>Union Budget Analysis: 2010-11 (HDFC SECURITIES)

We had said in our Pre-Budget note dated February 23, 2010

“Knowing the way the Indian polity works (in a measured manner and if possible by consensus, unless the situation is catastrophic like in 1991), people on the street have little expectations from the Budget. This makes us believe that the initial market reaction to the Budget would be positive, though a few days later our markets could fall in line with the global markets in terms of direction …..

Critical issues like labor reforms, pension reforms, subsidies, etc may need broader political consensus. We expect material developments on the same, if any, to be outside the budget….

In our view, the significant reduction in deficit, if carried out, will be a positive for government bonds and for the equity market. A lower deficit will help the INR, which we expect will appreciate going forward…..

For the common man, we expect that Finance Minister may raise the exemption limit in personal income tax, or the investment limit Under Sec. 80C or reintroduce standard deduction for salaried people. “

Most of these have come true and the market reacted positively to the Budget. The FM has positively surprised the common man on the street by bringing down his personal tax outflow and providing one more avenue to him to save tax.

As far as the corporate sector is concerned, while the general excise duty rate has been rolled back from 8% to 10%, goods attracting tax at higher rates have escaped this rollback. Further service tax has also not been rolled back. These reliefs have been partly offset by a hike in the MAT rate from 15% to 18% (though surcharge has been cut from 10% to 7.5%).

On the macro front, the FM has impressed by bring down the FY10 fiscal deficit to 6.9% (from 7.8% in FY09) and has laid the roadmap to bring it down further to 4.1% over the next three years. (5.5% in FY11, 4.8% in FY12 and 4.1% in FY13). Even accounting for some possible slippages due to external factors, if these numbers are achieved, it would be a significant achievement. Raising Rs.36,000 cr by way of 3G Auction and spectrum usage charges and raising Rs. 40,000 cr (vs Rs.25,958 cr in FY10) by way of divestment in FY11 could be crucial to achieving this number in FY11.

The FM has assumed a nominal GDP growth of 11.3% in FY11 to Rs.69,12,800 cr (almost equal to 11.5% growth expected in FY10). This number seems achievable as things stand now. However his assumptions on growth in customs duty (up 36.1%) and in excise duty (up 29.4%) seem a little tough despite the fact that the increase in excise duty and customs duty on crude oil and petro products could bring in a big part of these incremental revenues. There is a lower allocation for the petroleum sector (from Rs.25,300 cr to Rs.3,217 cr) suggesting that the Govt is not expecting subsidy payments to be high based on assumptions of softer crude and downstream prices and/or implementation of Kirit Parikh committee report shifting the burden to consumers.

In terms of sectors, allocation to water supply and sanitation, agri research and education, agri financial institutions have been hiked. However allocation for social security and welfare and rural employment has either been flat or has fallen thereby suggesting that there is a churn in the schemes with some schemes seeing a rise in allocation while some others have seen a cut. A number of reliefs (excise, customs and service tax) have been provided on equipments used in agriculture use (including storage, preservation and transport of agri produce). Further central plan allocation has been hiked substantially for Coal, Steel, Power, School education and literacy and higher education.

Inflation could take time to come down in view of the rise in the excise duties on petro products, levying of clean energy cess on coal, lignite and peat, increase in excise duty on cement, rollback in excise duty from 8% to 10%, removing exemption of service tax on transport by rail, extending service tax to all domestic and international air passengers.

A lower projected fiscal deficit has an impact on reducing the net borrowings of the Govt from the market to Rs.345010 cr in FY11(E) vs Rs.398411 cr in FY10(E). Though more or less on expected lines, this is welcome as it could result in softening of interest rates and stop crowding out the private players from the debt market.

Overall we feel that the FM has done a decent job of consolidating social schemes, putting more money in the hands of consumers, refraining from tinkering too much with the direct and indirect taxes till the DTC and GST codes are implemented. Managing or bringing down inflation could continue to remain an issue due to the reasons mentioned above. A normal monsoon this year hence becomes even more important.

To read the full report: BUDGET ANALYSIS