1. Union Budget 2012-13
MARCH 16, 2012
A PERSPECTIVE
SALIENT POINTS
• FY 12 GDP growth rate pegged at 6.9%, down from 8.4% in the previous year due to global uncertainty and
domestic factors. Expect growth rate to range between 7.35-7.85% in FY13.
• Union Budget retains emphasis on inclusive growth – increased spending on agriculture, education, and
healthcare.
• Capital Markets: Has proposed QFI access to Indian Corporate Bond Market; Greater participation by retail
investors in equity markets through Rajiv Gandhi Equity Savings Scheme.
• Has provided Rs. 15,888 crores towards re-capitalisation of public sector banks, regional rural banks and other
financial institutions including NABARD
• Infrastructure: hiked infrastructure outlay and has relaxed ECB norms for select sectors.
• Disinvestment: Rs. 30,000 crore target for FY13
• Sharp upward revision in FY12 fiscal deficit to 5.9% (4.6% estimated earlier) and target for FY13 set at 5.1%.
Aims to restrict central subsidy outlay to 2% of GDP in FY13
• Net market borrowing estimated at Rs. 4.79 lakh crores in FY13
• Direct transfers of subsidies mooted
• Taxation:
- Tax exemption limit hiked to Rs.200,000 from Rs. 180,000
- Investors with income of up to Rs.10 lakh can invest 50,000 in equities to get additional
exemption (subject to 3 year lock-in)
- No change in corporate tax rates; STT reduced to 0.1% and duties on gold imports increased
- Service tax and standard excise duty rate hiked to 12% from 10%
- Has indicated GST rollout by August 2012 and DTC at the earliest possible
FT’S VIEWS
The Union Budget continued with the government’s theme of inclusive growth but desisted from announcing
any populist measures, despite the background of the recent state election results. Instead it has focused on fiscal
consolidation through a slew of tax measures and efforts to curb expenditure by limiting subsidies. However, there
were no big announcements on the reforms front, which could be announced outside the Union Budget, as has
been the practice in recent years.
The government has also rightly focused on infrastructure and manufacturing sectors through various measures
– a higher number of sectors will now be eligible for viability gap funding and the amount of tax free bonds that
can be issued by government owned infrastructure companies has been doubled. Also there has been increased
outlay for infrastructure sectors and relaxation of ECB norms for select sectors.
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2. However, some of the announcements need to be evaluated carefully as the changes to Income Tax Act have been
proposed with a retrospective effect, which could have implications for Corporate India.The proposal to attract
new flows into the capital markets from domestic and foreign investors can have a positive impact over the long
term. While the fiscal consolidation measures are a positive, investors are likely to focus on execution, given the
tough macro economic conditions and the overrun witnessed in recent years.
EQUITY MARKETS
Lack of big bang reforms and specific measures to address the current issues seem to have weighed on market sentiment
and leading indices lost ground. The hike in exemption limits and increased rural spending gave a boost to FMCG
stocks. Despite the hike in excise duties, auto stocks closed in the positive territory. Indications that RBI will announce
guidelines for issuing banking licenses to private sector players boosted NBFC stocks.Amongst FMCG stocks, ITC was
trading firm as duty hike on cigarettes was lower than market expectations.The reduction in Securities Transaction Tax
(STT) on delivery transactions is a positive for brokerages.
% change From yesterdayʼs % change From yesterdayʼs
close close
BSE Sensex -1.19% BSE Realty -1.26%
S&P CNX Nifty -1.16% BSE Power -2.98%
BSE MidCap -0.68% BSE FMCG 1.91%
BSE SmallCap -1.12% BSE Auto 0.22%
BSE Bankex -1.92% BSE Healthcare -2.02%
BSE Oil & Gas -3.32% BSE PSU -2.63%
BSE Metals -2.22% BSE CG -2.94%
Measures to discourage flow of money into gold are positive – will need to see impact in coming months. It’s good to
see the government offering tax breaks to direct retail investors’ savings into equity markets, however will await details
to see the modus operandi and its potential impact.
While headline inflation has tapered, Corporate India continues to face challenges in terms of high borrowing costs
and rising input costs.The weakness in the rupee is adding to the pressure on current account deficit. In recent months,
we are seeing positive data emanate out of US and decent manufacturing data from the rest of the world.This means
that there is a likelihood that input costs will remain at current level and any increase will put pressure on inflation
numbers, once the base effect starts wearing off from the second half of 2012. Overall, we are not very comfortable
with the inflation situation and the government needs to undertake structural reforms to address supply-side issues from
a long term perspective
DEBT MARKETS
While the headline fiscal deficit projections and market borrowings were broadly in line with expectations and seem
realistic compared to last year, markets were impacted by the lack of concrete measures to curb expenditure/subsides.
There has been no roll back of the fiscal stimulus measures introduced over the past few years. Also the experience of
government overshooting their targets in recent years has led to increased skepticism about the projections. Like FY
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