentraise $16 billion and boosted its fiscal situation. Atthe same time a huge can of worms involving the2G sector scam which caused the exchequer a lossof 1.76 lakh crores which could have reduced thefiscal deficit of India to half has marred thetelecom sector. Till date there have already been17 million customers who have submittedrequests for number porting. The already cutthroat competition is going to further intensifywith ARPU expected to fall further. While

established players have the most to lose giventheir large customer bases, they also have strongpropositions and can benefit from lessons learnedfrom global markets that have alreadytransitioned to MNP. India has very high churnrates already. While MNP may have a one-timeimpact, it is likely that the winners will be thosewho are already winning the net acquisitionbattle.

The latest announcement has been that of the

delinking of the spectrum from the licenses. Thiswill lead to the operators paying marketdetermined prices for the additional spectrum.This may cause swelling in the telecom tariffs. Thisstep has come in the aftermath of the 2Gspectrum scam.

Recent regulator recommendation has stimulatedsome uncertainty in the sector, especially withregards to recent 2G pricing and license renewalfees. However, increasing rural penetration anddata services offers immense potential goingforward.


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Rate of Minimum Alternate Tax (MAT)increased from the current rate of 15% to 18%

of book profits. Negative. Increase in taxburden.

Outright exemption from special additionalduty provided to mobile phones imported forretail Sale Positive for handset distributors.

Exemptions from basic, CVD and specialadditional duties are now being extended toparts of battery chargers and hands-freeheadphones. Also, the validity of theexemption from special additional duty isbeing extended till March 31, 2011.

Outright exemption from special additionalduty on goods imported in a pre-packagedform for retail sale which would also covermobile phones even when they are notimported in pre-packaged form.

EXPECTATIONS FROM BUDGET2011 2012

Impose import duty on imported mobilehandsets

Relaxation in the taxation norms to telecomservice providers and telecom infrastructurecompanies, given the capital intensive natureof the sector is expected. The government isexpected to impose import duty on importedmobile handsets to encourage the domesticproduction.

Tax treatment of spectrum chargesThere is no clarity as regards the treatment tobe adopted for corporate tax purposes inrespect of massive upfront spectrum feepayment, interest costs on account of borrowed capital and deductibility/ taxabilityof foreign exchange fluctuations in respect of overseas borrowings. The Government shouldtherefore, bring out specific amendments inthe Income tax law, so as to provide fordepreciation claim on the upfront spectrumfee payment, allow deduction of interest paidon capital borrowed for acquisition of spectrum.

Tax holiday benefits on consolidationHyper-competition in the sector and reducedtariffs are forcing telecom companies tostreamline operations. To combat thesechallenges, a consolidation phase would beexperienced in the near future. However, the

restrictive provisions in Section 80IA(12A) of the I-T Act denying tax holiday to undertakingswhich undertake bona fide restructuring wouldbe detrimental to such consolidations in thetelecom sector and hence, these provisionsshould be deleted.

Re-introduction of tax holiday Tax holiday for network roll-outs in rural areaswould also speed up the process significantly.Further, providing tax breaks to telecom

infrastructure service providers wouldimmensely help in cutting down costs, therebyassisting in deeper rural penetration.

Indirect Tax The key areas that need urgent rationalizationinclude availability of input tax credit of dutiespaid on telecom infrastructure, explicitconfirmation that telecom service provided toforeign telecom operators should qualify asexport of service reinstate export incentives as

are available to other service sectors. Thesector expectation is to have clarity andrationalization of the tax regime which will solong way in promoting the much neededinvestment in the sector.

Though no respite was provided to the telecomsector by Union budget 2010, the telecom sectoris hopeful that this time round the Union budgetwould bring with it a bag of goodies, so as toprovide some relief to the high investment drivensector.

Krishna Bajaj

Manoj Jaju

Vaibhav Pathak


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RETAILRetail, one of Indias largest industries, haspresently emerged as one of the most dynamicand fast paced industries of our times with several

players entering the market. Accounting for over10 per cent of the countrys GDP and around eightper cent of the employment retailing in India isgradually inching its way toward becoming thenext boom industry.

The trends that are driving the growth of the retailsector in India are

Low share of organized retailing Increase in disposable income and customeraspiration

Increase in expenditure for luxury items Young population spending patterns

FACTS AND FIGURES

Number of shopping malls is expected toincrease at a CAGR of more than 18.9% till 2015. Apparel, along with food and grocery, will leadthe organized retailing in India. Rural market is projected to dominate the retailindustry landscape in India by 2012 with total

market share of above 50% Driven by the expanding retail market, thirdparty logistic market is forecasted to reach US$ 20Billion by 2011.

RECENT DEVELOPMENTS

Mukesh Ambanis Reliance Brands has reportedacquired 49 percent stake in Ermenegildo Zegnagroups mono brand retail operations in India. Thesubsidiary of Reliance Retail is expected to buythe stake in the Indian unit of Zegna South AsiaPrivate Ltd. Stanley, a genuine leather upholstery Indianbrand announced its retail expansion plan in Indiawith the launch of its exclusive flagship storeMumbai.

BUDGET 2010 - 2011ANNOUNCEMENTS Individual tax payers have been given thebenefit of lower tax slabs and higher exemptionlimits. Surcharge on domestic compani es reduced to7.5% from 10%

Increase in the rate of Minimum Alternate Taxfrom 15% to 18% of book profits Customs duty on gold ores and concentrates foruse in manufacture of gold is being fullyexempted. These goods will, however, be leviedconcessional CVD at the rate of Rs 140 per 10 gm

of gold content. Custom duty on precious metals indexed asfollows- on gold and platinum from Rs 200 per gmto Rs 300 per gm. In case of silver the hike hasbeen of Rs 500 to Rs 1,500 per kg.

IMPACT

Increase in disposable income in the hands of the people resulted in increase in consumption.Thus, in general increase in spending powerboosted the growth of the retail.

Retailers like Pantaloon Retail, Shopper's Stop,Trent and Titan and many others gained withincrease in disposable income. Abolition of excise duty on branded articles,increase in customs duty in case of gold bars,coins and ornaments is a positive move for theorganised jewellery retailers. Titan Industries canutilise this competitive advantage. Many Foreign entrants pouring in the IndianMarket, with reforms expected and newer growth

avenues being explored.

EXPECTATIONS FROM BUDGET2011 - 2012Industry experts will carefully watch the sessionsof Union Budget 2011-12, with anticipation of announcements that will facilitate fund flow,resource availability and reforms within the sectorcreating opportunities for expansion and growth.

Recognition to the industry

The retail industry is on the growth path and iseagerly awaiting for aggressive expansion, withmany foreign giants already at the doorstep.

The government should offer the requiredimpetus for it to reach greater escalations. Theretail sector needs to get its deservingrecognition. It can be achieved by requiredreforms.

Strengthening the Retail supply chain, may bringabout controlled inflation.


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TECHNOLOGICAL IMPROVEMENTS

Budget must emphasize on needs of retail sectorof technological development. Technology highlydrives up the efficiency and productivity of sector.Thus policies must ensure that investment led

growth opportunities must arise, in turn boostingthe technological requirements and sector itself.

Relaxation of FDI

FDI is an issue that has been long debated topic inretail. India presently has the largest retailindustry in the world and the easing of the FDIwould only help it achieve greater heights.However, it is still an unresolved issue. Followingpoints must be considered.

Currently, India does not allow FDI in multi brand retailing while in single brand retail there isa 51 per cent limit on FDI. For wholesale cash -and-carry model 100 percent FDI is permitted. Allowing FDI in multi brand retail will bring ingreater efficiencies and effectively help lowerprices, improve product quality and improve thevariety of products as desired by the endconsumer. The government also needs to bring in

transparency on applicability of press notes 2, 3and 4 of 2009 for the retail industry. These notesdeal with the calculation of FDI in step downsubsidiary of an Indian Investing company havingFDI. The retail market in the country is expected togrow to $590 billion by 2012. FDI in retail can havesome positive results on the economy, triggering aseries of reactions that in the long run can lead togreater efficiency and improvement of livingstandards, apart from greater integration into the

global economy.

Neeraj Patki

ENERGY &PETROLEUM

PETROLEUMOil accounts for about 31 percent of Indias totalenergy consumption, with its share of the mix having fallen from 35 percent earlier this decade.The crude oil production was 24.812 MMT duringthe period April-Nov 2010 against the plannedoutput of 24.888. This was an increase of 10.32%over the same period in 2009-2010. The crudethroughput by OMCs was 106.53 MMT during theperiod April-Nov 2010 against the planned outputof 104.37. This was a marginal increase of 0.8%over the same period in 2009-2010. The LNGproduction was 35293.1 MCM during the periodApril-Nov 2010 against the planned output of 35789.5 MCM. This was an increase of 19.77%over the same period in 2009-2010.


An expert group under Mr. Kirit Parikh hassubmitted its recommendations with respect topricing of petroleum products. The decisions onthe same will be taken in due course.

As per the recommendations of Kirit Parikhcommittee, the petrol prices were deregulatedsince June 2010. The public sector oil companieshave raised the price of petrol by over Rs10 a literin eight instalments during the current financialyear.

CURRENT SCENARIO

The imposition of 5% import duty on crude oil and7.

pre-budget analysis 2011-2012

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