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Strategies & Market Trends : India Coffee House -- Ignore unavailable to you. Want to Upgrade?

To: Mohan Marette who wrote (3811)	2/26/1999 8:41:00 AM
From: Mohan Marette	Read Replies (1) \| Respond to of 12475

Crisil's Impact Analysis : India Union Budget 1999-2000 A Prelude To Budget FEBRUARY 1999 1 Review Of 1998-99 : Key Budget Initiatives A key objective of fiscal policy in a developing economy like India would be to drive economic growth. The initiatives taken in the Budget of 1998-99 were towards this objective. The growth of the economy in 1998-99 was largely at the same level as the previous year. Specific initiatives in different important segments of the economy are covered below : 1.1 Fiscal Deficit Fiscal deficit was targeted at 5.6% of GDP June 1998 Budget announcements Achieved Outlook Indirect tax collections to increase by 17%, direct tax collections to increase by 19% Slippage seen in both excise and import duty collection due to slowdown in the economy and due to reduced import revenues on oil imports Initiatives expected to increase tax revenues despite the current slowdown persisting. Disinvest in specified portions of equity of IOC, GAIL, VSNL and CONCOR announced to net in Rs 50 bn 10% of GAIL, ONGC and IOC proposed disinvested through swaps. Government expects to raise Rs 75 bn through cross holdings. Higher targeting of PSU disinvestments likely to happen. Reduction in Fiscal deficit/GDP ratio to 5.6% from 6.1% in 1997-98 Slippage seen with consequences of increased market borrowings of government, higher fiscal deficit/GDP ratio due to slowdown in revenue collections.Fiscal deficits unlikely to be contained in the near future due to rising interest payments from government borrowings Urea price increase by Rs 1 per kg Rolled back later Government has recently increased PDS price of foodgrains, price of urea and cooking gas to control the subsidy bill. Will reduce subsidies in subsequent years 1.2 Industry Key objective was to provide a boost to industrial growth June 1998 Budget announcements Achieved Outlook Additional Special import levy of 8% to provide protection to domestic companies by putting them on a level playing field Later rolled back to 4% to neutralise subsequent currency depreciation which occurred Increase in import tariffs possible in the short-term in certain commodity sectors facing threat from imports, to WTO committed bound levels. Provides incentives to SSIs with increased loan ceiling limit, lower interest rates on loans with the intention of supporting SSIs which are employment oriented.Slippage in growth of the SSI sector has been recently announced by the Ministry of Industry.Gradual dereservation of SSI industries likely to happen 1.3 Infrastructure : Key objective was to ensure availability of long-term private sector funds and remove procedural bottlenecks and bring about structural reforms in the sector June 1998 Budget announcements Achieved Outlook Plan outlay for key infrastructure sectors of Energy Transport and Communications enhanced by 35%. Outlay for Ministry of Power enhanced by 40% No figures available yet on the amount of actual spending by the government in these sectors. Infrastructure initiatives to succeed requires early resolution of policy issues. Securitisation of SEB dues to Coal India and NTPC by giving government guarantees. No significant progress has been made here.Progress is unlikely in the short term 10% of incremental accretion to provident funds to be invested in private sector infrastructure securities. No major investments by large PFs Funds unlikely to flow in the short term 1.4 Agriculture Key objective was to increase rural incomes and enhance productivity. Input availability, specially in terms of credit needs and farm implements and tools were addressed alongwith marketing and distribution issues. Another objective was to control the excessive use of nitrogenous fertilisers. June 1998 Budget announcements Achieved Outlook Price of Urea was raised by Rs 1 per Kg Later rolled back Price of Urea was recently increased in January 1999 by Rs 0.60/kg. Benefits to flow to government in subsequent years Exclusion of farm implements and tools from the list of items reserved for manufacture by SSI sector, to give farmers a wider range of implements and tools at competitive prices This was achieved only during the last month Benefits to flow to farm sector in future years Watershed development programme allocation stepped up to Rs 6.77 bn from Rs 5.17 bn. Provision for Accelerated Irrigation Benefit Programme enhanced by 58%. Figures on the amount actually spent is not yet available. Further enhancing the flow of public investment in the sector may happen to enhance yield and productivity levels NABARD share capital to be enhanced by Rs 5 bn, Rs 1 bn from government and the rest from RBI NABARD share capital has been enhance by only Rs 1 bn by government, RBI contribution awaited RBI likely to contribute though the benefits would accrue in subsequent years 1.5 FDI/FII And NRI Inflows June 1998 Budget announcements Achieved Outlook SBI RIB scheme Successful in implementation, collected $ 4.16 bn through the scheme Government may introduce such schemes in the event that FDI declines. UTI India Millenium Scheme No progress made on the scheme Likely to be launched in the event capital markets improve Monitoring official to be appointed for monitoring foreign investment proposals exceeding 1 bn and decision on investment proposals within a period of 90 days in order to boost private investment in industry 1.Not much headway made, though the PMO's office does monitor the working of the FIPB 2.FDI inflows in April-Nov, 1998 at $ 1.4 bn compared to $ 2.3 bn in the same period last year FDI initiatives would be largely dependant on early resolution of project clearance policies 1.6 Capital Market and Debt Market June 1998 Budget announcements Achieved Outlook Amending SCRA to introduce derivatives Referred to the Standing Committee on Finance Likely to be taken up in this budget session 1.7 Key Indian Sectors : Prognosis For Budget 1999-2000 Sector Overview Prognosis Petrochemicals Petrochemical prices have fallen by over 50% in the past year. The domestic industry faces strong threat from imports at low prices from East Asia resulting in severe pressure on margins. Current import duty on polymers (40%) is in line with India's commitment to WTO for the year 2000. An interim across the board 5% duty increase for petrochemicals (polymers, fibre intermediates and downstream products) could be expected in the 1999-2000 Union Budget. The hike may be rolled back in the subsequent budget (to ensure compliance with the WTO regime) following an expected strengthening of petrochemical prices, and increased domestic protection resulting from possible depreciation of the rupee. Textiles Sluggish domestic demand and threat from East Asia in the export market has adversely affected the Indian textile sector Man-made fibres continue to attract high excise duty, which constrains demand Indian import duties on fabric and yarn remain high. The developed world has been asking for reduction in these duties in order to facilitate easier access to the domestic market. The excise duty on PFY (currently at 34.5%), and blended yarn (currently at 20.7%) are likely to be reduced by about 5-10%. Protection to the ailing PSF and PFY industry could be increased by raising import tariffs by 5% The import duty on fabric and yarn is likely to be reduced from the current high level of 45%. Automobiles- 4 Wheelers The downturn witnessed in the automobile sector in 1997-98 has continued in 1998-99 also. Car sales declined by around 5% during the period April-December 1998, while sales of commercial vehicles (CV) fell by 21% during the same period. To boost demand and reverse the recessionary trend in the CV industry the government has allowed the full 40% depreciation rate on commercial vehicles purchased between October 1, 1998 and April 1, 1999 irrespective of the number of days for which the vehicle has been used. Further, new commercial vehicles purchased between October 1, 1998 and April 1, 1999, as replacement of scrapped vehicles will be allowed a higher depreciation rate of 60% irrespective of the number of days for which the vehicle has been used. A 5-10% reduction in excise duty on cars is expected in the union budget 1999-2000. This is expected to lead to a cut in car prices and lead to higher demand. No change is expected in excise duties on Commercial Vehicles Sector Overview Prognosis Automobiles - 2/3 Wheelers The two wheeler sector, which had grown marginally at 4% in 1997-98, recovered in 1998-99 to post a growth of 9.9% for the nine months ending December 1998. The motorcycle segment continued to outperform with a growth of 20.9% Three wheeler sales have however declined during the year. The competition in the two wheeler sector would further intensify in the future due to entry of existing players into other segments and launch of new models. The excise rates on 2/3 wheelers are already low at 15-25%. As the two wheeler sector has outperformed the auto industry in recent years, further cuts in excise are not expected. The import duty on two-wheelers is high at 40%. Import duty cuts are also unlikely due to the depreciation of currencies in the South East Asian nations. Software The software industry has exhibited a high compounded annual growth rate of 53.7% over the previous five years. Export income exempt from corporate tax. Zero import duty on software imports. Import of CD-ROM titles including software attract 32% import duty Import of hardware equipment and components attract 20% and 10% import duty respectively. The excise duty for equipment and components are 13% and 18%. Import of capital goods by software export firms under export promotion capital goods (EPCG) scheme at zero duty. (Turnover limit for eligibility reduced from Rs.250 mn. to Rs.1 mn. in the exim policy for 1998-99) A 5% service tax may be imposed. Import duty on hardware equipment may be reduced to meet WTO target of zero duty by 2004. A corresponding reduction in excise duty is also expected. This would help players targeting domestic software market by improving computer penetration. Import of software in CD-ROM could be made duty-free. Fertilizer To encourage consumption of fertilizers, there is no import duty or excise levied on either inputs or products. Government controls the selling price of all fertilizers. As an incentive to produce, fertilizer manufacturers are compensated by the government for selling at lower prices. No increase in import duty or excise duty is expected. Fertilizer pricing is unlikely to change in the context of recent hikes. Sector Overview Prognosis Food Processing Edible oils High imports of edible oils due to a reduction in import duties to 15% have made crushing and refining operations in the Solvent Extraction sector unviable. Further, a duty structure of 40% on oilseeds and 15% on refined oil has led to lower value added in the industry. Other branded food products The budget is likely to increase excise duties on branded FMCG products in an attempt to increase indirect tax revenues The import duty on refined oils may be hiked following the fall in domestic edible oil prices. Further, the government is likely to initiate steps towards quantitative restrictions on oilseed imports. Other products like Chocolates, Food drinks (other than those for infants) and branded culinary products like sauces and ketch-up are expected to witness a hike in excise duties. Consumer Electronics In an attempt to increase revenues, the finance minister is likely to increase excise duties on consumer electronics items. Excise duties on CTVs is likely to be increased from the existing basic duty of 18%. Further, the budget is likely to classify CTVs as premium products. The expectation of classification of CTV as a premium product may be accompanied by a re-classification of AC's, Refrigerators and washing machines as premium products. Steel Global steel prices have fallen to 15 year lows and the import threat was countered in 1998-99 by the administered import floor prices for prime and second grades besides an antidumping duty on imports from CIS. Excise duty of 15% contributes significantly to the government revenues and a reduction is unlikely to induce demand for a basic good like steel. Seven inputs were exempted from special and additional import duties in November 1998 to reduce material costs. Proposal for the grant of infrastructure status to the sector awaits MoF clearance. Sluggish growth in end use sectors has impacted industry prospects in 1998-99. The administered prices have weakened the linkage between global and local prices. While merchant cold rollers have sought a reduction in these floor price, these are expected to be reviewed only in end 1999 and not in the Budget. The problems in 1998-99 continued to be the sluggish demand and not excessive imports. Import duties on steel are unlikely to be raised. Duty reduction unlikely in the Budget as the GoI is expected to seek additional revenue streams to contain the fiscal deficit. Duty exemptions likely to remain in the 1999-2000 Budget in line with the recommendations of the working group set up by the GoI Likely benefits include tax benefits on losses carried forward, lower borrowing costs and flexibility to access foreign funds. Very few companies have the ability to access foreign loans and investor interest in sector has waned in line with adverse demand supply balance. The said grant is not expected to be provided. Budget incentives to sectors such as housing, infrastructure and capital goods and measures to implement the same are expected to induce steel consumption. Sector Overview Prognosis Telecom Basic and Cellular telecom services opened up to private sector players. But penetration has been limited due to lower than anticipated demand. The 1998-99 budget had included Rs. 28 bn. as non-tax revenue receipts as license fee payments from basic and cellular operators. Most private operators are faced with cash losses and are finding it difficult to meet the license fee commitments made by them. Custom duty on import of capital goods including project import retained at 20%. Import of capital goods excluded from the 4% additional duty levied during the 1998-99 budget. The special import duty has been reduced from 5% to 2%. There is a 30% import duty on telecom equipment and 20% duty on import of telecom equipment parts. Full exemption has been granted to import of software for telecom projects. Import duty on import of general telecom software has been reduced from 40% to 30% during the 1998-99 budget. Five year tax holiday and a 30% deduction in the subsequent three years. As the draft telecom policy recommends a revenue sharing arrangement in lieu of the existing fixed license fee mechanism, it is possible that the budget may provide for lower revenue receipts from the telecom sector as compared to the 1998-99 budget. However, the final decision regarding the license fee arrangement would be taken only after the finalisation of the new telecom policy. Other incentives provided to the sector are expected to be retained. Power The initiative to add power generating capacity through private sector participation has met with limited success. Central sector utilities like NTPC were the major contributors to capacity addition in the Eighth Plan period. In order to expedite investments in power projects, an increase in Budgetary outlay for central sector power utilities could be expected. The increased investments in power projects would also improve demand for capital goods. 1.8 Capital Markets Sector Overview Prognosis Equity Markets Disclosure norms strengthened - Quarterly reporting mandatory Increasing corporatisation of Intermediaries Transparent clearing and settlement systems with counter party risk guarantee Compulsory Demateralisation of increased number of securities Introduction of rolling settlement in depository trades FIIs allowed to hedge forex exposure by taking forward cover Warehousing of trades permitted Introduction of Securities lending scheme Issuance of Non Voting Shares permitted Equity Buyback Allowed 1.Norms for Equity Buy-Back likely to be relaxed. 2.Tax benefits likely to be announced on investment in shares of infrastructure companies. 3.Dealing through Depository might be made more attractive by giving incentives like waiver of stamp duty on Dematerialization. 4.SCRA likely to be amended for commencement of Derivatives trading Debt Markets FIIs allowed to set up 100% debt funds & invest in Dated Govt. Securities Interest rate swaps allowed Primary and Satellite Dealers setup to impart additional liquidity in secondary market Norms on Provident Fund Investments further liberalised to include investments in AAA/AA rated corporate debt. 5.Indexation benefits likely for fixed income instruments in line with equity instruments 6.More sectors likely to be eligible to issue tax-free bonds. 7.Steps towards rationalisation of stamp duty structure expected foe enhancing trading in secondary markets 8.The salary ceiling applicable for compulsory coverage of provident fund likely to be raised. 9.The investment norms applicable to Provident funds and Pension Funds likely to be further liberalised with additional 5-10% of incremental money allowed to be invested in Equity markets Mutual Funds Allowed to invest in offshore markets Introduction of stock lending scheme Guidelines on standard disclosures and uniform valuations Strict guidelines on investment in group companies and dealing with associated firms 10.The limit of Rs 10,000 on investments in ELSS schemes for claiming tax benefits under sec 88 likely to be raised. 11.Dividend paid by Mutual Funds likely to be made tax-free in line with dividend payouts by corporates 12.Limits for tax benefits under Sec 80 L likely to be raised to encourage investment through Mutual Funds.