Budget 201011

8/8/2019 Budget 201011

1/36

Analysis & Outlook

uUnion B dget

RevenueExpenditure

2010-11

8/8/2019 Budget 201011

2/36

Disclaimer

CRISIL Research, a Division of CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from

sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is notresponsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is not liable for investment decisions which

may be based on the views expressed in this Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/

transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's

Ratings Division, which may, in its regular operations, obtain information of a confidential nature which is not available to CRISIL Research. No part of

this Report may be published/reproduced in any form without CRISIL's prior written approval.

CRISIL Research is India's largest independent and integrated research house meeting the requirements of over 750 Indian and global

clients, including 90 per cent of Indias commercial banks. We are the foremost providers of incisive and high quality research helping

clients make and track business and investment decisions. Our unique, integrated macro-micro research model enables us to provide

unmatched quality and range of research products on the economy, industries and companies, fund services and equity research. Through

continuous innovations and cutting edge products, CRISIL Research is today a dominant player in the Indian research arena.

CRISIL Research services:

Fundamental Research:Through its Industry Research reports on approximately 65 industries, Industry Risk Score reports on 135

industries, and company reports on top 150 listed companies, CRISIL Research provides the most comprehensive and independent

coverage on industries and companies. It also provides special reports on many topical sectors such as Real estate, Infrastructure,

Logistics and Small and Medium Enterprises and Emerging segments of the economy.

CRISIL Customized Solutions: Its customized research solutions facilitate informed business decisions by undertaking studies on

Project Feasibility, Market sizing, Demand Estimations, Customized Credit reports, Regional demand and growth strategies, etc.

CRISIL Fund Services and Fixed Income (CFS): CRISIL FundServices is Indias leading provider of rankings, desktop tools,

customized investment research, wealth management solutions, market intelligence cum outreach reports, valuation tools, Indices and

market benchmarks. Its CRISIL~Composite Performance Rankings (CRISIL~CPR) is the industry standard for mutual fund evaluation

in India for over a decade.

CRISIL Equities: It offers an Independent Equity Research coverage on Fundamentals and Valuations of Companies, IPO Gradingservices, Customized Sector Content for Information Memorandum and Offer Documents

8/8/2019 Budget 201011

3/36

i

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

Union Budget

Contents

Foreword 1

Economy

Highlights 4

Economy analysis 5

Industry

Overall sectoral impact 12

Overall company impact 18

Capital markets

Equity market 24

Mutual funds 27

8/8/2019 Budget 201011

4/36

8/8/2019 Budget 201011

5/36


Union Budget

1

ForewordThe growth tide lifts the fiscal boat

The gloom prevailing at the time of the last budget in July, 2009 has given way to optimism and confidence this year.

The Economic Surveys growth optimism is resonated by the budgetary assumption of 8.5 per cent growth for 2010-11.

The higher-than expected growth in 2009-10, nevertheless, provided an opportunity to initiate exit strategies. In order to

balance the objective of sustaining the ongoing recovery with medium-term fiscal correction, the budget has begun the

rollback of fiscal stimulus measures. As some concerns on the growth front still remain, the roll back is partial. The

budget sets the fiscal deficit target at an aggressive 5.5 per cent of GDP for 2010-11 and 4.1 per cent by 2012-13. We

believe, that fiscal year 2010-11 will close with fiscal deficit at 5.6 per cent of GDP. Beyond that, speedy

implementation of GST will be the key to achieving the medium-term fiscal targets outlined in the budget.

The roll back on indirect tax cuts will not hamper the economys growth prospects. The tax concessions offered to

middle class, expected to benefit 60 per cent of the tax payers, will boost private consumption and offset the impact of

rise in excise duties. Education has received the attention it needs in this budget. Further, the budget significantly raises

the allocation to key infrastructure sectors. Both these measures will help raise Indias growth potential.

Tax buoyancy response is synchronized with economic performance- going down sharply in a downturn and rising

during an upturn. Tax collections are therefore set to benefit from the rising growth tide, particularly industrial growth.

Assuming the tax buoyancy to rise to 1.2 per cent in 2010-11 from 0.4 per cent in 2009-10, the FM rightly budgets a

17.9 per cent increase in tax revenues this year. Aggressive 3G revenues and divestment are expected to further bolster

revenues. Given that elections are still not on the horizon, it was time to bite the bullet on expenditure reforms. The

good news is, fiscal correction is not riding on cuts in capital expenditure. The not so good news is that revenue

expenditure reforms have again been ignored. Without these steps, enduring correction in government finances will not

take place, in our opinion.

Inclusiveness has been top priority for the UPA government and this budget further builds on the attempts of the

previous budget, by broadly maintaining elevated allocations under its flagship safety net scheme NREGA. Our

analysis of the schemes economic impact suggests that wages distributed under the NREGA added around 55 basispoints to rural household consumption and around 32 basis points to GDP in 2009-10. Spending under NREGA can

now treated as a permanent component of stimulus. Measure to improve banking penetration, re-capitalisation of

regional rural banks push the financial inclusion agenda further.

8/8/2019 Budget 201011

6/36


Union Budget

ForewordOne of the major concerns for the monetary policy continues to be the bloated government borrowings. Despite

reduction, net borrowings of the government remain bloated at Rs 3450 billion. As growth gains further traction,

managing government borrowing programme of this size will be quite challenging as the private sector will start

competing for funds and RBI tightens the monetary policy further.

Overall the budget has tried to satisfy the needs of various stakeholders, but clearly growth and Aam admi get the

most attention.

Dharmakirti Joshi

Principal Economist, CRISIL

8/8/2019 Budget 201011

7/36

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 3

Econom

8/8/2019 Budget 201011

8/36


Union Budget

Highlights Fiscal deficit pegged at 5.5 per cent of GDP for 2010-11

Fiscal deficit projected at 4.8 per cent and 4.1 per cent of GDP in 2011-12 and 2012-13, respectively.

Revenue deficit for 2010-11 projected at 4.0 per cent

Revenue deficit for 2009-10 revised upwards to 5.3 per cent from the budget estimate of 4.8 per cent

Net market borrowings for 2010-11 is budgeted at Rs 3,450 billion, 13.4 per cent lower as compared to the

previous year

Total expenditure in 2010-11 to increase by 8.6 per cent over 2009-10

Defence allocation pegged at Rs 1,473.4 billion in 2010-11 as against Rs 1,417 billion in the previous year; of this,

capital expenditure would be Rs 600 billion.

30 per cent increase in capital expenditure and 5.7 per cent increase in revenue expenditure over 2009-10

Personal income tax slabs changed:

Income up to Rs 1.6 lakhs nil

Income between Rs 1.6 lakhs and Rs 5 lakhs 10 per cent

Income above Rs 5 up to 8 lakhs 20 per cent

Income above Rs 8 lakh 30 per cent

Additional income tax deduction of Rs 20,000 allowed on long-term infrastructure bonds in addition to the Rs 1

lakh deduction allowed already.

Standard rate of excise duty on all non-petroleum products increased from 8 per cent to 10 per cent

Minimum Alternate Tax (MAT) to be increased from 15 per cent to 18 per cent on book profits Excise duty on petrol and diesel up by Re 1 per litre

Restoration of the customs duty on crude oil to 5 per cent, on diesel and petrol to 7.5 per cent, and on other refined

products to 10 per cent

Rate of service tax retained at 10 per cent, but coverage extended

Disinvestment receipts for 2010-11 are estimated at Rs 400 billion

Proceeds from 3G auction estimated at Rs 350 billion

Government to provide oil and fertilizer subsidy in cash instead of issuing bonds

Nutrient based fertiliser subsidy scheme to come into force from April 1, 2010

Allocation to infrastructure at Rs 1,735.5 billion

Spending on social sector increased to Rs 1376.7 billion, which is 37 per cent of total plan outlay

Rs 165 billion allocated for enhancing banks Tier-I capital to 8 per cent by March 31, 2011

Direct Tax Code (DTC) to be implemented by April 1, 2011

Endeavour to introduce GST by April 1, 2011

8/8/2019 Budget 201011

9/36


Union Budget

5

Economy analysisOutlook 2010-11

There is a growing consensus across the world that the worst of the financial crisis is over. Economies globally have

started to stabilise and recover either from the recession or severe slowdown in the past 2 years. After having contracted

in 2009, the global economy is expected to expand by 3.9 per cent this year (International Monetary Fund, January

2010). The Indian economy has displayed remarkable resilience over the course of the downturn and is expected to have

grown at a rate of 7.2 per cent in 2009-10 (Central Statistical Organisation, February 2010). Since 2008-09, the

government had engineered a substantial increase in demand through fiscal measures to compensate for the decline in

private and export demand. The focus has now shifted to private consumption and investment, which are being viewed

as key drivers of growth in 2010-11.

A timely and orderly exit from the fiscal stimulus is crucial to maintain the credibility of government finances, and

thereby, the potential growth in coming years. If the fiscal stimulus has to generate net long-term gains, and not merely

end up as a transfer of expenditure from the private sector to the government, a realistic fiscal tightening plan is

essential. This would be the most important economic challenge facing India over the next few years. The budget of

2010-11 made some progress on this account by partially rolling back the reductions in indirect taxes. The real boost to

sustainable fiscal correction, however, would have come from expenditure reforms, which are largely missing in the

budget, with government expenditure expected to rise by around 8.5 per cent in 2010-11 (over revised estimate 2009-

10) over the exceptionally high growth of 15.5 per cent in the previous year. Against this backdrop, we discuss the

outlook for the Indian economy for 2010-11.

Table 1: Indian economy in 2009-10

2010-11

Real GDP factor cost (y-o-y percentage growth) 8.0

Supply-side

Agriculture 5.5

Industry 8.6

Services 8.4

Hotels, transport and communications 9.1

Finance 10.5

Community and social 5.0

Demand-side

Private final consumption expenditure 6.5

Government final consumption expenditure 5.7

Gross fixed capital formation 12.5

Other macroeconomic variables

WPI inflation (average) 6.5-7.0

Interest rate (10-year G-sec March-end) 8.3-8.5

Exchange rate (Rs-$ March end) 43.5-44.0

Fiscal deficit (% of GDP) 5.6

Note: Industry includes mining and quarrying, manufacturing, electricity, gas and water supply, constructionSource: CRISIL assessment

8/8/2019 Budget 201011

10/36


Union Budget

Economy analysisBased on the measures announced in the budget and also taking into account the global macroeconomic scenario, we

expect the economy to grow by 8.0 per cent at factor cost in 2010-11.

Growth in the services sector, which accounts for nearly 57 per cent of the GDP, is expected to moderate marginally

from 8.7 per cent in 2009-10 to 8.4 per cent in 2010-11 due to slower growth of government expenditure. As a result,

growth in community and social services is expected to weaken despite significant additions to several infrastructure

and development initiatives. In contrast, the hotels, transport, communication, finance and real estate sectors would

expand at a faster pace as compared to 2009-10 with the expected revival in household demand. Industrial growth is

expected to remain at 2009-10 levels on the back of sustained increase in demand - both exports and domestic. In the

event of a normal monsoon, agriculture is expected to grow at a higher rate than its trend because of a low base of 2009-

10, when the sector had contracted due to severe drought.

Investment activity is likely to pick up, with gross fixed capital formation growing at 12.5 per cent as compared to 5.2

per cent in 2009-10. The notable improvement in both domestic and export demand should enhance business prospects,

and hence, attract investments. Corporate profits are at relatively healthy levels and corporates are having increasing

access to external sources of finance. Hence, supply of funds is not expected to present any roadblocks to investment

growth, unless government borrowing programmes go beyond the budgeted numbers and crowds out private demand.

Private consumption growth should recover to around 6.5 per cent from a mere 4.2 per cent in 2009-10, as personal

disposable income would rise owing to the new direct tax slabs announced in the budget. This along with relatively

improved conditions for retail credit availability should aid household consumption growth.

The main threat to growth arises from the escalating inflation, at least in the first half of 2010-11, due to the agricultural

price shock, rising commodity prices and recent petrol and diesel price hike. In the event of an unanticipated sharp rise

in inflation, the Reserve Bank of India would have to tighten the monetary policy at a faster pace and this would impact

market interest rates, albeit with a lag. In the latter half of 2010-11, year-on-year inflation should start to slow down in

spite of demand pressures, given the exceptionally high base of this year. We expect average WPI inflation of around

6.5-7.0 per cent for 2010-11. As for the 10-year government securities rate, the pressures would arise from the RBIs

move towards hiking interest rates from April 2010 as well as the governments demand for funds to finance its deficit.

In recent months, the Rupee has remained relatively stable at around 45.5 to 46.5 per US$ mark. Foreign investments

are expected to start flowing back into the country at a faster pace in 2010-11, thus enabling the currency to continue on

its fundamental trend of appreciation. We expect the Rupee to stabilise in the range of Rs 43.5-44.0 per US$ by March

2011. The margin of error for the exchange rate forecast remains high in view of the continuing global economic

uncertainty.

On the fiscal front, tax receipts are expected to increase sharply by 14.8 per cent (over RE 2009-10) along with rising

economic growth. In addition, the combined expected revenues of Rs 750 billion from disinvestment in public sector

enterprises and revenues from the auction of 3-G would bring in additional revenues. As a result of a significant

increase in government revenues, the fiscal deficit to GDP ratio for 2010-11 is expected to decline to 5.6 per cent from

6.7 per percent a year earlier.

8/8/2019 Budget 201011

11/36


Union Budget

7

Economy analysisTable 2: Assessment of Key Macroeconomic Risks (2010-11 relative to 2009-10)

Directional change

External financing

Domestic credit availability

Exports

Distressed fiscal position

Lack of reforms

Rupee appreciation

High interest Rates

Increase in oil Price

Note: implies the risk has diminished relative to 2009-10

Source: CRISIL

The CRISIL macroeconomic forecasts presented here are firmly based on our view of the fundamentals. However, we

recognise that the global economic outlook remains uncertain. Moreover, on the domestic front, how the monsoon pans

out and what the response of private demand to changes in the fiscal stance would be is difficult to ascertain at present.

Therefore, revisions to our outlook may become necessary as FY 2010-11 progresses. A significant deterioration in any

of the risks noted in table 2 would require a reassessment of our current forecasts.

Fiscal Scenario: Balancing growth concerns with medium-term fiscal sustainability

In 2009-10, the government managed to improve upon its deficit target. Not because of revenue buoyancy or cut in

expenditure. Total expenditure has marginally increased from the budgeted estimate, while total non-debt receipts fell

by 2 per cent from the budgeted estimates. Higher-than-expected nominal GDP growth lowered fiscal deficit as a

percentage of GDP. Had it not been for the reduced excise and service tax during the economic slowdown, the revenue

would have been higher. The budget for 2010-11 clearly begins the process of fiscal consolidation by targeting fiscal

deficit at 5.5 per cent of GDP.

The fiscal targets for 2010-11 look realistic and we only expect a marginal slippage in budgetary targets. Tax revenues

are not linearly related to economic activity. Empirical evidence from India clearly reveals that government revenues

plummet during downturns and spike up during upturns. In the coming fiscal, higher economic growth, propelled by

rising industrial activity, will lead to sharp increase in tax collections for the government. The only downside risk to the

fiscal target is the possibility of slippages in the planned aggressive 3G and disinvestment collections of Rs 75,000

crores.

8/8/2019 Budget 201011

12/36


Union Budget

Economy analysisThe medium-term fiscal policy statement, which accompanied the budget, estimates the revenue deficit at 2.7 per cent

of GDP and fiscal deficit at 4.1 per cent of GDP by 2012-13. The total liabilities of the government are projected to fall

to 48.2 per cent of GDP by 2012-13. We have tested the feasibility of fiscal targets set for 2010-11 to 2012-13 by

employing our fiscal model. Our simulations show that these targets are too aggressive, and are unlikely to be achieved

in a business-as-usual scenario. By 2012-13, we expect fiscal deficit, revenue deficit and debt to stand at 5.4 per cent,

3.5 per cent and 49.7 per cent, respectively, of GDP. Fiscal projections over the medium run clearly indicate that, unless

concerted efforts are made for curbing expenditures and/or raising revenues, reducing the revenue deficit to 2.7 per cent

of GDP by 2012-13 would be a challenging task. Disinvestment and 3G auctions will help in tiding over immediate

fiscal pressures. For medium-term sustainability, setting GST implementation on the fast track, and some bold

expenditure reforms will be critical. Else, the fiscal correction axe could fall on capital expenditure, which in fact, needs

a further boost.

The debt to GDP ratio will start reducing after 2010-11, and is expected to fall to around 50.0 per cent by 2012-13. The

debt dynamics can be understood in terms of growth, interest rates and primary deficits. As long as growth remains

higher than the cost of borrowing (interest rates), the debt ratio can be kept stable even by running a primary deficit.

Despite the current downturn, the structural upward shift in growth rates and a downward shift in interest rates will help

stem any potentially explosive debt dynamics in the future.

Infrastructure

Like in the previous Budget, physical infrastructure has again taken centre stage in the Union Budget 2010-11, with a

sum of Rs 1,735.52 billion being provided for infrastructure development. This works out to a little more than 46 per

cent of the total Plan allocation. Allocation to major infrastructure sectors, including power, road transport, shipping,

urban infrastructure and railways, has been raised by 22.6 per cent in 2010-11 as compared to 2009-10 (RE). As in the

previous financial year, majority of fiscal support for power, shipping and railways has again come from internal and

extra budgetary resources (IEBR). Allocation for road transport has increased by over 13 per cent, from Rs 175.20

billion in 2009-10 to Rs 198.94 billion in 2010-11.

Figure 1: Growth in Central Plan Outlay, y-o-y%

48.1

11.94.7

15.5

49.3

35.7

6.9

22.725.216.9

34.2

-10.9

-50.0

0.0

50.0

100.0

Ministry of

Power

Ministry of

Shipping

Ministry of

Road

Transport and

Highways

Ministry of

Urban

Development

Railways Total

FY10 (RE over actual) FY11 (BE over RE)

Source: Government of India Budget document 2010-11

8/8/2019 Budget 201011

13/36


Union Budget

9

Economy analysisInclusiveness

In line with the past trend, the Union Budget 2010-11 has continued its emphasis on social infrastructure. Concern with

regard to fiscal deficit, notwithstanding, Finance Minister Pranab Mukherjee has tried to do a fine balance between the

need to achieve fiscal prudence and social sector spending. In the Union Budget 2010-11, spending on social sector has

been increased to Rs 1,377 billion, which is 37 per cent of the total Plan outlay in 2010-11. The Budget support to social

sector as a whole, together with internal and extra budgetary resources (IEBR), is Rs 1,817 billion, a growth of 17.6 per

cent over the revised estimate of 2009-10. The government aims to utilise the proceeds from PSU disinvestment to meet

this increased capital expenditure requirements of various social sector schemes. The levels of budgeted Plan outlay has

increased across the major heads under the social sector in 2010-11 BE compared to 2009-10 RE, with the Ministry of

Rural Development still getting the maximum allocation.

Figure 2: Growth in Central Plan Outlay, y-o-y%

-0.5

28.1

6.3

36.5

28.7

11.8

18.720.8

38.3

22.0

-20.0

0.0

20.0

40.0

60.0

Higher Edu School Edu &

Literacy

Women & Child

Dvlpmnt

Health & Family

Welfare

Rural Dvlpmnt

FY10 (RE over actual) FY11 (BE over RE)

Source: Government of India Budget document 2010-11

8/8/2019 Budget 201011

14/36

This page is intentionally left blank

8/8/2019 Budget 201011

15/36


Industr

8/8/2019 Budget 201011

16/36


Union Budget

Overall sectoral impactIndustry Effect

Airport infrastructure Negative

Increase in MAT rate will have negative impact on airport infrastructure sector

The increase in Minimum Alternate Tax (MAT) rate from 15 per cent to 18 per cent of book profits will have a

marginally negative impact on the financials of players. An additional deduction available for investment in long-term

infrastructure bonds, for individuals, will lead to improved availability of funds for airport projects.

Auto components & Tyres Neutral

Auto components and tyres demand to continue to grow despite cost push

The proposals in Union Budget 2010-11 will not have a significant impact on the auto component and tyre industries.

The increase in excise duty on auto components could be passed on to automobile manufacturers. Even if this is

absorbed by the industry, it will be offset by healthy demand. The interest subvention of 2 per cent will have a

marginally positive impact for SMEs engaged in the export of auto components. For the tyres industry, the 2 per cent

increase in excise duty will be fully passed on to the OEM and replacement segments.

Automobiles Neutral

Rise in disposable income to support demand despite increase in prices

The budget announcements for 2010-11 will have a mixed impact for different automobile segments. While the overall

impact is positive on passenger cars, the impact on the commercial vehicles sector will be marginally negative.

Continued focus on rural development will benefit two-wheeler and tractor sales. Commercial vehicle prices will rise in

line with the increase in excise duty. Further, operating expenses will be higher by around 2 per cent (with increase in

diesel prices) for a typical transporter, thus negatively impacting their profitability marginally. Passenger car prices are

expected to rise by Rs 6,000-7,000 for a typical compact car in line with the hike in excise duty. Rise in petrol and

diesel prices will also hike fuel costs by around 1-2 per cent for passenger vehicles. Increase in vehicle prices and other

costs will be more than offset by the rise in disposable income. Disposable incomes are estimated to increase by Rs

20,000-50,000 for people with income between Rs 5-8 lakh. CRISIL Research expects the benefits of increase in

disposable income to more than offset any impact of increase due to increase in excise duty.

Banking and Finance Neutral

PSBs to gain with capital support

The government has proposed a capital infusion of Rs 165 billion as Tier-I capital in 2010-11, as against the infusion of

Rs 12 billion and Rs 19 billion in 2009-10 and 2008-09, respectively. This would preserve the governments holding in

public sector banks. At the same time, banks would be able to cater to credit growth of around 20 per cent over the next

2 years, while maintaining a healthy Capital Adequacy Ratio.

The extension of bank loan waivers to farmers by 6 months would postpone the recognition of non-performing assets,

which would have otherwise been reflected in the agriculture portfolio of banks as of March 2010. The overall impact is

neutral for the sector.

Continued

8/8/2019 Budget 201011

17/36


Union Budget

13

Overall sectoral impactcontinued

Industry Effect

Cement Negative

Roll back of excise duty to have negative impact on Cement sector

The Union Budget 2010-11 is expected to have an overall negative impact on the cement sector due to the increase in

excise duty by 2 per cent. Players will find it difficult to pass on the additional burden of the increased excise duty due

to falling operating rates on account of significant capacity additions. However, measures to spur housing and

infrastructure investments will have a marginally positive impact on demand for cement.

Construction Positive

Higher allocations and improved funding to increase order inflows

Higher allocation towards roads, railways, housing, urban infrastructure and continued takeout financing and

refinancing plans of IIFCL will be beneficial to the sector. Further, additional deduction available for investment in

long-term infrastructure bonds for individuals will aid in the faster execution of infrastructure projects. Payment of

import duty on depreciated value rather than the original value of resale machinery along with concession on import

duty for monorail projects will reduce the capital cost for players.

Hike in Minimum Alternate Tax from 15 per cent to 18 per cent of book profits will have a marginally negative impact

on the financials of players having operational BOT projects. Overall impact of the Union Budget 2010-11 on the sector

is positive.

Fertilisers Neutral

Subsidy reimbursement in cash to provide working capital flexibility to players

The Union Budget 2010-11 announced that fertiliser subsidy payout will be in the form of cash instead of fertiliser

bonds. This is expected to benefit players in the form of greater working capital flexibility. The governments budgetary

allocations towards the agricultural sector in the form of higher agricultural credit, subvention of interest on farm loans

and renewed emphasis on expansion of Green Revolution in the Eastern states are also expected to lead to increased

fertiliser demand in the long term. During the transitionary period of 2010-11, farm gate prices of complex fertiliser

products post the NBS policy would be held constant at current levels. The budget allocation for fertiliser subsidy has

been reduced from Rs 529.8 billion (revised estimates) in 2009-10 to Rs 499.8 billion in 2010-11.

Hotels Neutral

No significant impact on premium segment hotels

In order to incentivise the setting up of new hotels, the Union Budget 2010-11 has provided for investment-linked tax

deductions. This is unlikely to have a significant impact on the premium hotels segment, as the segment has already

witnessed large supply additions over the last 2 years, resulting in increased competition, and consequently a reduction

in room rates. A positive development for the hotels industry is that service tax has been maintained at the reduced rate

of 10 per cent, which was introduced as part of the Central Governments fiscal stimulus package.

continued

8/8/2019 Budget 201011

18/36


Union Budget


Industry Effect

Household Appliances Positive

Higher disposable income to boost demand for consumer durables

The change in income tax slabs will lead to a significant reduction in tax liability for the salaried class. This will result

in a rise in disposable income and is likely to induce higher demand for household appliances. The hike in excise duty

from 8 per cent to 10 per cent is unlikely to have a major impact on the household appliances industry, as a significant

part of the production of major manufacturers comes from excise-free zones.

Housing Neutral

Minuscule allocations neutral for housing sector

The allocation of Rs 12.7 billion for the Rajiv Awaas Yojana under the Jawaharlal Nehru National Urban Renewal

Mission (JNNURM) to provide property rights to slum dwellers will give a boost to slum redevelopment programmes.

Additionally, the budget has allocated Rs 10 billion for housing and urban poverty alleviation. The extension given to

the scheme offering 1 per cent interest subvention on housing loans up to Rs 1 million (where the cost of the house does

not exceed Rs 2 million) will help sustain the boost to affordable housing. On the rural front, Rs 100 billion has been

allocated under the Indira Awaas Yojana scheme, which will help in reducing the prevailing shortage in rural housing.However, these allocations will not have a major impact on the organised housing sector.

Information Technology Negative

Tax rate increases to affect near term cash flows

The minimum alternate tax (MAT) has been increased from 15 per cent to 18 per cent which would impact the cash

flows for players across the board, especially for the small and mid-size players. The 3 per cent increase in MAT would

override any benefits from the reduction in surcharge from 10 per cent to 7.5 per cent for Indian IT companies.

Domestic IT services which constitute about 20 per cent of the IT services revenues are expected to get a shot in the

arm from the governments planned expenditures for improving IT infrastructure and delivery mechanisms.

Media and Entertainment Positive

Focus on digitalisation augurs well for media sector

The Union Budget 2010-11 will have a positive impact on the media sector. Reduction in customs duty from 10 per cent

to 5 per cent and complete waiver of Special Additional Duty on the initial setting up of Digital Head End would

reduce input costs for multi-service operators. Rationalisation of customs duty on imported digital masters of films and

imported gaming and music software would enable proliferation of digital content in the country. Further, accredited

news agencies, which provide news feed online, will benefit from the exemption of service tax.

continued

8/8/2019 Budget 201011

19/36


Union Budget

15


Industry Effect

Non-ferrous Metals Neutral

Aluminium prices to increase by Rs 2, 000 -2, 500 per tonne

The impact of Union Budget 2010-11 is neutral on the non-ferrous metals industry as the rise in costs on account of

increase in excise duty and levy of cess on coal is likely to be passed on.

Increase in the CENVAT rate from 8 per cent to 10 per cent will result in an increase of around Rs 2,000- 2,500 per

tonne on aluminium, zinc and lead prices and Rs 7,000 8,000 per tonne on copper prices. The levy of cess of Rs 50

per tonne on coal will result in marginal rise in cost of aluminium production. However, with an expected increase in

demand, we expect the increase in costs to be passed on to buyers.

Oil and Gas Positive

Subsidy reimbursement in cash to reduce working capital stress on OMCs

The government has stated that subsidy on petroleum products would be accounted for in the Union Budget, and it will

be disbursed as cash to the OMCs. We believe that this would significantly reduce working capital stress on OMCs,

thus strengthening their balance sheets through short term debt reduction. The increase in customs duty across crude oil

and petroleum products would translate into higher duty protection for the refiners. However, the resultant increase in

the refinery gate prices for retail auto (petrol and diesel) and cooking fuels (LPG and kerosene), if absorbed by OMCs,

would lead to Rs 110-140 billion increase in under-recoveries to Rs 650-700 billion in 2010-11. The imposition of an

additional central excise of Re 1 per litre on petrol and diesel, if passed on to end consumers, would have no implication

on the profits of OMCs, with the retail selling prices increasing by Rs 1.25 per litre. However, in the event retail prices

are adjusted to reflect even the increase in custom duties, then the required hike in petrol and diesel retail selling prices

would be Rs 2.4-2.6 per litre.

Paper Neutral

Benefits of duty cuts to be passed on

The measures announced in the Union Budget 2010-11 would have neutral impact on the domestic paper industry. The

exemption of additional duty of customs of 4 per cent on wastepaper will reduce raw material costs for paper

manufacturers; however, players will not be able to retain this benefit and will have to pass it on to end consumers.

Hence, the overall impact remains neutral.

Petrochemicals Neutral

No impact on the petrochemical industry

The overall impact of the Union Budget 2010-11 on the domestic petrochemical industry is neutral with no changes

announced in the excise or customs duties of petrochemicals.

continued

8/8/2019 Budget 201011

20/36


Union Budget


Industry Effect

Pharmaceuticals Neutral

Benefit from hike in tax deduction on in-house R&D offset by increase in MAT rate

Overall impact of the Union Budget 2010-11 on the pharmaceuticals sector is neutral.

The hike in weighted tax deduction on in-house R&D expenditure (from 150 per cent to 200 per cent) is expected to be

marginally favourable for pharmaceutical companies focussing on new drug discovery such as Piramal Lifesciences,

Sun Pharma Advanced Research Company, etc. The increase in Minimum Alternate Tax (MAT) rate from 15 per cent

to 18 per cent will have a marginally negative impact for most of the pharmaceutical players. Pharma players will not be

impacted by the increase in excise duty on bulk drugs as the same is MODVATable.

Ports Negative

Increase in MAT rate will have negative impact on ports sector

The Union Budget 2010-11 is expected to have a negative impact on the ports sector. The increase in Minimum

Alternate Tax (MAT) from 15 per cent to 18 per cent is expected to have a negative impact on the returns of players

with operational projects. Additional deductions available for investment in long-term infrastructure bonds for

individuals will lead to improved availability of funds for port projects.

Power Neutral

Marginal increase in tariffs expected due to cess on coal

The budgetary allocation for the power sector excluding Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) has

been raised by 130 per cent from Rs 22.3 billion to Rs 51.3 billion. Allocation for Accelerated Power Development

Programme (APDRP) has been increased by 78 per cent from Rs 20.8 bn to Rs 37.0 bn while for RGGVY it has been

decreased by 21 per cent from Rs 70 bn to Rs 55 bn. The hike in MAT from 15 per cent to 18 per cent would have a

neutral impact, as it would be passed on to the end users. A clean energy cess of Rs 50 per tonne would be levied on

domestic as well as imported coal. As fuel costs for the power sector are a pass through, CRISIL Research expects

power tariffs to rise by 2-3 paise per kWh. On the renewable energy front, the budgetary allocation has been increased

by 61 per cent from Rs 6.2 bn to Rs 10 bn.

Roads Neutral

Higher allocation towards the roads sector offset by the increase in MAT rates

Higher allocation towards road projects, and continued take-out financing and refinancing plans of IIFCL are

marginally positive for the sector. Further, additional deduction available for investment in long-term infrastructure

bonds will help mobilise funds for the roads sector. Payment of import duty on depreciated value rather than the

original value of resale machinery will reduce the capital cost for road players. However, the increase in MAT from 15

per cent to 18 per cent of book profits will have a negative impact on the financials of players where BOT road projects

are operational. Overall, the budgets impact on the sector is neutral.

continued

8/8/2019 Budget 201011

21/36


Union Budget

17


Industry Effect

Steel Neutral

Steel prices to go up due to excise duty pass through

The impact of the budget on the steel industry is expected to be neutral. With the increase in the Central excise duty

from 8 per cent to 10 per cent, the prices of steel products are expected to rise by Rs 500-750 per tonne. The

manufacturing cost will also increase slightly (~1 per cent of raw material cost of steel players) as cess will be levied on

coal (Rs 50 per tonne). As steel players are expected to pass on the incremental duty and cost, their profitability will

remain unaffected. Higher allocation for infrastructure investment in railways, urban development and housing is likely

to spur demand for steel marginally.

Sugar Neutral

No impact on the industry

The impact of the Union Budget 2010-11 on the sugar sector is neutral. The reduction in basic customs duty for

sugarcane harvesting equipment from 7.5 per cent to 5 per cent is expected to result in marginal cost savings for

farmers.

Telecom Negative

MAT increase to adversely impact the sector

Minimum Alternate Tax (MAT) has been increased from 15 per cent to 18 per cent which would negatively impact

profitability of the telecom service providers.

Full exemption from basic, CVD and special additional duties (SAD) on parts, components and accessories of mobile

handsets, has been extended to include battery chargers and headphones. The government has also extended the

exemption of SAD to mobile phones not imported in pre-packaged form. These measures would result in further

reduction in mobile handset prices. However, we expect the impact to be marginal as mobile handsets and accessories

are already at a very affordable level.

Textiles Positive

Interest subvention expected to benefit textile sector

Impact of the Union Budget 2010-11 is positive on the textile sector. Extension of the 2 per cent interest subvention on

pre and post shipment export credit till March 31, 2011 will help small exporters reduce their interest costs. Hike of

excise duty on man-made fibers and yarns from 8 per cent to 10 per cent will raise polyester prices by Rs. 1.5-2 per kg.

However, this will not affect demand as polyester continues to be cheaper than cotton. Additionally, the governments

announcement of a one-time grant of Rs 2 billion to the Government of Tamil Nadu for the installation of a zero

discharge system to reduce environmental pollution at the Tirupur cluster will benefit knitwear exporters of the regionin the long term.

8/8/2019 Budget 201011

22/36


Union Budget

Overall company impactCompany Impact Impact factors Industry

ABG Infralogistics A,B Ports

ACC A,B Cement

Adani Power Ltd B, C Power

Adlabs Films Ltd B Media and Entertainment

Alok Industries Ltd A,B Textiles

Andhra Pradesh Paper Mills Ltd A Paper

Apollo Tyres Ltd A, C Auto Components

Ashok Leyland Ltd A,B,D Automobiles

Aurobindo Pharma Ltd B, C Pharmaceuticals

Bajaj Auto Ltd A,B,C,D Automobiles

Bajaj Hindustan Ltd - Sugar

Balaji Telefilms Ltd - Media and Entertainment

Ballarpur Industries Ltd A Paper

Balrampur Chini Mills Ltd - Sugar

Bannari Amman Sugars Ltd - Sugar

Bharat Heavy Electricals Ltd (BHEL) D Power

Bharat Petroleum Corporation Ltd A,B,C Oil and gas

Bharti Airtel Ltd A Telecom services

Bhushan Steel Ltd A, B, C, D Steel

Ceat Ltd A, C Auto Components

Chambal Fertilisers & Chemicals Ltd A Fertilisers

Chemplast Sanmar Ltd - Petrochemicals

Chennai Petroleum Corporation Ltd A Oil and gas

Cipla Ltd B, C Pharmaceuticals

Coromandel Fertilisers Ltd A,B Fertilisers

DCW Ltd - Petrochemicals

Dish TV Ltd - Media and Entertainment

DLF Universal Ltd B Real estate - Residential

Dr Reddy's Laboratories Ltd C Pharmaceuticals

EID Parry Ltd - Sugar

EIH Ltd A Hotels

Essar Steel Ltd A, B, C, D Steel

Finolex Industries Ltd - Petrochemicals

Firstsource Solutions Ltd A Information Technology

Continued

8/8/2019 Budget 201011

23/36


Union Budget

19

Overall company impactcontinued

Company Impact Impact factors Industry

GAIL India Ltd - Oil and gas

Gammon India Ltd A, B, C Construction

Gammon Infrastructure Projects Ltd A, B, C Roads

GlaxoSmithKline Pharmaceuticals Ltd - Pharmaceuticals

GMR Infrastructure Ltd A,B Airport Infrastructure

Gokaldas Exports Ltd B Textiles

Goodyear India Ltd A, C Auto Components

Gujarat Ambuja Cement Ltd A,B Cement

Gujarat Gas Co. Ltd - Oil and gas

Gujarat State Fertilisers Company Ltd A,B Fertilisers

GVK Power and Infrastructure Ltd A,B Airport Infrastructure

Haldia Petrochemicals Ltd - Petrochemicals

HCL Technologies Ltd A,B Information Technology

HDFC Bank A, B, C, D, E Banking and finance

HDFC Ltd E Banking and finance

HDIL B Real estate - Residential

Hero Honda Motors Ltd A,B,C,D Automobiles

Hindalco Industries Ltd A,B,C,D Non-ferrous metals

Hindustan Construction Co Ltd A, B, C Construction

Hindustan Construction Corporation Ltd A, B, C Roads

Hindustan Copper Ltd A,B,C Non-ferrous metals

Hindustan Organic Chemicals Ltd - Petrochemicals

Hindustan Petroleum Corporation Ltd A,B,C Oil and gas

Hindustan Zinc Ltd A,B,C Non-ferrous metals

Hotel Leelaventure Ltd A Hotels

HT Media Ltd C Media and Entertainment

ICICI Bank A, B, C, D, E Banking and finance

IG Petrochemicals - Petrochemicals

India Cement Ltd A,B Cement

Indian Hotels Co Ltd A Hotels

Indian Oil Corporation Ltd A,B,C Oil and gas

Indo Rama Synthetics (India) Ltd A Textiles

Infosys Technologies Ltd A,B Information Technology

IRB Infrastructure Developers Ltd A, B, C Roads

ITI Ltd B Telecom services

IVRCL Infrastructure & Projects Ltd A, B, C Roads

IVRCL Infrastructures & Projects Ltd A, B, C Construction

continued

8/8/2019 Budget 201011

24/36


Union Budget



JK Industries Ltd A, C Auto Components

JK Paper Ltd A Paper

JSW Energy Ltd B, C Power

JSW Steel Ltd A, B, C, D Steel

Larsen & Toubro Ltd A, B, C Construction

Larsen & Toubro Ltd A, B, C Roads

LG India A,B Household appliances

LIC Housing Finance Ltd E Banking and finance

Mahanagar Telephone Nigam Ltd B Telecom services

Mahindra & Mahindra Ltd A,B,C,D Automobiles

Mangalore Refinery & Petrochemicals Ltd A Oil and gas

Maruti Suzuki Ltd A,B,C,D Automobiles

MIRC Electronics Ltd A,B Household appliances

MRF Ltd A, C Auto Components

Mundra Port and Special Economic Zone Ltd A,B Ports

Nagarjuna construction Co Ltd A, B, C Construction

Nagarjuna Construction Company A, B, C Roads

Nagarjuna Fertilisers and Chemicals Ltd A Fertilisers

National Aluminium Company Ltd A,B,C,D Non-ferrous metals

National Thermal Power Corp Ltd B, C, D Power

Oil and Natural Gas Corporation Ltd - Oil and gas

Oil India Ltd - Oil and gas

Orchid Pharmaceuticals Ltd A, B, C Pharmaceuticals

Parsvnath Developers Ltd B Real estate - Residential

Phillips Carbon Black Ltd - Petrochemicals

Piramal Healthcare Ltd B, C Pharmaceuticals

Power Grid Corporation of India Ltd B, D Power

Punjab National Bank A, B, C, D, E Banking and finance

PVR Ltd B Media and Entertainment

Rashtriya Chemicals and Fertilisers Ltd A,B Fertilisers

Reliance Communications Ltd A, B Telecom services

Reliance Industries Ltd B Petrochemicals

Reliance Infrastructure A, B, C Roads

Reliance Infrastructure Ltd B, C Power

Reliance Power Ltd B, C Power

continued

8/8/2019 Budget 201011

25/36


Union Budget

21



Samsung India A,B Household appliances

Samtel Colour Ltd A,B Household appliances

Seshasayee Paper and Boards Ltd A Paper

Shree Ashtavinayak Cine Vision Ltd B Media and Entertainment

Shree Cement Ltd A,B Cement

Shree Renuka Sugars - Sugar

SI group - Petrochemicals

Sobha Developers Ltd B Real estate - Residential

State Bank of India A, B, C, D, E Banking and finance

Steel Authority of India Ltd A, B, C, D Steel

Sterlite Industries (India) Ltd A,B,C,D Non-ferrous metals

Sun Pharmaceutical Industries Ltd A, B, C Pharmaceuticals

Sun TV Ltd - Media and Entertainment

Supreme Petrochem Ltd - Petrochemicals

Tamil Nadu Newsprint and Papers Ltd A Paper

Tamil Nadu Petroproducts Ltd - Petrochemicals

Tata Communications Ltd - Telecom services

Tata Consultancy Services Ltd A,B Information Technology

Tata Motors Ltd A,B,C,D Automobiles

Tata Power Company Ltd B, C Power

Tata Steel Ltd A, B, C, D Steel

Thirumalai Chemicals Ltd - Petrochemicals

UltraTech Cement Ltd A,B Cement

Unitech Ltd B Real estate - Residential

Vardhaman Textiles Ltd - Textiles

Welspun India Ltd B Textiles

Whirlpool of India Ltd A,B Household appliances

Zee Entertainment Enterprises Ltd - Media and Entertainment

Zenith Computers Ltd - Information Technology

Zuari Industries Ltd A,B Fertilisers

8/8/2019 Budget 201011

26/36

This page is intentionally left blank

8/8/2019 Budget 201011

27/36


Ca ital markets

8/8/2019 Budget 201011

28/36


Union Budget

Equity marketThe market benchmark S&P CNX NIFTY (Nifty) has remained range-bound over the last 1 month. We believe the

Union Budget 2010-11 will provide a marginal boost to the market. The governments aim to reduce fiscal deficit to 5.5

per cent and plans to raise ~Rs 400 billion through disinvestment of profit-making Public Sector Undertakings (PSUs)

in 2010-11 will act as a positive catalyst for the market.

Around 20 per cent of the Nifty stocks will have a marginally negative impact on earnings due to increase in Minimum

Alternate Tax (MAT) from 15 per cent to 18 per cent. However, reduction in surcharge from 10 per cent to 7.5 per cent

will only have a minimal impact on the overall cash outflow of the companies. Further, increase in budget allocation for

the infrastructure segment will have a positive impact on construction stocks (including Punj Lloyd, L&T etc). Some of

the PSU banks with lower capital adequacy ratios will benefit from the infusion of Rs 165 billion. Increase in the budget

allocation for renewable energy, with special thrust on wind and solar power, will benefit companies like Suzlon and

Moser Baer. Moreover, additional allocation in the education sector would benefit companies like Educomp and Edserv

Soft. We do not expect any major impact on companies like Hero Honda and Maruti due to the hike in excise duty from

8 per cent to 10 per cent as this increase would be passed on to end-customers with no major impact in demand. Further,

increase in disposal income will have a positive impact on consumption-driven sectors.

The Nifty jumped ~2.2 per cent from its previous close of 4,859 to above 4,960 before closing at 4,923 (up 1.3 per

cent).

Market reaction to the budget:

Sector Close as of Rise (%) Remarks

26-Feb-10 25-Feb-10

NIFTY 4,922.7 4,859.8 1.3% Nifty rallies on benefits announced to common man

Sectoral indices:

AUTO 7,171.0 6,846.7 4.7% Increase in disposal income to lead to higher sales

METAL 16,401.5 15,989.8 2.6% Higher spending on infrastructure projects to boost demand

BANKEX 9,828.7 9,611.6 2.3% Infusion of Rs 165 billion as tier-I capital in public sector banks toimprove capital adequacy ratios

HC 4,913.0 4,837.8 1.6% Higher deduction on R&D expenditure

REALTY 3,236.7 3,196.3 1.3% Sops for real estate, housing projects extended by a year

OIL&GAS 9,596.2 9,493.5 1.1% Subsidy reimbursement will reduce working capital stress onOMCs

CG 13,474.9 13,333.3 1.1%

PSU 9,214.3 9,118.4 1.1%

CD 4,001.8 3,964.7 0.9%

POWER 2,961.6 2,953.9 0.3% i. Marginal increase in tariffs expected due to cess on coal.However, the increase in costs would be passed on toconsumers.ii. Higher budget allocation to the sector

TECk 3,179.2 3,178.2 0.0% Increase in MAT

IT 5,174.0 5,188.9 -0.3% Increase in MAT; No extension in STPI scheme

FMCG 2,662.1 2,723.9 -2.3% Increase in excise duty on cigarettes

Source: BSE, NSE

8/8/2019 Budget 201011

29/36


Union Budget

25

Equity marketExpect modest returns in 2010

2009 started off on a low base but it was the year of economic recovery and showed improvement in risk appetite.

While we are positive on the prospects of the Indian equity markets, 2010 will not be a repeat of 2009, at least in terms

of absolute returns. Post the Union Budget today, the key areas that will be under the scanner for 2010 would include

interest rate movements due to rise in inflation, movement in fiscal deficit, the barrage of IPOs from the private sector

and disinvestments by the government. As per our estimates, the markets are expected to remain range-bound over the

next couple of quarters and could test levels of 17,000-17,500 on the Sensex and 5,1005,250 points on the Nifty

towards end 2010, based on 2011-12 EPS estimates of Rs 1,250and Rs 375, respectively.

Nifty 1-year forward PE

0

5

10

15

20

25

Apr-

05

Ju

l-05

Oc

t-05

Jan-0

6

Apr-

06

Ju

l-06

Oc

t-06

Jan-0

7

Apr-

07

Ju

l-07

Oc

t-07

Jan-0

8

Apr-

08

Ju

l-08

Oc

t-08

Jan-0

9

Apr-

09

Ju

l-09

Oc

t-09

Jan-1

0

NIFTY

Source: Prowess

Impact analysis

Rise in individual income tax slabs

The Budget brought good news for individual taxpayers with increase in individual tax slabs. A deduction of an

additional amount of Rs 20,000 has been allowed, over and above the existing limit of Rs 1 lakh on tax savings, for

investment in long-term infrastructure bonds as notified by the Central government.

A male assessee with taxable salary income of Rs 10 lakhs will save Rs 50,000 on his annual tax outlay, thus providing

him with higher disposable income. The new income tax slabs work as below:

8/8/2019 Budget 201011

30/36


Union Budget

Equity MarketAs per new slab As per old slab

% tax % tax

Upto Rs 1.6 lakh Nil Upto Rs 1.6 lakh Nil

Rs 1.6-5 lakh 10 Rs 1.6-3 lakh 10

Rs 5-8 lakh 20 Rs 3-5 lakh 20

Rs 8 lakh and above 30 Rs 5 lakh and above 30

Example for individuals with taxable income of Rs 10 lakhs

Tax computation

Upto Rs 1.6 lakh 0 Upto Rs 1.6 lakh 0

Rs 1.6-5 lakh 34,000 Rs 1.6-3 lakh 14,000

Rs 5-8 lakh 60,000 Rs 3-5 lakh 40,000

Rs 8 lakh and above 60,000 Rs 5 lakh and above 150,000

Total tax 154,000 204,000

Effective tax rate 15.4% 20.4%

Net savings in tax 50,000

Source: CRISIL Equities

Change in MAT and surcharge

The Budget introduced an increase in MAT rate from of the current 15 per cent to 18 per cent on book profits. Also,

surcharge applicable on domestic companies was reduced to 7.5 per cent from the 10 per cent applicable earlier.

Other key reforms

Introduction of Companies Bill, 2009, to replace the existing Companies Act, 1956, which will address issues

related to regulation in the corporate sector in the context of the changing business environment

Plans to implement Direct Tax Code (DTC) from April 1, 2011 and introduce Goods and Services Tax (GST) by

April 2011

Divestment process in progress for National Mineral Development Corporation and Satluj Jal Vidyut Nigam

Limit for turnover over which accounts need to be audited, increased to Rs 60 lakh for businesses and to Rs 15 lakh

for professions. Also, limit of turnover for the purpose of presumptive taxation of small businesses enhanced to Rs60 lakh.

8/8/2019 Budget 201011

31/36


Union Budget

27

Mutual fundsMutual fund industry assets touch all-time high, but growth trajectory to be under pressure

The Indian mutual fund industrys average assets under management (AAUM), which touched a record high of Rs

8.09 trillion (including fund of funds) in November 2009, fell marginally to Rs 7.63 trillion in January 2010.

AAUM grew by 65 per cent till January 2010 compared with the same month last year, largely on the back of

inflows into debt funds as well as mark-to-market gains in equity funds following the close to 80 per cent rise in the

benchmark indices. High systemic liquidity too helped fund houses increase their corpus. The industry recorded net

inflows of Rs 1,742 billion, out of which Rs 1,727 billion were in debt-oriented funds (mainly ultra short term debt

schemes). Going forward, systemic liquidity is expected to be lower than the levels seen in the last several months

on account of factors such as bank credit growth picking up and the inflation control measures of the government.

Consequently, increasing the assets under management (AUM) would be a challenge for the mutual fund industry.

Banks were key contributors to mutual fund assets, occupying around a fifth of the AUM till December 2009.

However, the sectors contribution dropped in the last 2 months (December 2009 and January 2010) after the RBI

expressed concerns on the rising mutual fund investments of banks. Banks investments in mutual funds stood at Rs

1.07 trillion on January 29, 2010 compared to Rs 1.69 trillion in early December 2009.

Debt-oriented funds continued to garner a major share of the mutual fund assets (70 per cent share as of January

2010). This was, however, marginally lower than the 72 per cent share in the corresponding period of the previous

year. Equity-oriented funds accounted for the remaining share.

Mutual fund industry AAUM and net inflows

4

5

6

7

8

Jan-0

9

Fe

b-0

9

Mar-

09

Apr-

09

May-0

9

Jun-0

9

Ju

l-09

Aug-0

9

Sep-0

9

Oc

t-09

Nov-0

9

Dec-0

9

Jan-1

0

(AAUM-

Rstrillion)

-1,500

-1,000

-500

0

500

1,000

1,500

(netinflows-Rsbillion)

Net inflows (Rs billion) Industry average AUM (Rs tr ill ion)

Source: Association of Mutual Funds in India (AMFI)

The industry continued to be top heavy, with the top five mutual funds accounting for a 56 per cent share while the

top 10 funds had an 80 per cent share of the January 2010 assets. The bottom 10 fund houses continued to have

around 1 per cent of the industry assets. Reliance Mutual Fund dominated the assets chart throughout the year, and

became the first fund house to cross the Rs 1 trillion AAUM mark in May 2009 (Rs 1.17 trillion as of January

2010). HDFC Mutual Fund was the second fund house to cross the Rs 1 trillion-mark in November 2009.

8/8/2019 Budget 201011

32/36


Union Budget

Mutual funds The year 2009 saw a key regulatory change for the benefit of retail investors with SEBIs decision to waive-off

entry loads for investing in mutual fund schemes from August 1, 2009. SEBI further proposed that distributors

must move to an advisory model, whereby they can charge fees for investment advice as against the distribution

commissions that they received earlier. The immediate impact of this regulation was the reduction in the equity

schemes monthly sales from over Rs 90 billion in July 2009 to Rs 40-50 billion levels from August 2009 till

December 2009 on account of lower distributor interest in selling schemes following the SEBI ban on entry loads.

The launch of new fund offers (NFOs) too dropped as a result.

SEBI also targeted improving retail investor penetration by allowing investors to buy and sell mutual fund schemes

on stock exchanges. Both the BSE and NSE have subsequently launched mutual fund trading platforms though

volumes have yet to pick up.

CRISIL FundServices is of the view that investor education is key to improving penetration, as investors must

inculcate the habit of regular investing through options like systematic investing via mutual funds. CRISIL

FundServices also expects pressure on mutual fund assets growth going forward, as the withdrawal of the fiscal

stimulus (liquidity) is likely to gain momentum. Banks too are likely to reduce their mutual fund exposure post the

full implementation of the 0.75 per cent cash reserve ratio (CRR) hike announced in the latest monetary policy

review as well as due to the pick up in credit demand.

Snapshot of mutual fund performanceCRISIL Index Returns in

per cent

Tracks 1-month returns

till Feb 24, 2010

3-month returns

till Feb 24, 2010

6-month returns

till Feb 24, 2010

1-year returns

till Feb 24, 2010

CRISIL Fund~eX Equity funds -1.50 0.79 14.02 88.30

CRISIL Fund~bX Balanced funds -1.59 0.58 14.47 76.67

CRISIL MIPEX Benchmark for monthly

income plans

-0.58 -0.25 3.26 13.20

CRISIL MF~Gilt Index Gilt funds -0.57 -0.28 1.18 0.88

CRISIL Fund~dX Long-term bond funds 0.06 0.46 2.24 5.20

CRISIL STBEX Benchmark for short-

term bond funds

0.11 0.75 2.38 5.46

CRISIL~LX Liquid funds 0.24 0.86 1.88 4.47

Source: CRISIL Mutual Fund Database

Budgetary measures and their impact

1. Financial inclusion and financial literacy

Government proposes to set up an apex-level Financial Stability and Development Council, which would monitor

macro prudential supervision of the economy, including the functioning of large financial conglomerates, and

address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion.

The government proposes to provide appropriate banking facilities to regions having a population in excess of

2,000 by March 2012. The government has also proposed to extend insurance and other services to these targeted

beneficiaries.

8/8/2019 Budget 201011

33/36


Union Budget

29

Mutual funds To encourage financial inclusion, the government proposes to augment NABARDs Financial Inclusion Fund and

Financial Inclusion Technology Fund by Rs 1 billion. These funds enable to expand the reach of banking services

to unbanked areas.

Impact

Increase in financial inclusion and financial literacy would benefit mutual fund penetration, which is currently at less

than 5 per cent of the total population.

2. Infrastructure spending

The government has provided Rs 1,735 billion (over 46 per cent of the total plan allocations) for infrastructure

development.

The government has provided Rs 661 billion for rural development in 2010-11.

The allocation for Bharat Nirman (upgradation of rural infrastructure through its various programmes) would be Rs

480 billion.

There would be an allowance for the deduction of an additional amount of Rs 20,000 for investment in long-term

infrastructure bonds as notified by the Central Government, above the existing limit of Rs 0.1 million on tax

savings under Section 80C.

Impact

The continued thrust on infrastructure funding is expected to result in an increasing appetite for infrastructure-

oriented funds.

The focus on infrastructure projects is likely to result in an increasing number of corporate bond and equity

issuances for fund raising by infrastructure companies and institutions. This would provide an expanding avenue

for mutual funds to invest in.

3. Governments contribution to NPS (New Pension System)

Government will contribute Rs 1,000 per year to each NPS account opened in 2010-11. An allocation of Rs 1

billion has been made for the year, which will benefit up to 1 million NPS subscribers of the unorganised sector.

Impact

This incentive is likely to improve subscriptions towards NPS as well as add to the assets of pension fund managers

under the NPS.

8/8/2019 Budget 201011

34/36


Union Budget

Mutual funds4. Broadening of tax slabs

Income tax rate 2009-10 (Existing) 2010-11 (Proposed)

Nil Upto Rs 1.60 lakhs Upto Rs 1.60 lakhs

10% Above Rs 1.60 lakhs upto Rs 3 lakhs Above Rs 1.60 lakhs upto Rs 5 lakhs

20% Above Rs 3 lakhs upto Rs 5 lakhs Above Rs 5 lakhs upto Rs 8 lakhs

30% Above Rs 5 lakhs Above Rs 8 lakhs

(10 lakhs = 1 million)

Impact

This will result in higher disposable incomes, which could see additional inflows towards mutual fund schemes,

amongst other investment avenues.

5. Concessions for clean energy technology

The government has announced various concessions for clean energy technology such as solar energy and other renewal

energy sources.

Impact

Mutual funds may look at clean energy as a theme going forward, taking into account the evolving consensus on global

warming.

8/8/2019 Budget 201011

35/36

List of Industries analysed by CRISIL Research

Cold Chain Oil-field Equipments & Services Earth Moving Equipments

Power Transformers Telecom Towers & Allied Services Material Handling Equipments

Power Transmission Towers Container Freight Stations/Inland Container depot Power Cables

Warehousing Automotive Castings Steel Pipes

Pharma: Bio-pharma Pharma: Contract Research Pharma: Bulk Drugs

Sectors covered in MESCOR (Mid-size emerging segments and company research)

Special reports

CRISIL Research Outlook on Capital Expenditure

Indian Logistics Industry: Analysis of Infrastructure and Modes (AIM)

City Real(i)ty: An independent view of 10 cities in India

Indian Infrastructure Report: Funding requirement and investment returns

Automobiles

Chemicals

Consumer Products

Energy

Automotive Components

Cars and Utility VehiclesCommercial VehiclesTractorsTwo-wheelersTyres

Chlor Alkalies

Commodity Chemicals

Petrochemicals

Pharmaceuticals

Household Appliances

Sugar

Tea

CoalCrude OilNatural GasPowerRefining and MarketingRenewable Energy Sources

Industrials

Infrastructure

Metals

Services

Cement

FertilisersPaper

Airport InfrastructureConstructionHousingPortsRoads and HighwaysTelecom - ServicesTelecom Data Services

AluminiumSteel ProductsSteel Intermediates

Airline ServicesBankingDomestic Freight Transport ServicesEducational ServicesHotelsHospitals

IT Services

Textiles

Media and Entertainment

Retail Finance - AutoRetail Finance - HousingRetailingShipping

Cotton YarnMan Made FibresReadymade Garments

8/8/2019 Budget 201011

36/36

ChennaiMezzanine Floor, Thapar House43 / 44, Montieth RoadEgmoreChennai - 600 008, India.Phone: +91 (44) 2854 6205/06, 2854 6093Fax: +91 (44) 2854 7531

Bengaluru

KolkataHORIZON

Block B 4th Floor

57, Chowringhee road

Kolkata - 700 071, India.

Phone: +91 (33) 2283 0595

Fax: +91 (33) 2283 0597

W-101, Sunrise Chambers22, Ulsoor Road

Bengaluru - 560 042, India.

Phone: +91 (80) 4117 0622

Fax: +91 (80) 2559 4801

MumbaiCRISIL HouseCentral Avenue RoadHiranandani Business Park, PowaiMumbai - 400 076, India.Phone: +91 (22) 3342 8035/18Fax: +91 (22) 3342 8088

New Delhi

The Mira, G-1, 1st FloorPlot No. 1 & 2, Ishwar NagarNear Okhla Crossing

New Delhi - 110 065, India.Phone: +91 (11) 4250 5100,

2693 0117-121Fax: +91 (11) 2684 2212/ 13

For further details or more information,please contact:Client ServicingCRISIL ResearchCRISIL HouseCentral AvenueHiranandani Business ParkPowai, Mumbai - 400 076, India.Phone: +91 (22) 3342 3561/ 62Fax: +91 (22) 3342 3501E-mail: [email protected]: [email protected]