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Indian Union Budget 2013-2014 preview

Fiscal discipline to regain focus Budget FY2014 - Key themes

- Fiscal consolidation is expected to remain priority in the budget as macroeconomic stability and attracting capital inflows gain focus

- Populist measures are likely to come later during the year, closer to the general elections

- Markets to be watchful for credibility of FY2014 fiscal deficit target

- Incentives to boost savings and channelize households' savings in financial assets and away from non-productive physical assets such as gold (since it is also adding to the current account deficit)

- Sops for exporters likely as weakness in export performance persists

- More clarity on implementation of GST and DTC, telecom policy (revenue from spectrum auction), divestment targets, policies regarding land acquisition and mining

- Lowering of fiscal deficit to provide headroom for monetary policy easing, and to provide boost to investment in infrastructure sector to revive the investment cycle in the economy.

Budget FY2014 amidst macroeconomic challenges

The twin deficits in the economy - current account deficit and fiscal deficit - continue to pose a challenge to the macroeconomic outlook. Amongst these we believe that the current account deficit (CAD) is more worrisome since it reached a record-high level of US$22.4bn or 5.4% of GDP in 2QFY2013, owing to an elevated merchandise trade deficit. Going forward, in FY2013, the CAD is expected to touch ~5.0% of GDP (as against 4.2% of GDP witnessed in FY2012). Thus attracting strong capital inflows is imperative to finance the large CAD.

Although the government has stepped up momentum on positive reforms since September 2012, we believe that it cannot afford any adverse economic developments at this juncture on the back of the still-looming threat of sovereign ratings downgrade by credit rating agencies. Stability in the macro-economic environment is imperative to preserving the sovereign ratings and attracting healthy capital flows to plug the CAD. Risking a rating downgrade from the lowest investment grade to junk status could adversely impact capital inflows, the currency, and availability of cheaper overseas finance for the corporate sector; thus affecting business confidence and market sentiments as well.

Given this backdrop, we expect fiscal consolidation to regain focus in the forthcoming FY2014 Union Budget despite a heavily laden election calendar. In our view, any populist measures such as the national food security bill are likely to be implemented in the latter part of the year, closer to the general elections, rather than in the budget itself.

Fiscal consolidation efforts so far

The Finance Minister outlined a five-year roadmap for fiscal consolidation in October 2012 aimed at eventually bringing down the fiscal deficit by about 50bp - 60bp every year to 3.0% of GDP in FY2017 so that the economy can return to the path of 'high investment, higher growth, lower inflation and long-term sustainability'.

The fiscal consolidation measures taken so far include hike in diesel prices by ?5/litre, restricting subsidized LPG cylinders per household to 9 (the cap was eventually raised from 6 cylinders), thrust on PSU disinvestment, hike in railway fares after almost a decade, curtailing plan expenditure, aligning diesel prices for bulk users (accounting for 18.0% of volumes) to market prices and letting oil marketing companies hike prices every month by 40-50ps/litre to eliminate under-recoveries.

Trends in April - December 2012: Having breached the budgeted fiscal deficit target by over 1.0% of GDP in FY2012, the government has sought to contain the fiscal deficit in FY2013 to its revised estimate of 5.3% of GDP (as against the budgeted estimate of 5.1% of GDP). In the April - December 2012 period, total receipts garnered by the government stood at 60.0% of the budgeted estimate, lagging behind total receipts (61.0% of budgeted estimate) in the corresponding period of the previous year. On the other hand, the government has successfully reined in plan and non-plan expenditure to 56.8% and 71.7% of the budgeted estimate respectively. Correspondingly it has restricted the fiscal deficit during the period at 78.8% of the budgeted estimate as compared to 92.3% of the budgeted estimate in April - December 2011.

Continued reliance on one-off revenues

We expect reliance on one-off revenues, particularly proceeds from disinvestment in PSUs and the telecom spectrum auction, to continue contributing to the total receipts in FY2014 as well.

Disinvestment: Since April 2012, the Cabinet Committee on Economic Affairs has approved stake sale in 10 PSUs, namely - SAIL, NALCO, Hindustan Copper, MMTC, Oil India, NMDC, Hindustan Aeronautics, NTPC, RCF and Engineers India. So far, the government has offloaded 5.58% stake in Hindustan Copper, 10% stake in NMDC, 10% stake in Oil India and 9.5% stake in NTPC, and garnered over ?21,000cr, ie 70% of the budgeted divestment target of '30,000cr.

Telecom spectrum auction: The FY2013 budget targeted '40,000cr as revenue from the telecom spectrum auction. So far, the first round of the auction has managed to fetch the exchequer about '9,400cr while the yet to be announced second round of the auction process is expected to fetch over '40,000cr.

Special dividends from cash-rich PSUs: The government has already directed cash-rich PSUs to use their surplus cash toward capex activity or declare special dividends. We believe that dividend distribution is likely to aid the government to shore up its receipts, with the fiscal year deadline fast approaching and cash-rich PSUs (such as Coal India, NMDC, ONGC, Oil India, etc) having cash in excess of their annual investment needs.

SUUTI stake sale: Furthermore, the government may also consider selling shares of blue-chip companies held by Specified Undertaking of the Unit Trust of India (SUUTI) which is the restructured unit of UTI. SUUTI holds 11.54% in ITC, 23.6% in Axis Bank and 8.3% in L&T and although it is unlikely to wind up the entire stake simultaneously the total value of these holdings amounts to over '40,000cr.

We believe that buoyancy in the capital markets is fundamental to fetch these one-off revenues for the government.

Curtailing the subsidy burden in FY2014

Petroleum subsidy: Petroleum subsidies have increased manifold from 2.2% of the total subsidies in FY2009 to 31.7% of the total subsidy burden in FY2012. In FY2013 the petroleum subsidy was budgeted to decline steeply by 36.4% yoy but in the April - December 2012 period itself 93.0% of the budgeted estimate has already been exhausted.

The recent reform measures taken to curtail the petroleum subsidy are positive and we expect the petroleum under-recoveries to decrease by 18% in FY2014 and even more post FY2014. We anticipate government's subsidy burden to decline to ?75,OOOcr in FY2014 compared to ?100,000cr in FY2013. Moreover, in terms of the subsidy sharing burden we expect the government to be the largest beneficiary given the fiscal consolidation imperatives, i.e. compared to the subsidy sharing ratio of 60:40 between the government and upstream companies in FY2012, the government is likely to bring down its share the most. Upstream companies are also likely to be beneficiaries due to lower under-recoveries during FY2014 and this is likely to lead to an increase in their capex on exploration and acquisition of energy assets.

Food subsidy: The food subsidy constitutes the largest proportion of the subsidy bill at 33.7% of the total subsidy in FY2012. In addition, the government has time and again indicated its commitment to introduce the National Food Security Bill (NFSB). The Parliamentary Standing Committee has recommended coverage of 67% of the total population under the NFSB. It seeks to guarantees a uniform entitlement to the beneficiaries of 5kg of food grain per person per month at low cost (rice at ?3/kg, wheat at '2/kg etc). We believe enacting the legislation is likely to inflate the food subsidy bill to over '100,000 cr and in view of the present fiscal challenges the government is unlikely to table the NFSB in the budget session, rather it is likely to time the bill closer to the 2014 general election for enhanced electoral benefits.

Sops for exporters likely; import duty hike possible

The economy is running a high trade deficit at 10.2% of GDP in FY2012 and we expect it to exceed US$200bn in FY201 3 (as against US$183.4bn in FY201 2). The surge in our trade deficit at 11.7% of GDP in 2QFY2013 is the primary reason for a record-high current account deficit at 5.4% of GDP in 2QFY2013. In the April - January FY2013 period, the trade deficit widened to US$167.2bn as against US$154.5bn in the corresponding period of the previous year, reporting a growth of almost 9.0%.

The Commerce Ministry extended the interest subvention scheme on rupee-denominated loans for export-oriented labor-intensive and small-scale industries as well as engineering sector until FY2014. The government also raised import duty on gold ahead of the budget from 4.0% to 6.0% aiming to curb demand to some extent. In the previous budget it was increased from 2.0% to 4.0%. Exports reported a marginal growth of 0.8% in January 2013 after eight straight months of contraction. Therefore, to augment export growth, we believe that this budget is likely to announce sops for exporters particularly in the manufacturing industry. Moreover, in view of the high CAD the government could possibly enhance import duty/ tariff hikes on certain items to discourage import demand.

Goods and Services Tax - Implementation likely post April 2014

The impending legislation on the Goods and Services Tax (GST) is aimed at creating a unified market for goods and services by replacing all indirect taxes on goods and services such as central as well as state level sales taxes, service taxes, VAT, excise duty and octroi. The implementation of GST is likely to broaden the tax base, simplify tax structure and increase the tax to GDP ratio. However, it is a contentious issue with the States who are concerned about revenue-sharing and loss of fiscal autonomy and has thus missed numerous deadlines since April 2010. The leveling of differences is crucial since the Constitution (115th Amendment) Bill requires the approval of not less than two-thirds of the members present and voting in each House of Parliament and ratification of at least one-half of the states.

Recent progress: The Centre and States recently discussed issues such as incorporating a floor rate with a narrow band instead of a single GST tax rate, compensation on Central Sales Tax (about '34,000cr for FY2011-13), exclusion of petroleum products from the bill so as to let states decide on their inclusion in GST, phased rollout and flexibility to exit, etc. In addition, three sub-committees with central as well as state government officials are expected to deliberate on further key issues. Consensus remains to be established on vital issues but owing to progress being made in deliberation, we expect the Finance Minister to unveil a credible timeline for roll out of the GST in this budget, which is likely to be post April 2014.

Direct Tax Code - Clarity on roadmap for rollout

The Direct Tax Code (DTC) seeks to replace the archaic Indian Income Tax Act, 1961 and simplify the tax structure as well as increase tax compliance. The Parliamentary Standing Committee on Finance in its report recommended raising income tax exemption to '3 lakhs (from the present '2 lakhs) and modification in subsequent tax slabs, hiking the investment limit for tax saving schemes and wealth tax limit, and the abolition of the Securities Transaction Tax amongst others.

The Finance Ministry is likely to review the suggestion of the committee, after which the DTC bill would be tabled in Parliament. We expect clarity in the forthcoming budget on the roadmap for rolloutof the DTC. In the interim, to boost tax revenue, media reports suggest that a higher income tax rate on the 'super-rich' or surcharge on tax in the highest income bracket could be on the cards in this budget.

Boost to savings likely by hiking tax saving deduction limit

The shift from savings in physical to financial assets is vital to improve the growth mix in a developing economy like India. Conversely, the savings rate in the economy has slowed down to 30.8% in FY2012 from 34.0% in the previous year and a high of 36.8% in FY2008. Further, households are increasingly preferring savings in physical assets (such as gold, property etc) over financial assets. In FY2012, physical savings constituted about 64.1% of the total households savings and the share of financial savings decelerated to 35.9%. The banking system has also witnessed a persistent wedge between credit growth (16.0%) and deposit growth (13.1%) during the year.

Akin to the Rajiv Gandhi Equity Savings Scheme announced in the previous budget, we expect the Finance Minister to take some measures to boost savings in financial assets, and thus discourage demand for gold, which is adversely impacting our CAD. This can be done by increasing the tax saving deduction limit in investment instruments such as ELSS, equities, longer-duration fixed deposits, tax-free bonds etc.

Reviving the metals and mining sector

Despite having one of the largest coal reserves, India's imports of coal and coke reported about 78% rise in FY2012. India is also the fourth largest producer of steel but about 10% of our requirements are being met by imports. These avoidable imports add to pressure on the current account deficit and currency woes. The steel sector is currently facing stress owing to issues such as availability of raw materials, regulatory and environment clearances, land acquisition and infrastructure bottlenecks. We believe legislations such as the Mines and Minerals (Development and Regulation) Bill, the new Land Acquisition Bill as well as the new steel policy should seek to create a simple and transparent mechanism for grant of mining license through competitive bidding and fast-track clearances to attract investment (including foreign direct investment) and technology in the sector, thereby boosting growth.

The potential foreign capital inflows from South Korean steel major POSCO's project alone are pegged at ?54,000cr. Such projects would bring immediate benefit of precious foreign capital inflows in the economy and lasting benefits in the form of India becoming a major net exporter of steel. The Finance Minister could use his budget speech to bring clarity on these crucial issues.

'Banking' on licenses to private players

The passage of the 'Banking Laws Amendment Bill' by the parliament is positive for paving the way for issuance of the new bank licenses to private players. Recent media reports suggest that the Reserve Bank of India is closer to finalizing guidelines on new-bank licenses. In our view, the possible entry of large business conglomerates in the banking space could be a game-changer for the industry and could inject capital to the tune of '50,000cr, which would be leveraged further. In his budget speech, the Finance Minister could give greater clarity on the entry of corporates in the banking industry and subsequently its impact on additional credit creation for productive sectors of the economy.

Boost to infrastructure sector

In line with past trends, we expect infrastructure to be a key focus area in this budget as well. We expect the Finance Minister to address the slowdown in investment and growth, by taking positive steps to strengthen the investment environment.

Measures such as increasing budgetary allocation to the sector, improving the clearance mechanism, providing tax sops/benefits and channelizing long-term, low-cost funding for infrastructure projects, increase in tax saving limit for investment in tax-free bonds, etc are likely to boost growth in the infrastructure sector. We expect the Finance Minister to take some steps in this direction to revive growth in the sector.

Further, revival of the investment cycle also rests on a conducive interest-rate environment, and a credibly lower fiscal deficit could give the RBI some headroom to cut policy rates more meaningfully to support growth.

Cash transfers to lead to efficiency in welfare delivery system

The objective of the Direct Benefit Transfer (DBT) scheme is to transfer cash directly to beneficiaries of existing government schemes such as scholarships, pensions, NREGA wages etc through an electronic payment system linked with the Aadhaar platform, giving a unique identity number to each resident. We believe implementation of DBT is likely to improve targeting of intended beneficiaries, reduce leakages and corruption by eliminating middle-men and thus increase efficiency in the welfare delivery system. We further believe that extending the scheme to subsidized goods and services is likely to remove price distortions in the market and rationalize consumption.

Coverage and Implementation: The government has identified 43 districts in 16 States on the basis of coverage of bank accounts and Aadhaar for the first round of Direct Benefits Transfer (DBT) under 26 selected schemes (mainly scholarship schemes and stipends). Of these 43 districts, 20 districts were identified to receive DBT from January 1, 2013; 11 more districts from February 1, 2013 and the remaining 12 districts from March 1, 2013. Going forward, 18 states are expected to be covered from April 2013 and the remaining states are expected to be covered for implementation of DBT from April 2014. The three pillars for successful implementation of cash transfer scheme are identification of intended beneficiaries, Aadhaar enrollment and banking infrastructure. So far, while almost 59% households have access to banking services according to census data, Aadhaar enrollment amounts to just about 270 million people, ie around 22% of the population.

The 'Task Force on Direct Transfer of Subsidies on Kerosene, LPG and Fertilizer' recommended direct transfer of these subsidies to beneficiaries in a phased manner. The adoption of DBT in these cases is likely to depend on evaluation of the success of pilot projects in Alwar (for kerosene), Mysore (for LPG), and Jharkhand (for PDS). We expect clarity on inclusion of further schemes in DBT in the forthcoming budget.

Global comparisons

We believe that even India's combined (Centre + States) expenditure/GDP ratio is not as high as compared to other countries. The Centre's expenditure to GDP ratio has in fact been on a declining trend, decelerating to 14.9% in FY2012 from 15.9% in FY2010. But the fiscal deficit has remained elevated on account of the slide in the tax revenue to GDP ratio, which stood at 10.2% in FY2012 as compared to 11.9% in FY2008, mainly owing to a deceleration in the gross direct taxes to GDP ratio. As growth recovers, we expect revenues (particularly tax revenues) to improve, abating the heightened fiscal deficit concerns.

To sum up

We expect the fiscal deficit to stand at 5.5% of GDP in FY2013. However, if the government tightens expenditure further than anticipated, adopts a more aggressive strategy towards garnering one-off revenues, defers the petroleum subsidy payment or retains the largest share of gain through the diesel price hikes; then the fiscal deficit for FY2013 could be brought down to 5.3% of GDP For FY2014 we expect the government to stick to its fiscal deficit target of 4.8% of GDP

We believe that calibrating fiscal policy by means of reduction in subsidies and boosting the investment environment through meaningful capital expenditure is a pre-requisite for getting the economy on a virtuous growth path. In addition, alleviating supply-side constraints in the economy through structural reforms in the mining and power sectors, enabling land acquisition policy etc are essential to unlock the growth potential in the economy.

Automobile

Expected Impact: Neutral

FY2013 has been a challenging year for the Indian automobile industry as slowdown in economic activity coupled with high interest rates and rising fuel and vehicle prices have dampened consumer sentiments. As a result, the domestic industry growth has slowed down to ~5% YTD in FY2013. The medium and heavy commercial vehicle and passenger car segments have been severely impacted by the ongoing slowdown and have registered a de-growth of ~21% (FYTD) and ~2% (FYTD) respectively. Nonetheless, easing of interest rates in CY2013 is expected to revive demand going ahead and provide relief to the automakers.

Considering the current environment we expect status quo to be maintained on the excise duty front. However, in light of the ongoing clamor for imposing higher taxes on diesel vehicles, whose sales continue to defy the slowdown; we do not rule out a possibility of an additional tax on diesel vehicles in the Union Budget.

The sector however, will stand to benefit from indirect sops such as higher outlay for the rural sector (driving consumer spending), increased budgetary allocation for infrastructure spending (increase in road freight) and increase in income tax benefits.

Overall, we expect the Budget to be broadly Neutral for the Automobile sector.

Banking

Expected Impact: Positive

India's savings rate has reduced substantially from the highs of around 37% to barely 30% in the last few years, which is reflecting in the faltering deposit growth and high interest rates for banks. Simultaneously savings in physical assets like gold and property has increased. Lowering gold imports has become vital from the viewpoint of improving the precarious current account deficit. Simultaneously, there is a need to increase savings and investments in order to revive GDP growth. Hence, from several angles it has become important for the budget to encourage financial savings and discourage savings in gold. Possible ways to do this would be to increase the limit for tax deductions in respect of financial investments such as bank deposits, ELSS and equities. Also, banks may be allowed to issue tax-free infra bonds.

In general, the budget has always been important for banks, from the perspective of the credible fiscal deficit initiatives and corresponding implications for market borrowings by the government. Credible signs of fiscal consolidation would be positive for banks from the point-of-view of lower government bond yields and interest rates.

In light of capital constraints being faced by the banking sector and the imminent implementation of stiffer Basel-III norms from 1 April 2013, the government might earmark a healthy sum for capital infusion in public sector banks and provide clarity on the creation of a holding company structure for public sector banks, which would be able to raise money globally on its own.

Currently, the banks are allowed tax deduction in respect of full write-offs from book and additionally, provisions made for rural advances over and above the actual write-offs is also eligible, subject to limits. In light of increased credit costs, considering persistent asset quality stress, bankers are pressing hard for the allowance of provisions made for non rural advances as a tax expense and/or increasing limits for provisioning based deductions on rural advances.

Capital Goods

Expected Impact: Positive

The capital goods sector has been bearing the brunt of slowdown in investments across various sectors owing to the deteriorating macro environment and sluggish domestic industrial growth. The number of projects that have been stalled and cancelled has increased. If the budget addresses some of the power sector issues such as poor financial position of state power distribution companies and delays in land acquisition and forest clearances, among others, it would be beneficial for the capital goods sector.

Additionally, fund allocation to the various programs including the R-APDRP and RGGVY would continue to provide a fillip to the transmission line players.

Overall, we expect the Budget to be Positive for the Capital Goods sector.

Cement

Expected Impact: Positive

The cement sector is currently facing a problem of low demand with dispatches growth in the current financial year expected to be ~5-6%. The low demand scenario has resulted in a fall in cement prices. Efforts by cement manufacturers to increase prices have not succeeded, as price hikes could not be absorbed due to low demand. The industry is also facing cost pressures due to hike in diesel prices. The hike in diesel prices has pushed up both, the rail and road freight charges. This has affected the profitability of cement manufacturers.

The cement sector would hope that there is no increase in excise duty on cement in the budget. As the industry is currently facing low demand, it would be difficult to pass on the hike in excise duty to customers. Status quo with respect to excise duty on cement will be a positive for the sector.

The cement sector would also be hoping for some announcements on infrastructure projects such as road, freight corridor, irrigation etc, which would boost cement demand.

Overall we expect the Budget to be Positive for the Cement sector.

FMCG

Expected Impact: Positive

The overall slowdown in the economy has began to affect the FMCG sector with companies posting deceleration in volume growth in the recent quarterly results. Discretionary spending has been hit severely due to the ongoing slowdown. The prevailing high inflation level is also a cause of concern for the sector.

In the upcoming budget, the FMCG sector would be hoping for announcements that would boost demand, such as higher allocation to rural employment schemes, lowering of personal taxes etc which would boost the disposable income in the hands of consumers.

The sector would also keenly await concrete announcements regarding the long awaited implementation of Goods and Services Tax (GST). Implementation of GST would result in uniform taxation for products and services across the country and also abolish the cascading effect of tax. GST would also result in reducing the overall tax burden on products and services, thereby propelling demand.

Cigarette makers would be hoping for no hike or just a marginal hike in excise duty on cigarettes as the same was hiked by ~22% in the 201 2-13 budget.

Overall, we expect the Budget to be Positive for the FMCG sector.

Infrastructure

Expected Impact: Positive

The sector has underperformed over the last twelve months relative to the BSE Sensex on the back of persistent headwinds faced by the industry in the form of slower-than-anticipated revival in industrial capex, environment clearances and land acquisition issues. Further, a stretched balance sheet and working capital on the back of investment in subsidiaries and delays in payment from clients continue to pose a problem. Moreover, the inflationary pressures, spiraling commodity prices and high interest rates are also hurting overall profitability of the companies.

However, it is quite apparent that in order to achieve sustainably healthy GDP growth, a proportionate increase in investment in infrastructure is required. The government can ensure this by allocating higher funds to flagship programs of Bharat Nirman, JNNURM, APDRP AIBP and NHDP for the sector in the budget. Land acquisition and environment clearance are the two major bottlenecks hampering timely execution of projects. Hence, roll out of policies to expedite these procedures would lend a fillip to the sector.

Further, we expect the government to look at more avenues of long-term financing for the sector including creation of corporate debt market, dedicated infrastructure debt fund and attracting foreign investment, which would solve the current asset-liability mismatch problem faced by the banks. However, creation of these funds would require regulatory changes.

Overall, we expect the Budget to be Positive for the Infrastructure sector.

IT

Expected Impact: Neutral

Union Budget 2013-14 is likely to be a non-event for the Indian IT sector as the wish list remains extremely small. In the last budget, MAT was continued on SEZ units. As per media reports, industry body NASSCOM's wish list includes removal of MAT on SEZ units, however, we do not expect any material change to the current tax structures. The budget can clarify issues related to dual levy of VAT and Service tax on licensing of software.

In addition, the Indian government has started focusing on e-governance lately, with its various initiatives such as RAPDRP, UIDAI and Sarva Shiksha Abhiyan; this is also a space to look out for if the government decides on increasing the outlay related to these schemes to move towards modernization. Some of the Indian IT companies have bagged some crucial deals under these schemes and have started setting up SBUs to tap the domestic market. Also, increased emphasis on PPP in education and incremental allocation for ICT implementation in schools would benefit companies catering to the K-12 segment, including Educomp Solutions and NIIT.

Overall, we expect the Budget to be Neutral for the IT Sector.

Media

Expected Impact: Neutral

According to a report by FICCI-KPMG released in 2012, the Indian media and entertainment sector is slated to post a strong CAGR of 14.9% through CY2011-16 to '1,45,700cr from regional markets, digitization push and increasing mobile and broadband penetration.

One of the key developments is Phase 3 Radio auction which is expected to add 839 new frequencies and extend the reach of private FM stations to about 227 new cities. However, the logjam in telecom spectrum allocation is expected to delay the Phase 3 radio auctions.

Key expectations of the media sector from this budget include:

1) Exemption of import duty on STBs: It will reduce the cost burden of DTH and cable companies, facilitating rapid digitalization.

2) Uniformity in taxation under GST: Currently, the entertainment industry is paying multiple taxes including service tax, entertainment tax, among others. Moreover, high rates of entertainment tax and lack of uniformity in tax rates across different states add to their woes. A uniform, simplified and single-point taxation across product categories under the ambit of GST will benefit the entertainment sector. Hence, a roadmap for implementation of GST which brings entertainment tax under its ambit would be positive for the sector.

Overall, we expect the Budget to be Neutral for the Media sector.

Metals & Mining

Expected Impact: Neutral

Union Budget 2013-14 is likely to be broadly neutral for the metals and mining sector.

We expect the government to likely lower the export duty on export of low-grade (<55% Fe) iron ore fines which is likely to benefit iron ore exporters such as Sesa Goa and NMDC. Further, the government may raise the duty on import of manganese ore to 5% from the current level of 2%.

We believe fund-raising plans by the government through disinvestment are likely to continue in FY2014. We believe FY2014 budget to likely consider further stake sale in Coal India and divestment of Rashtriya Ispat Nigam Ltd.

Overall, we expect the Budget to be Neutral for Metal companies.

Oil & Gas

Expected Impact: Positive

Rising crude prices have resulted in mounting under-recoveries for oil marketing companies (OMCs), which are expected to be over '166,224cr in FY2013. We expect the budgetary measures to be focused on addressing oil under-recoveries by way of providing clarity on subsidy sharing formula for upstream oil companies. A concrete subsidy sharing formula would provide visibility over earnings of upstream oil companies and hence, it would be positive for them (ONGC, Oil India and GAIL). The government is likely to re-introduce 5% customs duty on import of crude oil which will be positive for Cairn India.

Hence, the Budget is expected to be Positive for the Oil and Gas Sector.

Pharmaceuticals

Expected Impact: Positive

The Union Budget 2013-14 is likely to be positive for the pharma sector. The last budget provided a big boost and consent to the biggest wish list of the industry, ie it approved the proposal to extend weighted deduction of 200% for R&D expenditure in an in-house facility for a further period of five years beyond March 31, 2012.

Going into this Budget, the other demands by the sector are:

a) Incentives for units engaged in the business of R&D or contract manufacturing, b) Incentives for units engaged in the business of R&D and contract manufacturing byway of profit-linked incentives, c) Exemption of income generated from the utilization of IP should also be provided in order to provide an incentive for R&D in India, d) An amendment should be brought into effect that entire expenditure in/for the purpose of an approved R&D facility, which is eligible for weighted deductions and clinical trials carried out in approved hospitals and institutions outside the R&D unit, be covered within the ambit of expenditure eligible for weighted deduction.

Among the other tax incentives demanded is that all life-saving drugs (including medical devices) be exempted from customs duty on import into India.

Apart from these demands, the budget could, however, continue to increase budgetary allocation for healthcare spending.

Overall, we expect the Budget to be Positive for the Pharmaceutical Sector.

Power

Expected Impact: Positive

The Power sector in India is facing many headwinds such as shortage of domestic fuel (both coal and gas), poor financial position of state power distribution companies and delays in land acquisition and forest clearances, among others. However, recent announcements by the Central Government, such as approving imported coal price pooling to tackle domestic coal shortage, and framing of SEB restructuring policy to improve their financial health, have enthused the Power sector.

Some of the anticipated announcements pertaining to the Power sector are :

1) Extension of tax benefits under 80-IA beyond FY2013

2) Budgetary allocation of ,200cr towards restructuring of state power distribution companies Overall, we expect the budget to be Positive for the Power Sector.

Telecom

Expected Impact: Neutral

The telecom sector is currently facing a number of challenges on the regulatory front, relating to spectrum allocation, license fee, spectrum charges, tariffs and M&As.

We expect Budget 2013-14 to be a non-event for the telecom sector as the National Telecom Policy / Spectrum Enactment Act is expected to be announced soon this year, which will address most of the abovementioned issues. The budget could pencil in the expected revenue to be generated from the upcoming auction of 2G spectrum. Last year the government penciled in '40,000cr to be raised through 2G spectrum auction but has been able to garner just ~ '9,400cr till now.

The telecom sector is among the heavily taxed sectors in India, attracting various levies such as license fees and spectrum charges. A uniform tax structure would help in reducing operational costs, in turn increasing profitability, which is highly important right now for telecom companies, which are facing high interest costs and amortization charges. However, the probability of some announcement in this space is highly unlikely in this budget.

Overall, we expect the Budget to be Neutral for the Telecom Sector.