Budget 280206 - ACM

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Union Budget Analysis 2006-07

28 February, 2006Union Budget 2006-07

1

Preface

The economic backdrop for FY06 , with GDP growth estimated at an encouraging 8.1%, revised fiscal estimates at4.1% from the budgeted estimates of 4.3% of the GDP and benign inflation at 4%, serve as a testimony to theconfidence in the momentum gathered by the Indian economy.

The Union Budget 2006-07 places an emphasis on employment generating sectors like textiles, food processing,leather, automobiles and metals. The Finance Minister Mr. Chidambaram expressed a determination to achieve 10%growth rate to combat poverty and unemployment. Agriculture was given increased importance with boost toirrigation projects, agro processing industry and thrust on farm credit. The budget reflected continuation of infrastructural policy of the government with focus on the development of roads, ports and the power sector.

On the social side, the budget increased outlay for the UPA governments flagship programme like Sarva SikshaAbhiyan, Mid-day Meal Scheme, Rajiv Gandhi Drinking Water Mission, Total Sanitation Campaign, National RuralHealth Mission, Integrated Child Development Services, National Rural Employment Guarantee Scheme andJawaharlal Nehru National Urban Renewal Mission by 43% to Rs 50,015 Cr. It extended larger support to BharatNirman program by increasing the proposed outlay by 54% to Rs 18,696 cr on water supply, roads, construction of houses and rural electrification for building infrastructure and basic amenities in rural India.

The FM stressed the need for the country to move towards a national level Goods and Services Tax from 2010, tobring India at par with the world-over practice of goods and services attracting the same rate of tax. In a step towardthis direction, the service tax rate is increased from current 10% to 12%. Also, with the growing contribution of services to the GDP, to increase its contribution to the exchequer, more industries are to be brought under the servicetax net. On the direct taxes front, no change is proposed in the rates of personal income tax or corporate income taxand clarity has been brought on the much-debated Fringe Benefit Tax.

Overall, the Union Budget 2006-07 appears to be neutral with a few positives like reiteration of previously articulated growth policies, as well as stressing the need to lower the fiscal deficit. The budget is generalistic in nature withreforms being spoken of without providing much clarity on how they will be achieved.

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Contents Macro Economic Scenario 3 Budget at a Glance 4

Direct Taxes 5

Indirect Taxes 6

New Policy Initiatives 8

Sectoral Impact 10

q Automobiles 11

q Cement & Construction 12

q Oil & Gas 13

q Power 14

q Steel and Other Metals 15

q Textiles 16

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3

Macro Economic Scenario

GDP Growth

The economy is estimated to grow at 8.1% in 2005-06, which is an increase of 0.6% over the 7.5% growth recordedin 2004-05. This growth can be attributed to - pick up in investments, strong industrial performance and modestinflation despite high and volatile oil prices. The industrial growth in 2005-06 is driven by robust performance of the manufacturing, construction and service sector. Going forward, the government expects the economy to grow at10% in the next two years.

Inflation

The WPI inflation was benign at 4% in February 2006 as compared to 5.1% in February 2005. Should the currentscenario of high and volatile pricing in the global crude oil markets persist to levels whereby the Centre is forced toreview its current policy regarding subsidies, this is likey to cause inflationary pressures.

Fiscal Scenario

The revenue and fiscal deficit in 2005-06 (Revised) as proportion to GDP are 2.6% and 4.1% respectively, which isa good sign because the revenue deficit was budgeted at 2.7% and fiscal deficit at 4.3%. It is estimated that in theyear 2006-07, the revenue deficit would be 2.1% and fiscal deficit would be 3.8% as proportion to GDP. It isbelieved that the process of fiscal correction will resume in 2006-07. The government said that the net borrowingfor 2006-07 is estimated to be Rs. 1,14,000 crores against Rs. 1,00,000 crores in 2005-06.

External Performance

Indias merchandise exports grew by 18.9% reaching $74.9 billion during April-January 2005-06 compared to26.2% in 2004-05.On the other hand, imports grew by 26.7% reaching $108.8 bn in 2005-06 compared to 39.7% in2004-05. The increase in the import bill was on account of sharp rise in global crude prices with petroleum, oil andlubricants imports increasing by 46.9% in April December 2005-06. The trade deficit for April-January 2005-06was $33.8 billion, higher than the $22.8 billion deficit recorded during April-January 2004-05.

Savings and Investment

Public sector savings have doubled to 2.2% of GDP in year 2004-05 as compared to 1.0% in previous year. But thedeclining growth in household savings slowed down savings growth which grew by 0.2% of GDP to 29.1% in2004-05, as compared with 28.9% in 2003-04 when it had grown by 2.4% of GDP. Investments in 2004-05overtook savings to stand at 30.1% of GDP, growing by 2.9% of GDP. The increase in investments or capitalformation was mainly on account of private investments growing by 19.7%. Consumption expenditure showed a

declining trend. Private final consumption fell to 60.6% in 2004-05 from 62.4% in 2003-04.

Equity Market

The BSE Sensex crossed the 10000 mark in February 2006, reflecting the optimism in the economy despite signs of corporate profit and sales slowdown, infrastructure constraints and hardening interest rates. The number of IPOsincreased from 26 to 55 between 2004 and 2005. At the end of the calendar 2005, the market capiatlisation of Niftywas roughly two thirds of the broad Indian equity market.

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Budget at a Glance (Rs in Crore)

Particulars2004-05

Actual2005-06Budget

Estimates

2005-06Revised

Estimates

2006-07Budget

Estimates1.Revenue Receipts 306013 351200 348474 403465

2. Tax Revenue (net to centre) 224798 273466 274139 327205

3. Non-Tax Revenue 81215 77734 74335 76260

4. Capital Receipts (5+6+7) 191669 163144 160231 160526

5.Recoveries of Loans 62043 12000 11700 8000

6. Other Receipts 4424 - 2356 3840

7. Borrowings and other Liabilities 125202 151144 146175 148686

8. Total Receipts (1+4) 497682 514344 508705 563991

9. Non-Plan Expenditure 365406 370847 364914 391263

10. On Revenue Account of which, 296857 330530 326142 344430

11. Interest Payments 126934 133945 130032 139823

12. On Capital Account 68549 40317 38772 46833

13. Plan Expenditure 132276 143497 143791 172728

14. On Receive Account 87495 115982 114153 143762

15. On Capital Account 44781 27515 29638 28966

16. Total Expenditure (9+13) 497682 514344 508705 563991

17. Revenue Expenditure (10+14) 384351 446512 440295 488192

18. Capital Expenditure (12+15) 113331 67832 68410 75799

19. Revenue Deficit (17-1) 78338 95312 91821 84727

20. Fiscal Deficit {16-(1+5+6)} 125202 151144 146175 148686

21. Primary Deficit (20-11) -1732 17199 16143 8863Source: Budget 2006 - 07

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Direct Taxes

CORPORATE TAX

No change in the tax rates

Minimum alternate tax to be increased from 7.5 % to 10% of the book profits. The period for taking credit of

MAT to be extended from 5 years to 7 years. It has also allowed to adjust MAT credit while calculating interest

liability. Fringe Benefit Tax

q Value the benefit in the form of 'tour and travel' at 5 % instead of 20 %

q Value the benefit in the form of 'hospitality' and 'use of hotel boarding and lodging facilities', in case of

airline companies and shipping industry, at 5 % instead of 20 %

q Exclude expenses on free samples of medicines and of medical equipment distributed to doctors

q Exclude expenses incurred on brand ambassador and celebrity endorsement

q A threshold limit of Rs 100,000 under section 115WB(1)(c) so that only a contribution by an employer to an

approved superannuation fund in excess of Rs 100,000 per year per employee to attract FBT.

Section 80IA benefit of the Income Tax Act available to infrastructure companies extended from March 31, 2006

to March 31, 2009.

Removal of the exemption under Section 10(23G)

PERSONAL TAX

No change in the tax rates Investments in fixed deposits in scheduled banks for a term of not less than five years to be eligible for deduction

under Section 80C of the Income Tax Act.

The limit of Rs 10,000 in respect of contribution to certain pension funds in Section 80CCC, to be removed

subject to the overall ceiling of Rs 1 lakh.

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Indirect Taxes CUSTOMS DUTY Peak rate for non-agricultural products to be reduced from 15 % to 12.5 %; duty on alloy steel and primary and

secondary ferro alloys and non-ferrous metals reduced from 10 % to 7.5 %.

Duty on mineral products to be reduced from 15 % to 5 %.

Duty on ores and concentrates to be reduced from 5 % to 2 %. Duty on materials required for manufacture of refractories to be reduced from 10% and above, to 7.5 %

Duty to be reduced on basic inorganic chemicals from 15% to 10 %; on basic cyclic and acyclic hydrocarbons

and their derivatives to 5 %; on catalysts from 10 % to 7.5 %.

Duty to be reduced on major bulk plastics like PVC, LDPE and PP from 10 % to 5 %; on naptha for plastics to

nil; on styrene, EDC and VCM which are raw materials for plastics to 2 %. Reduction of customs duty on 10 anti-AIDS and 14 anti-cancer drugs to 5 %; on certain life saving drugs, kits

and equipment from 15 % to 5 %; these drugs also to be exempted from excise duty and countervailing duty

(CVD).

Duty on packaging machines to be reduced from 15 % to 5 %. CVD of 4 % to be imposed on all imports with a few exceptions

Rates on clearances by EOUs to the Domestic Tariff Area (DTA) adjusted at 25 % of basic customs duty plus

excise duty on like goods.

Reduction in the duty on set top boxes from 15% to nil.

EXCISE DUTY

Duty on aerated drinks to be reduced from 24% to 16 %.

8 % duty to be imposed on packaged software sold over the counter, of which customised software and software

packages downloaded from the Internet to be exempted; DVD Drives, Flash Drives and Combo Drives to be fully

exempt from excise duty. Condensed milk, ice cream, preparations of meat, fish and poultry, pectins, pasta and yeast to be fully exempt;

duty on ready-to-eat packaged foods and instant food mixes, like dosa and idli mixes, to be reduced from 16 % to8 %.

In the leather sector, vegetable tanning extracts, namely, quebracho and chestnut to be exempted from duty; duty

on footwear with a retail sale price between Rs.250 and Rs.750 to be reduced from 16 % to 8 %.

Duty on compact fluorescent lamps to be reduced from 16 % to 8 %.

Concessional rate of 8 % to be extended to all LPG stoves.

Glassware to attract duty of 16 %.

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Excise duty on specified printing, writing and packing paper to be reduced from 16 % to 12 %.

Re-imposition of excise duty at 12 % on computers. Imposition of excise duty on set top boxes. Excise duty on cigarettes to be increased by 5%.

SERVICE TAX

More services to be brought within the service tax net such as :

q ATM operations, maintenance and management,

q Registrars, share transfer agents and bankers,

q The sale of space or time for advertisements other than in the print media,

q Sponsorship of events by companies other than sports events,

q International air travel excluding economy class passengers,

q

Container services on rail excluding the railway freight charges,q Business support services,

q Auctioneering,

q Recovery agents,

q Ship management services,

q Travel on cruise ships and

q Public relations management services. Service tax rate to be raised from 10% to 12%.

1st April 2010 proposed as the date to introduce a national level Goods and Service Tax (GST).

CAPITAL MARKET

Increase in the rates of Securities Transactions Tax (STT) by 25%. Increase the limit on FII investment in Government securities from $ 1.75 billion to $ 2 billion and the limit on

FII investment in corporate debt from $ 0.5 billion to $ 1.5 billion;

To raise the ceiling on aggregate investment by mutual funds in overseas instruments from $ 1 billion to $ 2

billion and to remove the requirement of 10 % reciprocal share holding; To allow a limited number of qualified Indian mutual funds to invest, cumulatively up to $ 1 billion, in overseas

exchange traded funds; and To set up an investor protection fund under the aegis of SEBI, funded by fines and penalties recovered by SEBI.

This will bolster confidence among retail investors who should be the key drivers of the capital market. Definition of open-ended equity-oriented schemes of mutual funds in the Income tax Act aligned with the

definition adopted by SEBI; open-ended equity-oriented schemes and close-ended equity oriented schemes to be

treated on par for exemption from dividend distribution tax.

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New Policy Initiatives

Agriculture

q Irrigation : Outlay for 2006-07 increased to Rs.7,121 crore, with grant of Rs.2,350 crore; Command Area

Development Programme to be revamped to allow participatory irrigation management through water users

associations.

q Credit : Banks to increase the level of credit to Rs.175, 000 crore in 2006-07 with addition of 50 lakh farmers.

A one time relief to be granted to farmers who have availed of crop loan from scheduled commercial banks,

RRBs and PACS for Kharif and Rabi 2005-06, and an amount equal to 2 % points of the borrowers interest

liability on the principal amount up to Rs.100, 000. Farmers to receive short-term credit at 7 %, with an upper

limit of Rs.300, 000 on the principal amount for which support to be given to NABARD.

q Corpus for Rural Infrastructure Development Fund (RIDF XI) to be increased to Rs.10, 000 crore.

q Plantation: To introduce a 15 year programme for massive re-plantation and rejuvenation of tea, a Special

Purpose Tea Fund is proposed to be setup with initial contribution of Rs.100 crore in 2006-07.

q Microfinance: NABARD to open a line of credit for financing farm production and investment activities

through Self Help Groups Committee to be appointed on Financial Inclusion. A bill to provide a formal

statutory framework for the promotion and development and regulation of the micro finance sector to be

introduced

q Horticulture and Fisheries: Terminal markets to be setup on PPP model-Rs.150 crore earmarked for this in

2006-07 under National Horticulture Mission and National Fisheries Development Board to be constituted.

Food Processing: Industry to be accorded priority sector status for bank credit. NABARD to create a refinancing

window with a corpus of Rs.1, 000 crore, especially for agro-processing infrastructure and market development.

Petrochemicals, Chemicals and Petroleum: In order to promote investment in this sector, Government has set

up a Task Force to facilitate the development of large PC&P Investment Regions. At least three such Investment

Regions to be developed in FY07.

Tourism: Development of 15 tourist destinations and circuits to be taken up. 50 villages with core competency in

handicrafts, handlooms and culture, close to existing destinations and circuits, to be identified and developed.

Plan allocation increased from Rs.786 crore to Rs.830 crore.

Telecommunication: Propose to provide Rs.1,500 crore for Universal Services Obligation Fund in 2006-07.

More than 50 million rural connections to be rolled out in three years. In order to extend financial support to

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infrastructure for cellular telephony in rural areas, a Bill to be introduced in the Budget session to amend the

Indian Telegraph Act.

Maritime Development: National Maritime Development Programme (NMDP) approved. Plan allocation for

Department of Shipping increased by 37 % to Rs.735 crore. Study to identify a suitable location for a new deep

draft port in West Bengal to be carried out.

Investment

q Government to provide equity support of Rs.16, 901 crore and loans of Rs.2, 789 crore to Central PSEs

including Railways.

q Proposes to constitute an expert body for gems and jewellery to look into the potential of this sector, as a

precursor to make India a hub for gems and jewellery.

Bill on insurance to be introduced in 2006-07.

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Automobiles

Measure Impact CommentExcise duty on small cars (a small car, for this

purpose, will mean a car of length not exceeding

4,000 mm and with an engine capacity not

exceeding 1,500 cc for diesel cars and not

exceeding 1,200 cc for petrol cars) to be reduced

from 24% to 16%.

This move would help the industry to seize theopportunity to make India a hub for the

manufacture of small and fuel-efficient cars.

More affordable for the buyers.

Acceleration in road development programme. May result in increase in commercial vehiclesdemand.

Key Players: Maruti Udyog, Tata Motors, Ashok Leyland

Positive

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Cement & Construction

Measure Impact CommentAdditional budgetary support for National Highway

Development from Rs. 9,320 crore in FY06 to Rs.

9,945 crore in FY07. Special accelerated road

development programme for North Eastern region

with estimated cost of Rs. 4,618 crore. Development

of access-controlled Expressways (1000 kms) on

Design, Build, Finance and Operate model

approved. In-principle approval granted for three

road projects in Gujarat.

Positive for Cement Companies in the form

of growth in cement demand. Also positive

for construction companies with focus on

road development projects.

Reduction in import duty on cement from peak rate

of 15% to 12.5%

The impact on cement companies is

expected to be neutral considering the

negligible level of imports.

Additional outlay under Rajiv Gandhi Drinking

water mission from Rs. 3,645 crore to Rs. 4,680

crore for FY07. Special emphasis on establishing

water testing laboratories and rural sanitation

projects.

Positive for construction companies focused

in water, irrigation and sewage systems

development projects.

Increase in corpus of Rural Infrastructure

Development fund upto Rs. 10,000 crore with focus

on Public-Private-Partnership models. Special

window for rural roads with a corpus of Rs. 4000

crore to be established. Enhanced allocation under

National Urban renewal mission for promoting

industry specific towns.

Positive for Cement Companies in the form

of growth in cement demand. Also positive

for construction companies with focus on

road development projects.

Identification of 20,000 water bodies with a

command area of 1.47 mn hectares for repair,

renovation and restoration at an estimated outlay of

Rs. 4481 crore.

Positive for construction companies focused

in water, irrigation and sewage systems

development projects.

Key Players: Gujarat Ambuja, ACC Limited, Grasim Industries, Shree Cement, IVRCL Infrastructure,Gammon India, Hindustan Construction, PBA Infrastructure, Era Constructions, Jain Irrigation, KirloskarEngines .

Positive

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Oil & Gas

Measure Impact CommentRaising cess on crude oil from Rs. 1800/MT to

Rs. 2500/MT.

Negative for Oil Exploration companies like

ONGC, OIL in the form of increased burden

of subsidy from the current levels of Rs.

5000 crore.

Concessional project rate of 10% to be

extended to pipeline projects for transportation

of natural gas, crude petroleum and petroleumproducts.

Marginally beneficial for gas distribution

companies such as GAIL, Gujarat State

Petronet Limited, refining companies likeIOCL, BPCL & HPCL in the form of lower

costs for their pipeline expansion projects.

NOTE:

The key issues of subsidies on consumptive fuels like LPG and Kerosene, under-recovery on auto fuels likepetrol and diesel have not been discussed in the budget. However the Finance Minister Mr. Chidambaram hasurged the members to come to a consensus on the issues drawn out in Dr. C. Rangarajan committee report.Until the issues are ironed out the oil marketing companies will continue to lose on account of underrecoveries and subsidies.

Neutral

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Power

Measure Impact CommentBudgetary support of Rs.597 crore for non-

conventional energy resources

Thrust on non-conventional energy projectsbeing undertaken, like wind, hydro and

nuclear energy.

Benefit of 10 year Tax Holiday under Section

80IA of the Income Tax Act extended to

power projects commencing operations till

March 31, 2010

Reduced cost of generation for projects

commencing operations till 2010, thereby

encouraging investment in new projects

NOTE:

The budget stressed on the need of augmentation of generation capacity along with durable reforms intransmission and distribution sector. It also pointed out governments plan to award Ultra Mega powerprojects before December 31 2006 and de-blocking of coal reserves of 20 billion tonnes for power projects.

Key Players: NTPC, Reliance Energy, Tata Power, BHEL, ABB, Siemens

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Steel and Other Metals

Measure Impact CommentRestoring import duty on steel melting scrap to

5%

Marginally positive for steel industry.

Reduction in customs duty on aluminium from

10% to 7.5%

Reduction in import duty will result in drop

in landed costs of imports and further the

operating margins of companies like

HINDALCO and NALCO. However with the

current ruling prices of aluminum, the impactis expected to be marginal.

Reduction in customs duty on zinc from 10% to

7.5%

Reduction in import duty will result in drop

in landed costs of imports and further the

operating margins of companies like

Hindustan Zinc. However with the current

ruling prices of zinc, the impact is expected

to be marginal.

The reduction in import duty will have a

positive impact on galvanized steel

manufacturers for which zinc is an important

raw material.

Reduction in import duty on ferro alloys and

certain refractories from 10% to 7.5%

Marginally positive for steel industry

Key Players: Tata Steel, SAIL, Uttam Galva, JSW Steel

Neutral

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Textiles

Measure Impact CommentReduction of excise duty on all man-made fibre

yarn and filament yarn from 16% to 8%

There will be no fresh accumulated unutilized

cenvat duty credit at the stage of yarn. This

correction of inverted duty structure will

increase the cost competitiveness of synthetic

yarn against cotton yarn. The exports of the

sector may also increase.

Reduction of import duty on all man-made fibresand yarns from 15% to 10%

This will make manmade fibre textilescompetitive vis--vis cotton textiles. The

profitability of the synthetic textile players

may also increase.

Import duty on raw materials such as DMT, PTA

and MEG reduced from 15% to 10%

This will make manmade fibre textiles

competitive vis--vis cotton textiles and

increase the profitability of the synthetic

textiles sector.

Import duty on paraxylene reduced from 5% to

2%

This will increase the profitability of the

synthetic textile industry due to reduction in

cost.

Allocation to Technology Upgradation Fund

increased from Rs. 435 crore to Rs. 535 crore

This will increase the much-needed

investment in the sector increasing the

production base and thereby increasing

exports.

Key Players: Indorama Synthetics Ltd, JBF Industries Ltd, Rajasthan Spinning and Weaving Mills Ltd,Banswara Syntex Ltd, Sangam India Ltd

Positive

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Notes

Disclaimer:This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for circulation.This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. Theinformation contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time totime have positions in and buy and sell securities referred to herein.

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Budget 280206 - ACM