Budget is the most waited for event – by the individuals, business-owners and the stock markets.  One tends to read into the fine print and understand what this means for them and their country’s long-term growth. And this time, Pranabda has not disappointed those holding their magnifying glass. The stock market has given a thumbs up sign as the Union Budget 2010-11 has shown the Government’s commitment to fiscal consolidation.

This Budget only reiterates the Government’s continued focus on the core issues – rising food prices, the persisting subdued mood in the economy following the global economic crisis, the measures to step up growth.

No more stimulus

The stimulus packages released during 2009 have done their bit to improve the economic scenario, the time was right to roll back some of the packages, while at the same time displaying fiscal prudence.

The Economic Survey 2009-10, which was presented a day before the Budget, sent out positive vibes for India’s economic future over the next three to five years. There have been concerns of inflation and stimulus withdrawal. The survey has very practically forecast that food prices would continue to rise further over the next few months. At the same time it has also recommended a gradual rollback of stimulus measures after assessing the impact on each sector.  Amidst all this, the survey seemed extremely positive on India touching a double-digit growth rate over the next 4-5 years. As for the current and next financial years (FY10 and FY11), the survey has projected GDP growth of 7.2 per cent and 8.75 per cent respectively.

Deficit issues

In his previous Budget speech, the FM had announced a deficit of 6.8% (which was targeted to be brought down to 3% of GDP by 2009-10) of gross domestic product (GDP) to support the economy during the global down turn. However, the deficit targets were misbalanced in the last two years because of the stimulus packages announced to diminish the negative impact of the global financial crisis of 2008-09. Some of these fiscal concessions served in worsening the country’s finances.

A revival in the GDP growth figures has allowed finance minister to present a lower fiscal deficit at 5.5 per cent of FY11 GDP. The current year’s deficit has been revised to 6.9 per cent. The coming years will see a lower deficit – for FY12, it is 4.8 per cent and for FY13, it is 4.1 per cent. Net borrowing for FY11 has been pegged at Rs 3.45 lakh crore much in line with market expectations. This was largely welcomed by all class of investors and in particular by the retail investor for whom the tax slab has now been raised from Rs 5 lakh to Rs 8 lakh, giving a sizeable saving of Rs. 20,000 to 50,000 per year.

Key moves

With 46 per cent of the total plan allocation being made for infrastructure – both in rural and urban areas – this critical sector is getting the attention it deserves. The additional tax deduction proposed for individuals for investment up to Rs. 20,000 in long-term infrastructure bonds would further help generate funds for infrastructure development.

The Finance Minister has seen a bigger role for the private sector, and in the financial services sector, the RBI will be allotting banking licenses to finance private sector companies and NBFCs. There is the proposal to set up a Financial Sector Legislative Reforms Commission along with measures for strengthening existing banks would create a financial sector equipped to cater to the requirements of a fast growing economy.

He has been firm in his measures to reign in deficit by refusing to issue oil or fertilizer bonds. The balanced approach is also seen in the re-affirmation of the commitment to clarify and simplify the FDI regime.

One of the highlights has been the tax rates. Corporate tax rates to remain unchanged. In case of a domestic company having total income exceeding Rs one crore, the surcharge is proposed to be reduced from 10% to 7.5%. No change in surcharge proposed in case of foreign companies.

The effective MAT rate proposed to be increased from 16.99% to 19.93% in case of domestic companies, and from 15.84% to 19% in case of foreign companies.

The Finance Minister has reduced the tax burden for 60% of tax payers by broadening the current tax slab.

This budget has given importance to Infrastructure development, housing, renewable and clean energy, promotion of Research and Development, Education and Medical care. It has attempted to leave the middle income group with more income to boost the consumption and thereby propel economic growth.

On the whole, the Budget seems to be positive and forward looking with an ambitious yet achievable target of double digit growth in GDP in the near future.

The author is a Market Strategist with Paterson Securities Pvt. Ltd. Bangalore.

BUDGET AND BUSINESS

Impact of the budget on the companies / sectors:

• Four wheelers to become more expensive: Peak excise duty increased. Ad valorem component of excise duty on large cars, multi-utility vehicles is being increased by 2% points to 22%. This may be –ve for the auto companies which may pass on the hike to customers. But at the same time deductions allowed on Research and Development is positive for companies like Tata Motors, Ashok Leyland.
• Medical Equipments to become cheaper: A concessional basic duty of 5% is being prescribed on parts and accessories for the manufacture of such equipment while they would be exempt from CVD and special additional duty.
• Consumer durables like Microwave ovens, Washing machine to cost less: Reduction in customs duty on one of its key components, namely magnetrons from 10% to 5%.
• Local mobile Phones to cost less: To encourage the domestic manufacture of accessories, duty exemptions are now being extended to parts of battery chargers and hands-free headphones. Also, the validity of the exemption from special additional duty is being extended till March 31, 2011.
• Tobacco products to cost more:  Excise duty on all non-smoking tobacco such as scented tobacco, snuff, chewing tobacco etc. In addition, he introduces a compounded levy scheme for chewing tobacco and branded unmanufactured tobacco based on the capacity of pouch packing machines.
• Refrigerator to cost less: Full exemption from customs duty to refrigeration units required for the manufacture of refrigerated vans or trucks has been proposed. This is a positive measure to develop food processing and cold storage chains
• The exemption in the research and development (R&D) is largely to benefit the pharmaceutical industry, but it has been neutralized by the increase in Minimum Alternate Tax.
• No extension of STPI: An extension of the software technology parks of India (STPI) scheme for smaller software companies and an improvement of infrastructure––in terms of land and manpower were in the top of the wish list of the IT industry in this Budget. While the software industry is keen to retain the tax holidays under the STPI scheme, the hardware faction has lobbied for continuance of reduced excise duties on computer components.
• Recapitalization of banks Rs 16500 crore: +ve for Uco Bank, Central Bank of India, Syndicate Bank, Dena Bank
• Rs 300 crore for agriculture impetus and Agriculture seeds exempt from service tax: +ve for Jain Irrigation, Advanta India, Kaveri seeds
• Non Banking Finance Companies could be considered for banking licenses: +ve for IDFC, IFCI
• Allocation doubled for Power sector, – +ve for NTPC, Reliance  Power
• Increased financing by IIFCL: Infra companies to benefit – Punj Lloyd, HCC, IRB infra, Gammon infra projects
• 13% higher road allocation: +ve for Punj, Gammon, Nagarjuna constructions
• Cut in excise duty for wind farm input and 61% hike in allocation for renewable energy will be positive for companies like Suzlon energy, Indo wind energy
• Clean energy cess on imported & domestic coal:  -ve for Tata Power, Adani power
• Allocation for school education upto Rs 31036 crore – +ve for Educomp, Edserv systems, Core Projects
• Waive of Excise duty on Solar Photovoltic panels – +ve for Moser Baer
• Customs duty of 5% on crude restored for -ve RIL and all other refinery stocks
• Hike in CET for refined products: Negative for Oil Marketing Companies like HPCL, BPCL, and IOC.
• Rs 60000 crore defense capex: BEL, M&M, L&T, Nelco
• Extending govt fertilizer subsidy in cash: + ve for RCF, Tata Chem, Coromandel international, Chambal Fertilizers.
• UID scheme Budget increased to Rs 1900 crore  and Smart Card extended to NREGA: +ve for Bartronics, TCS and Glodyne Tech
• Interest subvention for low cost housing and Slum Free India at the earliest: HDIL, Parsvanath