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OVERVIEW Prior to elections, convention dictates that the serving Government present an interim budget for a vote-on-account, which is a sanction of Parliament for withdrawal of money from the Consolidated Fund of India to meet expenses for a period of upto four months before a full budget is presented. This ensures release of funds towards payment of salaries and pensions, ongoing schemes as well as debt servicing, thereby allowing the basic administrative expenditure of the Government to continue. However, announcements on both expenditure and revenue policies, including modifications in the tax structure, are typically left for the new Government to be formed after elections. Given this norm, the absence of major expenditure announcements in the Interim Budget for 2014-15 was in line with expectations and encouraging from the point of view of fiscal restraint. The Revised Estimates (RE) for 2013-14 indicate a continued focus on fiscal consolidation, with a narrower fiscal deficit as compared to the budgeted target of 4.8% of GDP, despite a shortfall in tax revenues and disinvestment receipts and higher-than-budgeted subsidies, interest and pension payments. This was achieved through a substantial cut in revenue grants for the creation of capital assets and capital expenditure, rendering the quality of fiscal adjustment sub-optimal. Notably, 57% of the reduction in capital expenditure is led by a lower allocation for multilateral agencies (for higher voting rights) and defence, which would have a limited impact on domestic growth impulses. As expected, weak domestic growth and sluggish manufacturing activity have contributed to a considerable down-scaling of the estimate for tax collections in 2013-14. However, ICRA expects actual net tax revenues in this fiscal to be lower than the level projected by the RE for 2013-14 by around Rs. 110-120 billion, which would result in a fiscal deficit closer to the original target of 4.8% of GDP. In ICRA’s view, curtailing the fiscal deficit to 4.1% of GDP in 2014-15 as indicated by the Interim Budget Estimates (IBE) seems challenging, given the optimistic assumptions for nominal GDP growth (13.4%), net tax revenue growth (18%) and disinvestment receipts from sale of stake in Government companies (Rs. 370 billion), while simultaneously allowing for fiscal space to fund the new Government’s expenditure priorities. Notably, the reduction in the allocation for recapitalization of Public Sector Banks to Rs. 112 billion in the IBE for 2014-15 from Rs. 140 billion in 2013-14 RE is a negative in light of the prevailing asset quality trends and the capital requirements for meeting the capital adequacy norms. Assuming an average crude oil price of USD 105/barrel, INR/USD exchange rate of 62 and continuation of the monthly diesel price hikes, total under recoveries of the oil marketing companies (OMCs) are estimated at around Rs. 1 trillion in 2014-15. If the absolute contribution of the upstream companies does not decrease, the subsidy provision of Rs. 284 billion (net of carried forward amount Rs. 350 billion) seems largely adequate. The subsidy for phosphorus and potassium nutrients for 2014-15 is likely to be reduced in light of the recent fall in global di-ammonium phosphate (DAP) & muriate of potash (MOP) prices. Nevertheless, the IBE for fertiliser subsidy for 2014-15 of Rs. 680 billion is likely to prove inadequate, based on the assessed spillover of fertiliser subsidy to 2014-15 from this fiscal (~Rs. 370 billion) as well as the likely escalation in the subsidy required for domestic urea manufacturing, if the proposed gas price revision is implemented from April 1, 2014. The targeted reduction in excise rates till end-June 2014 to support the languishing manufacturing sectors is welcome. However, the extent of revival in manufacturing growth may be dampened by the short time frame of the excise cuts, the sluggish momentum of economic activity as well as the expectation that the current weak sentiments would prevail ahead of parliamentary elections. Government of India (GoI) has indicated gross borrowings of Rs. 5.97 trillion in 2014-15, 6% higher than the level in 2013-14, which would determine the market borrowing calendar for the first 3-4 months of 2014-15. However, a more realistic assessment of the borrowing requirement can be made only after the final Budget for 2014-15 is presented.

GOVERNMENT OF INDIA VOTE-ON-ACCOUNT 2014-15

Focus on fiscal consolidation maintained, with fiscal deficit for 2013-14 and 2014-15 projected below target February 2014

ICRA RESEARCH SERVICES

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Assessment of Government of India’s Fiscal Situation

The Interim Budget for 2014-15 indicates continued fiscal consolidation, with a fall in the fiscal deficit from 4.9% of GDP in 2012-13 to 4.6% of GDP in 2013-14 (according to RE) and further to 4.1% of GDP in 2014-15 (refer Chart 1). Notably, the estimated fiscal deficit for 2013-14 and 2014-15 is an improvement over the targets set in Oct 2012 (refer Table 7). Fiscal Situation as per 2013-14 RE: At an absolute level, both the revenue and fiscal deficits in 2013-14 RE are lower than the BE for 2013-14 (refer Table 1) despite a downward revision in tax revenues and disinvestment proceeds. However, the quality of fiscal adjustment is somewhat sub-optimal, as subsidies, interest payment and pensions (part of non plan revenue expenditure) have overshot the budgeted target, the impact of which has been absorbed by a cut in plan revenue expenditure (including revenue grants for capital assets) and capital expenditure. In line with our expectations, sluggish economic growth has prompted a downward revision in all the major sources of tax revenues in the RE for 2013-14 (refer Table 2). The largest revision has been made in the case of corporation tax (Rs. 258 billion), followed by excise duty (Rs. 180 billion) and service tax (Rs. 152 billion). Overall, tax revenue growth has been revised to 13% in 2013-14 RE from 19% in 2013-14 BE. Excise, customs and corporation tax collections are forecast to grow by a low 2%, moderate 6% and 10%, respectively, in 2013-14 RE. In contrast, service tax and personal income tax growth are estimated at a healthy 24% and 20%, respectively, in 2013-14 RE. In the first nine months of this fiscal, 64% of the RE for 2013-14 for gross tax revenues had been collected based on the provisional data released by the CGA (refer Table 3 and Chart 2). In ICRA’s view, actual net tax revenues in this fiscal are likely to be lower than the level projected by the RE for 2013-14 by around Rs. 110-120 billion, which would result in a fiscal deficit closer to the original target of 4.8% of GDP. In contrast, non tax revenues have been revised upwards by Rs. 210 billion, chiefly on account of dividends & profits and interest receipts. Around 60% of the 2013-14 RE for non tax revenues had been raised by December 2013, prior to the telecom auctions held in February 2014. The estimate for disinvestment proceeds has been revised downwards for both Government companies (to Rs. 160 billion from Rs. 400 billion) and non-Government companies (to Rs. 30 billion from Rs. 140 billion). As compared to the total miscellaneous capital receipts of Rs. 258 billion in 2013-14 RE, a low Rs. 55 billion had been raised till December 2013. Although attempts are being made to raise additional funds, the achievement of the RE figure for disinvestment remains uncertain.

Chart 1: GoI’s Revenue and Fiscal Deficit as a Percentage of GDP

Source: GoI Budget Documents; CGA, Ministry of Finance, GoI; ICRA Research Table 1: GoI’s Fiscal Balances

Rs. billion Growth 2013-14

BE 2013-14

RE 2014-15

IBE 2013-14

RE 2014-15

IBE Revenue Receipts 10,563 10,293 11,671 17% 13% Tax Revenues$ 8,841 8,360 9,864 13% 18% Non Tax Revenues 1,723 1,932 1,807 41% -6% Revenue Expenditure 14,362 13,995 15,501 13% 11% Revenue Deficit -3,798 -3,703 -3,829 % of GDP -3.3% -3.3% -3.0% Capital Receipts (Non Debt)

665 366 675 -13% 84%

Capital Expenditure 2,185 1,801 2,026 14% 13% Fiscal Deficit -5,425 -5,245 -5,286 % of GDP 4.8% -4.6% -4.1%

Source: GoI Budget Documents; CGA; ICRA Research $ Net of Refunds, Net of States’ share in Central Taxes

0%

1%

2%

3%

4%

5%

6%

7%

Revenue Deficit Fiscal Deficit

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Non plan revenue expenditure exceeded the budgeted levels by Rs. 348 billion (refer Table 5), led by higher subsidies (Rs. 244 billion), interest payments (Rs. 94 billion), defence outgo (Rs. 79 billion) and pension payments (Rs. 34 billion). However, the allocation for CST compensation to the States has been reduced to Rs. 19 billion in 2013-14 RE from Rs. 93 billion in 2013-14 BE. Overall, 71% of the RE for 2013-14 for non plan revenue expenditure had been incurred in April-December 2013. The allocation for fuel subsidy has been revised up considerably to Rs. 855 billion in the RE for 2013-14 from Rs. 650 billion in the BE for this fiscal, nevertheless remaining lower than the outgo of Rs. 969 billion in 2012-13. Around 65% of the RE had been released in April-December 2013 (refer Table 4). A spillover of Rs. 350 billion is estimated by GoI from this fiscal to 2014-15, lower than the spillover from 2012-13 to 2013-14 (Rs. 450 billion). The allocation for fertiliser subsidy has undergone a small revision to Rs. 680 billion in the RE for 2013-14 from Rs. 660 billion in the BE for 2013-14, remaining largely similar to the outgo of Rs. 656 billion in 2012-13. 83% of the RE for fertiliser subsidy had been released in the first nine months of this fiscal. ICRA estimates a spillover of around Rs. 370 billion in terms of fertiliser subsidy to 2014-15 based on the actual requirement and the revised allocation for 2013-14, which would need to be cleared in the coming fiscal. The allocation for food subsidy has been revised up to Rs. 920 billion in the RE for 2013-14 from Rs. 900 billion in the BE for this fiscal, exceeding the outgo of Rs. 850 billion in 2012-13. 95% of the RE had already been released in the first three quarters of this fiscal. Plan revenue expenditure has undergone a sharp cut of Rs. 714 billion in the RE for 2013-14, led by grants for creation of capital assets, which is a sub-optimal outcome. Notably, 74% of the RE for 2013-14 for plan revenue expenditure had been incurred in April-December 2013. Notably, the pace of growth of plan revenue expenditure in 2013-14 RE (13%) is slightly higher than that of non-plan revenue expenditure (12%). Notably, ~57% of the shortfall of Rs. 382 billion relative to the budgeted target for capital expenditure was on account of defence and contribution to multi-laterals, which do not have an impact on domestic growth impulses. This also highlights that the extent of the squeeze in productive capital expenditure was not alarming at ~Rs. 165 billion. The allocation for capital expenditure (ex defence and contribution to multilaterals) expanded by 16% in 2013-14 RE relative to 2012-13. A considerable 83% of the RE for 2013-14 for capital expenditure had been incurred in April-December 2013.

Table 2: Trends in Tax Revenue Receipts in 2013-14 RE and 2014-15 BE

Source: GoI Budget Documents; CGA; ICRA Research Table 3: Trends in Tax Revenue Receipts in 9MFY14

Source: GoI Budget Documents; CGA; ICRA Research ^ Net of Refunds, Gross of States’ share in Central Taxes

Rs. billion 2013-14 BE (1)

2013-14 RE (2)

2014-15 IBE (3)

Variation in 2013-14

(2)/(1)

Growth in 2014-15 IBE

(3)/(2)

Gross Tax Revenues 12,359 11,589 13,792 -6% 19% - Corporation Tax 4,195 3,937 4,510 -6% 15% - Income Tax 2,476 2,417 3,065 -2% 27% - Customs Duty 1,873 1,751 2,013 -7% 15% - Union Excise Duty 1,976 1,795 2,006 -9% 12% - Service Tax 1,801 1,649 2,155 -8% 31%

2013-14 RE 9MFY14 Rs. billion Rs. billion % of RE Growth

Gross Tax Revenues^

11,589 7,437 64% 9%

Corporation Tax 3,937 2,604 66% 10% Income Tax 2,417 1,537 64% 20% Customs Duty 1,751 1,239 71% 4% Excise Duty 1,795 1,017 57% -7% Service Tax 1,649 969 59% 20%

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Fiscal Situation as per 2014-15 IBE: While the policies of the new Government formed after elections will crucially impact fiscal trends, the following sections briefly discuss the revenue and expenditure trends forecast by GoI in the Interim Budget for 2014-15. Notably, plan expenditure (revenue + capital) in 2014-15 has been kept at the same absolute level as 2013-14 BE, which entails a 17% rise over 2013-14 RE. Revenue Receipts: Revenue receipts are estimated to expand by 13% in 2014-15 IBE, led by an 18% rise in net tax revenues, which factors in GoI’s expectation that nominal economic growth would be 13.4% in 2014-15; ICRA expects real growth of 5.0-5.5% in FY15. Corporation tax collections are estimated to rise by 15% in 2014-15, considerably higher than the 10% growth in 2013-14 RE, benefiting from an expected recovery of Corporate profitability. Personal income tax collections are estimated to rise by 27% in 2014-15, considerably higher than the 20% growth in 2013-14 RE. Notably, the surcharges on direct taxes that were introduced in the Budget for 2013-14 for a period of one year, have been extended in the Interim Budget for 2014-15. GoI announced a reduction in excise duty from 12% to 10% on all goods falling under chapter 84 and chapter 85 of the Schedule to the Central Excise Tariff Act, a cut in excise duty ranging from 3% to 6% on different types of automobiles and restructuring of excise duties on mobile handsets till June 30, 2014. In spite of these relaxations, GoI has forecast excise duty collections to rise by 12% in FY15, following the marginal 2% growth in 2013-14 RE. Moreover, customs duty collections are forecast to expand by 15% in the coming fiscal, higher than the modest 6% growth in 2013-14 RE; the achievement of this target would critically depend on the volume of trade in the coming fiscal. Customs duty structure on non-edible grade industrial oils & its fractions has been rationalised at 7.5%. Additionally, GoI has forecast service tax collections to rise by 31% in 2014-15, higher than the 24% growth in 2013-14 RE, the achievement of which seems to be optimistic. Rice and some healthcare services have been excluded from the levy of service tax. The IBE for 2014-15 forecast a 6% decline in non tax revenues, on account of lower dividends & profits (to ~Rs. 772 billion in 2014-15 IBE from ~Rs. 882 billion in 2013-14 RE) following high remittance by some PSUs in the current fiscal, as well as revenues from other communication services (to ~Rs. 390 billion from ~Rs. 401 billion). The target for disinvestment has been set at Rs. 569 billion in 2014-15 IBE, more than twice as high as the Rs. 258 billion in 2013-14 RE. Notwithstanding the budgeted figure, disinvestment inflows would depend on market conditions, timing of sale, valuations etc. Revenue Expenditure: Revenue expenditure is budgeted to increase by 11% in 2014-15 relative to 13% in 2013-14 RE. While non plan revenue expenditure is expected to rise by a

Chart 2: Trends in Tax Collections (Net of Refunds, Gross of States’ share in Central Taxes, Rs. billion)

Source: GoI Budget Documents; CGA; ICRA Research Table 4: Non-Plan Revenue Expenditure for Key Ministries/Departments in FY14

Source: GoI Budget Documents; CGA; ICRA Research

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14

Corporation Tax

Income Tax Customs Duty Union Excise Duty

Service Tax

Rs. billion

Q1 Q2 Q3 Q4

Rs. billion 2013-14 RE

9MFY14 (Prov.)

Percentage of RE

Department of Fertiliser 680 564 83% Department of Food & Public Distribution 920 878 95% Ministry of Petroleum & Natural Gas 855 554 65%

Total 2,455 1,995 81%

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modest 8% in 2014-15 IBE (12% in 2013-14 RE), plan revenue expenditure is expected to rise by a considerable 19% (13% in 2013-14 RE). Notably, grants for capital assets are set to rise by 21% in 2014-15 IBE as compared to the modest 5% growth in 2013-14 RE. The outlay for interest payments, pensions and defence are estimated to rise by 12%, 9% and 8%, respectively, while the allocation for subsidies has been kept largely unchanged in 2014-15 IBE. However, the fuel subsidy allocation has been cut from Rs. 855 billion in 2013-14 RE to Rs. 634 billion in 2014-15 IBE. ICRA believes that the same is likely to be largely adequate, despite the Rs. 350 billion spillover from 2013-14 to 2014-15, if the monthly diesel price hike continues as planned and the share of upstream companies in absolute terms does not decline, assuming total under recoveries to be ~Rs. 1.0 trillion in 2014-15. The allocation for fertiliser subsidies has been kept largely unchanged at Rs. 680 billion in 2014-15 IBE. ICRA estimates a spillover of around Rs. 370 billion in terms of fertiliser subsidy to 2014-15 based on the actual requirement and the revised allocation for 2013-14. In the absence of urea farm gate price revision, the subsidy requirement for domestic urea manufacturing is expected to rise by ~Rs. 130 billion, if the proposed gas price revision is implemented from April 1, 2014, as gas price hikes are passed through to GoI. Consequently, the budgeted subsidy for 2014-15 of Rs. 680 billion is likely to prove inadequate, even if GoI announces a ~10-15% reduction in subsidy for phosphorus and potassium nutrients for 2014-15 (as expected in light of the recent fall in global DAP & MOP prices), and is likely to lead to a further spillover to 2015-16. The food subsidy allocation has been enhanced to Rs. 1,150 billion in 2014-15 IBE from Rs. 920 billion in 2013-14 RE, in light of the additional funding required for the implementation of the National Food Security Act (NFSA). Nevertheless, the allocation is lower than the estimate of ~Rs. 1,247 billion made by GoI for food subsidies following the enactment of the NFSA. The identification of beneficiaries under the NFSA is required to be completed within one year after the commencement of the Act (Q2FY14), which would reduce additional costs to some extent in the coming fiscal. Capital Expenditure: Capital expenditure and gross lending is budgeted to rise by a lower 12% in 2014-15 relative to 14% in 2013-14 RE. However, growth of capital expenditure on defence is expected to rise to 14% in 2014-15 IBE from 12% in 2013-14 RE. Balance capital outlay and gross loans & advances are estimated to expand by a moderate 10% in the coming fiscal (16% in 2013-14 RE). In particular, the allocation for recapitalization of Public Sector Banks has been reduced to Rs. 112 billion in the IBE for 2014-15 as compared to the Rs. 140 billion in 2013-14 RE, which is disappointing in light of the prevailing asset quality trends and the capital requirements for meeting the Basel-III norms.

Table 5: Trends in Revenue and Capital Expenditure

Source: GoI Budget Documents; CGA; ICRA Research

Rs. billion 2013-14 BE (1)

2013-14 RE (2)

2014-15 IBE (3)

Variation in 2013-14

(2)/(1)

Growth in 2014-15 IBE

(3)/(2)

Revenue Expenditure 14,362 13,995 15,501 -3% 11%

Interest 3,707 3,801 4,270 3% 12%

Subsidies 2,311 2,555 2,557 11% 0%

Fertiliser 660 680 680 3% 0%

Food 900 920 1150 2% 25%

Fuel 650 855 634 32% -26%

Pensions 707 741 810 5% 9%

Defence 1,169 1,248 1,344 7% 8%

CST Compensation 93 19 NA -79% NA

Grants Capital Assets 1,747 1,213 1,466 -31% 21%

Balance 4,628 4,419 NA -5% NA

Capital Exp. Gross Loans & Adv.

2,291 1,909 2,132 -17% 12%

Defence 867 789 896 -9% 14%

Contribution/ Subscription to Multilaterals

144 5 10 -97% 96%

Recapitalisation of Banks etc.

140 140 112 0% -20%

Other 1,140 975 1,114 -14% 14%

Memo Item

Capital Exp (excluding Defence, Multilaterals) + Grants for Capital Assets

3,026 2,328 2,692 -23% 16%

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Fiscal Balances: At an absolute level, the revenue deficit and fiscal deficit are estimated to widen in 2014-15 IBE as compared to 2013-14 RE (refer Table 6). However, the effective revenue deficit is estimated to decline somewhat to Rs. 2.4 trillion in 2013-14 from Rs. 2.5 trillion in the ongoing fiscal. Moreover, the targeted fiscal deficit of 4.1% of GDP is below the target set in October 2012. Curtailing the fiscal deficit to 4.1% of GDP for 2014-15 seems challenging, given the optimistic assumptions for nominal GDP growth (13.4%), net tax revenue growth (18%) and disinvestment receipts (Rs. 370 billion), while simultaneously allowing for fiscal space to fund the new government’s expenditure priorities as well as higher capital infusion in public sector banks. The rolling targets indicated by GoI for 2015-16 and 2016-17 aim to curtail the fiscal deficit to 3.6% of GDP and 3.0% of GDP, respectively, in line with the targets set in October 2012. Outstanding liabilities are projected to decline to 41.0% of GDP in 2016-17, an improvement from 46.0% in 2013-14 RE. Borrowings: GoI has indicated gross borrowings of Rs. 5.97 trillion in 2014-15 (refer Table 8), 6% higher than the level in 2013-14. However, net long term borrowings are placed at Rs. 4.57 trillion in 2014-15, 2.5% lower than the borrowings of Rs. 4.68 trillion in 2013-14. These estimates would determine the market borrowing calendar for the first 3-4 months of 2014-15. However, a more realistic assessment of the borrowing requirement can be made only after the new Government presents its Budget for 2014-15 and unveils the fiscal deficit target that it chooses to adhere to. Yields of dated Government securities are likely to remain elevated in the near term, based on our expectation of a low likelihood of Repo rate cuts in the near term as the Reserve Bank of India (RBI) moves towards implementing the recommendations of the Dr. Urjit Patel Committee on the revised monetary policy framework. In 2013-14, the GoI in coordination with the RBI switched ~Rs. 306 billion of securities maturing in 2014-15 and 2015-16 for longer term securities. Also, securities worth Rs. 150 billion are scheduled for buy-back during the remainder of 2013-14. In continuation with this strategy of easing the redemption pressure in the near term, further buy-back/switching of shorter tenor securities worth Rs. 500 billion is proposed in 2014-15. The Interim Budget for 2014-15 also proposes to establish a non-statutory public debt management office, which can begin work in 2014-15.

Table 6: Fiscal Balances for GoI

Source: GoI Budget Documents; CGA; ICRA Research #Does not include the portion of National Small Savings Fund and Market Stabilisation Scheme that are not used to finance GoI’s fiscal deficit Table 7: Fiscal Deficit Targets for GoI

Source: GoI; ThFC Report; ICRA Research

Table 8: GoI’s Long-Term Market Borrowings (Rs. billion)

Source: RBI; ICRA Research

Rs. billion 2013-14 BE

2013-14 RE

2014-15 IBE

2015-16 Rolling Targets

2016-17 Rolling Targets

Revenue Deficit -3,798 -3,703 -3,829 NA NA

Percentage of GDP -3.30% -3.27% -2.98% -2.00% -1.50%

Effective Revenue Deficit

-2,052 -2,490 -2,363 0 0

Percentage of GDP -1.80% -2.20% -1.84% 0.00% 0.00%

Fiscal Deficit -5,425 -5,245 -5,286 NA NA

Percentage of GDP -4.80% -4.63% -4.63% -3.60% -3.00%

Total Outstanding Liabilities as a Percentage of GDP#

44.3% 46.0% 44.8% 43.1% 41.0%

Performance/ Targets in Budget 2014-15

Targets set in October 2012

Targets set by ThFC

2012-13 -4.9% -5.3% -4.2% 2013-14 -4.6% -4.8% -3.0% 2014-15 -4.1% -4.2% -3.0% 2015-16 -3.6% -3.6% -3.0% 2016-17 -3.0% -3.0% -3.0%

2013-14 2014-15 Growth Net Borrowings 4,689 4,573 -2.5% Redemptions 950 1,397 47.0% Gross Borrowings 5,639 5,970 5.9%

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ICRA Sectoral Analysis

Oi l & Gas

Pr o p o s a ls

Push for infrastructure including oil & gas exploration.

Provision of subsidy for sensitive petroleum products: Rs. 855 billion for 2013-14 (RE) and Rs. 634 billion for 2014-15 (IBE).

Reduction in excise duty on capital goods from 12% to 10% to lead to marginal savings of capex for oil & gas players.

Im p a c t - N e u t r a l

The marginal positive for PSU OMCs is the subsidy provision of Rs. 855 billion for 2013-14 (RE) with relatively lower carried forward under-recovery of Rs. 350 billion for Q4 FY14 (against Rs. 450 billion carried forward for Q4 FY13). ICRA believes that the fuel subsidy provision for the current year is adequate with the expected total under-recoveries to be around Rs. 1,420 billion for FY14, which is expected to be shared by GoI (Rs. 755 billion) and upstream companies (Rs. 639 billion) leaving small net under-recovery burden for OMCs. However, the subsidy provision of Rs. 284 billion for 2014-15 (IBE) (net of carried forward amount Rs. 350 billion) could be largely adequate only if the monthly diesel price hike continues as planned and the share of upstream companies in absolute amount does not decrease, assuming total under recoveries to be Rs. 1,000 billion in FY15. The budget speech emphasised on the push for infrastructure including the oil & gas exploration. The Budget 2014-15 takes note of the award of a number (19) of oil and gas blocks for exploration. Besides, the reduction in excise duty on capital goods from 12% to 10% would lead to marginal savings in capital expenditure (capex) plans of the oil & gas players.

Fer t i l is ers

Pr o p o s a ls

Budgetary provision for subsidy: Rs. 680 billion for 2013-14 (RE) and Rs. 680 billion for 2014-15 (IBE).

Im p a c t - N e g a t iv e

GoI has marginally increased the subsidy for 2013-14 vis-a-vis budgeted earlier. However, subsidy provisioning for 2013-14 is substantially lower than the estimated subsidy requirement of Rs. 1,050 billion, which would result in a subsidy backlog to the extent of ~Rs. 370 billion. This will lead to continuation of the tight liquidity situation that the fertiliser companies have faced in the recent past. The spillover would also lead to part of the budgeted subsidy for 2014-15 being utilised to pay the subsidy commitment of 2013-14. Moreover, in absence of any urea farm gate price revision, the subsidy requirement for domestic urea manufacturing is expected to escalate by ~Rs. 130 billion if the proposed gas price revision were to be implemented from April 1, 2014 as gas price hikes are passed through to GoI. Consequently, the budgeted subsidy for 2014-15 is likely to be lower even if the GoI announces a ~10-15% lower subsidy for phosphorus and potassium nutrients for 2014-15 as is expected (in light of recent fall in global DAP & MOP prices) and is likely to lead to a further spillover to 2015-16.

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Iron & Stee l

Pr o p o s a ls

Reduction of excise duty (from 12% to 10%) on all goods falling under Chapter 84 and 85 of the Schedule to the Central Excise Tariff Act.

Reduction of excise duty (extent of reduction ranging from 3% to 6%) on different types of automobiles.

Im p a c t - M o d e r a t e ly Po s i t iv e

The excise duty rate reductions proposed for the capital goods, consumer non-durable and automobile sectors for a period up to June 30, 2014 are positives for the domestic steel industry, given that almost 20% of steel consumption in India is derived from these sectors. However, one needs to see the extent of benefit that would be passed on to buyers, and if the incentives are strong enough to overcome other challenges that these sectors have been facing.

Cap i ta l G ood s

Pr o p o s a l

Reduction in excise duty from 12% to 10% on all goods falling under chapter 84 and chapter 85 of the Schedule to the Central Excise Tariff Act till June 30, 2014.

Im p a c t - Po s i t iv e

Reduction in duty will result in capital cost savings for domestic projects and may provide a marginal fillip to demand for capital goods. However, since the demand for capital

goods is directly linked to investment activity, its impact may be very limited till such time that there is a meaningful revival in project awards and execution.

Au tomo bi les

Pr o p o s a l

Reduction in excise duty from 12% to 8% on small cars, two wheelers and commercial vehicles. Reduction in excise duty on mid & large segment cars from 24% to 20% and 27% to 24%, respectively and on SUVs from 30% to 24%.

Im p a c t - Po s i t iv e

The reduction in excise duty on automobiles is a positive for the sector as it will bring down the prices of vehicles across all segments and thereby support demand. For instance, reduction in excise duty could bring down the cost of Passenger Vehicles by Rs. 15,000-46,000 and that of commercial vehicles by Rs. 19,000-42,000 per vehicle (assuming OEMs pass on the benefit completely). While in the passenger car, two-wheeler segment the price reduction should help demand in the near term through ‘positive’ sentiment effect; in the commercial vehicle segment, the reduction may provide relief to the industry currently reeling under high discounts. In the longer term however, a sustainable demand recovery in the automobile industry would be contingent on improvement in the overall economic environment.

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