India Strategy | Economics

1 March 2012

India Budget 2012

FY13 Budget: Burdened with hope
Uncannily, the Union Budget this time around is burdened with expectations from the industry, the street and the aam admi alike. Mr Pranab Mukherjee has the onerous task (once again!!!) to resurrect growth amidst uncertainties in the macros set-up and policy environment both globally and locally. We believe that there are low chances of a game changer of a budget given the weak macros and political compulsions of the ruling UPA. We believe that budget 2012 will be centered on the following themes: 1. 2. 3. 4. 5. Striking a mix of expenditure restructuring and fiscal consolidation Inclusive growth through centrally sponsored schemes like MNREGA A step towards taxation reforms: DTC and GST Stimulating the investment cycle Focus on reviving infrastructure and power sectors
yoy grow th

Exhibit 1: An impending slowdown ahead

10.0 8.0 (%) 6.0 4.0 2.0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
2010

Global Markets Research

Source: CMIE, Bloomberg, Elara Securities Research

Exhibit 2: needs the Union budget to focus on revival of the investment cycle
20

We believe that the government will target a fiscal deficit of ~5% over FY13E compared to 5.6% for FY12E (initially budgeted at 4.6%). The calculation is subject to balance sheet jugglery of deferment of a part of subsidies bill to next fiscal. The budget will work on real growth of ~7.1% and inflation of around ~6.5-7%, implying a nominal growth of ~14%. We believe that the sharp deterioration in fiscal health will take few years to mend. The transition to FRBM has to be in a phased manner rather than by setting up an ambitious and unrealistic target like in the current fiscal. We estimate the gross borrowing of the Centre at INR5.3tn. Post the announcements of the borrowing programme coupled with signs of fiscal consolidation and monetary easing, the yields should stabilise in ~8.0% range. Subsidies hold the key: Even as the finance minister has made some strong comments on the fallout of rising subsidy bill, it remains to be seen if words are converted into action. The union budget to be presented on March 16 could be the last serious attempt at fiscal consolidation ahead of LS elections due in May-14. The level of subsidy restructuring and timing the introduction (and extent) of food subsidy bill are key events to watch out for. Fiscal consolidation to trigger monetary easing: The central bank will keenly track the governments borrowing requirements and fiscal consolidation which will determine its monetary policy in these uncertain times. The RBI stance is now in favour of growth, though it maintains that inflationary risks persist in the economy. We maintain our stance that on March-15th, the central bank will cut the CRR by 50bps but the first cut (probably a token one) could only be seen in the April meet of the central bank. Unlike the aggressive cuts seen in 2008, we foresee a total 100bps cut in policy rates over FY13E. Sector wise expectations: Our in-house analyst team expects the budget to lay down a flurry of measures for the revival in infrastructure capital spending. Power equipment import duties are unlikely to be hiked in the current budget given limited ability of government to pass on tariff hikes. Government is unlikely to deviate much from its social schemes which will ensure that consumption will continue to hold steady. However, consumer discretionary in form of two wheelers and four wheelers will suffer from the governments effort to raise revenue and target diesel subsidy accurately.

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10

15

2000

2002

2004

2006

2008

Source: CEIC, Elara Securities Research

Exhibit 3: A step towards consolidation could be seen

(% to GDP) Center Fiscal Deficit State Fiscal Deficit Inter-government adjustments Combined Deficit Off-budget expenditures Overall Fiscal Deficit FY08 2.5 1.7 (0.1) 4.1 0.8 4.9 FY09 6.0 2.5 (0.1) 8.4 1.6 10.0 FY10 6.4 3.0 (0.1) 9.3 0.2 9.5 5.1 2.7 0.0 7.8 0.6 8.4

fiscal

FY11 FY12E FY13E 5.6 2.4 0.0 8.0 0.9 8.9 5.1 2.5 0.0 7.6 1.1 8.7

Source: Various Research

Budget

documents,

Elara

Securities

Exhibit 4: added by of some subsidy restructuring

3 (% to GDP ) 3 2 2 1 1 0 FY12E FY12BE FY13E FY07 FY08 FY09 FY10 FY11

Food Subsidy

Fertilized Subsidy

Fuel Subsidy

Source : India Budget, Elara Securities Research

Ashish Kumar ashish.kumar@elaracapital.com +91 224062 6836

Elara Securities (India) Private Limited

2013

India Budget 2012

FY12 Budget Preview: Not a Game Changer
The union budget 2012 is coming at a time when the government is caught in an unenviable mix of slowing growth, worsening fiscal, poor governance and a weak currency. Add to that rising crude prices amidst unabated global worries and the Indian economy has a perfect recipe for a slowdown. In this perspective, the union budget 2012 is burdened with huge expectations from market participants and policymakers alike. The budget to be presented on March 16 could be the last serious attempt at fiscal consolidation as LS elections are due in May 2014 and the intervening budget in Feb13 (and a vote on account in Feb-14) are expected to be populist as suggested by trends. Even as the finance minister has made some strong comments on the fallout of rising subsidy bill, it remains to be seen if words are converted into action. The key question is whether the finance minister can deliver a game changer of a budget-- aiming at raising revenues and lowering expenditure that could lead to lower fiscal deficit, simultaneously giving an impetus to ailing infrastructure and power sector (key to the growth revival in future). From the perspective of political economy, we don't think the government could maneuver the finances to a great extent. Factors that led to slippages on the fiscal side in FY12 are likely to persist over FY13 if credible actions are not taken on fiscal consolidation. Even as the government has run out of choices on revision of fuel prices (expected post assembly elections), the resulting savings could largely be offset by an early implementation of the Food Security Bill. These together with the restructuring of SEBs losses are key events to watch out for in budget 2012. With the CSO forecasting 6.9% growth (AE) for FY12E and inflationary risks restraining the central bank from monetary easing, these are desperate times for policymakers in New Delhi. Meanwhile, the INR 928bn additional borrowing announcement led to sharp jump in the yield curves over Q3FY12 and the central bank had to step in with open market operations (OMOs) to buy back government bonds. Expectedly, the central bank will need to track the federal borrowing requirements and fiscal consolidation measures before embarking on rate cuts as a rising fiscal deficit has inflationary implications. In this backdrop, fiscal consolidation is one of the key triggers for a growth revival. Having said that, the political compulsions of the ruling UPA will mean that the extent of consolidation could be marginal, even if there is intent. And with this, market's skepticism about the centre's will on fiscal consolidation will get vindicated. Exhibit 5: Growth threshold lowered
10.0 8.0 (%) 6.0 4.0 2.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: CMIE, Bloomberg, Elara Securities Research

Exhibit 6: amidst discussions of growth inflation trade-off

14 12 (YoY Growth) 10 8 6 4 2 0 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Real GDP growth
Source: CMIE, Bloomberg, Elara Securities Research

WPI Inflation

Exhibit 7: Aggressive monetary policy over FY12

12.0 10.0 8.0
(%)

6.0 4.0 2.0 0.0

Jul-08 Jul-09 Jul-10 Apr-08 Apr-09 Apr-10 Apr-11 Jan-09 Jan-10 Jan-11 Jul-11 Oct-08 Oct-09 Oct-10 Oct-11 Jan-12
5.1 2.5 0.0 7.6 1.1 8.7

(2.0)

Repo rate
Source: OEA, Elara Securities Research

WPI

Exhibit 8: Fiscal deficit will miss the budgeted target by ~100bps in FY12
(% to GDP) Center Fiscal Deficit State Fiscal Deficit Inter-government adjustments Combined Deficit Off-budget expenditures Overall Fiscal Deficit FY08 2.5 1.7 (0.1) 4.1 0.8 4.9 FY09 6.0 2.5 (0.1) 8.4 1.6 10.0 FY10 6.4 3.0 (0.1) 9.3 0.2 9.5 FY11 FY12E FY13E 5.1 2.7 0.0 7.8 0.6 8.4 5.6 2.4 0.0 8.0 0.9 8.9

Note: Off budget include Oil, food and fertilizer subsidy. Crude prices assumed at USD 102.5/bbl Source: Various Budget documents, Elara Securities Research

Elara Securities (India) Private Limited

India Budget 2012

We have estimated the fiscal deficit of FY12E at 5.6% of GDP against the budgeted 4.6%, mainly on the back of low budgeting of subsidies and unrealistic revenue targets in a year when the Indian economy showed distinct signs of a slowdown. Assuming oil subsidies are not (partially) rolled over into FY13, the current mix of macro signals suggest that our fiscal deficit targets for FY12 might actually turn out to be a conservative estimate. weakness in the capex cycle. It will depend a lot on the emerging political environment post the assembly election that could unleash the next wave of reforms over FY13. But such a counter-cyclical push requires an aggressive policy with a strong centre. Some actions are already taking place at the Prime Minister's Office (PMO) but sustainability remains the key. We believe that some key pending reforms like mining bills, GST and FDI in multi brand retail could see the light of the day that could revive the capex cycle if the assembly results favour the ruling UPA.

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Indian economy has shown early signs of a slowdown in FY12. The macro environment was largely driven by a monetary policy that remained hawkish on the inflationary spiral. This sharp trade-off between inflation and growth resulted in a significant sacrifice on the growth part. The ensuing industrial slowdown amidst weakening investment climate created major hindrances to growth. Amidst rising global uncertainties and a flight to safety, the domestic currency depreciated to an alltime low which incidentally was the highest amongst all emerging markets. We believe domestic factors are not supporting an inflexion in growth cycle even as global environment remains turbulent. The expansionary policies of the government which were employed to revive the economy after the 2008 credit crisis, fuelled consumption without creating adequate capacities into the system. The ensuing demand pressures in the economy resulted in a headline inflation that is over 5% for 24 months in a row. A consumption led growth is not sustainable in the medium to long run as it fuels inflation and raises the risks of twin deficits in the economy. In this context, any measure that will boost the consumption (through fiscal or monetary easing) in budget could pose inflationary risks by reviving the demand pressures amidst capacity constraints in the economy. Running a fiscal deficit is not bad as long as it is used to create capacities into the system. The problem in the Indian case however is that deficits usually finance the unnecessary subsidies and populist schemes. This phenomenon is too strong to be overcome in a short period of time. In this backdrop, the government has to shift focus from consumption to investment and design policies that will revive the investment cycle in the economy. We believe that under present circumstances, the fiscal policy (through the budget) has a greater role to play (than the monetary policy) to boost investments in the economy as investment cycle remains key to next leg of growth. An aggressive monetary easing is impossible if the central bank sees consumption led demand pressures emerging in the economy which in turn will mean prolonged

100 75 (%) 50 25 0 (25) 2005 2006 2007 2008 2009 2010 2011 Consumption Government Investments Net Exports

Source: CMIE, Elara Securities Research

Exhibit 10: and the focus has to shift to reviving investment cycle
20

yoy growth

10

15

2000

2002

2004

2006

2008

2010

Source: CMIE, Bloomberg, Elara Securities Research

Expenditure restructuring is the key

In this context, we expect a growth recovery in H2FY12 subject to policy commitment added by a monetary easing in early FY13 and a stable global environment. The budget will work on a real growth of ~7.1% and an inflation of around ~6.5-7%, implying nominal growth of ~14% (we estimate nominal growth at 14.3% on the back of 6.8% real growth and 7.5% inflation). We believe that the sharp deterioration in fiscal health will take some time to mend. The transition to FRBM has to be in a phased manner rather than an ambitious and unrealistic move like in the current fiscal. The phenomenon of large expenditure and higher subsidy bill amidst a slowing revenue growth has distorted all fiscal calculations. In
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Economics

Macro outlook calls for credible fiscal measure

Exhibit 9: Consumption led growth is not sustainable in medium to long run

India Budget 2012

this context, the budget has to aim not only at reducing the fiscal deficit but also restructure the expenditure patterns in a way that puts investments on priority. Exhibit 11: Trends in revenue expenditure suggest
% of Revenue Expenditure FY05 FY06 FY07 FY08 FY09 FY10 FY11RE FY12BE Interest Defense Payments Expenditure 42.8 40.5 40.4 40.6 34.4 32.4 33.1 36.5 14.8 14.7 13.9 12.9 13.1 13.8 12.5 13.0 Other Subsidies allocation Expenditure 15.5 14.5 15.3 16.9 23.2 21.5 22.6 19.6 27.0 30.3 30.4 29.6 29.3 32.3 31.8 30.9

Exhibit 13: Expenditure on government welfare schemes could remain at similar levels in FY13
(INR bn) Mahatma Gandhi National Rural Employment Guarantee (NREGA) Swarnajayanti Gram Swarozgar Yojana (selfemployment for rural poor) DRDA (District Rural Development Agency) Administration Rural Housing Pradhan Mantri Gram Sadak Yojana (Rural roads) Grants to National Institute of Rural Development Council for Advancement of People's Action and Rural Technology PURA (Provision of Urban Amenities in Rural Areas) Management support to Rural Development Programmes BPL (Below Poverty Line) Census Non-Plan Total: Department of Rural Development FY08 FY09 FY10 FY 11BE 401 FY 12BE 400

163

375

391

17

23

24

30

29

3 39 65 0 1 1 0 288

3 88 78 0 1 1 0 569

3 88 120 0 1 0 1 0 627

4 100 120 1 1 1 1 2 0 661

5 100 200 1 1 1 1 3 0 741

Source: India Budget, Bloomberg, Elara Securities Research

We believe that the government will target a fiscal deficit of around 5% over FY13E compared to 5.6% for FY12 (initially budgeted at 4.6%). Some key movers of revenue will be a 200bps rise in central excise across the board and expanding the ambit of services tax. However, the government may find it difficult to raise taxes in light of the weak macro environment and weak business confidence among private investors. Exhibit 12: impending subsidy restructuring
3 3 (% to GDP ) 2 2 1 1 0 FY07 FY08 FY09 FY10 FY11 FY12BE FY12E FY13E

Source: Various Budget documents, Elara Securities Research

The performance of the UPA on fiscal consolidation has not been as bad. Over the past six years, it will only be second time (in FY09, it floated an expansionary fiscal policy aimed at reviving the economy in the backdrop of the global credit crisis) when the government will not be able to meet its projected deficit target. Obviously the key to fiscal consolidation lies in implementation rather than mere announcements. Exhibit 14: Credibility of UPA on fiscal deficit targets
8.0 6.0 4.0 2.0 0.0 FY08 FY09 BE FY10 FY11 FY12E Actuals/RE 3.3 2.5 2.5 6.0 6.8 6.4 5.5 5.1 5.6 4.6

Food Subsidy

Fertilized Subsidy

Fuel Subsidy (% to GDP )

Source: India Budget, Elara Securities Research

On the expenditure side, review of subsidy allocation and expenditure restructuring hold the key. A full decontrol of existing subsidised items is neither advisable nor feasible (as it will create high inflationary risks in the short run) but a sustained road map that will aim at reducing (1) non-merit subsidy and (2) leakages in the governments welfare schemes, is prudent. This is critical to ensure that private corporate capex is revived in addition to containing the aggregate demand pressures and thus inflationary risks in the economy.

Source: Various Budget documents, Elara Securities Research

Elara Securities (India) Private Limited

India Budget 2012

Borrowing programme and bond yields
Exhibit 15: Negligible rise in market borrowing seen over FY13
5,500 5,000 4,500 (INR bn) 4,000 3,500 3,000 2,500 2,000 FY10 FY11 FY12E FY13E Net market borrowings
Source: India Budget, Elara Securities Research

Repayments

Over FY12, the government has already borrowed INR5.1tn from the market against the budgeted target of INR4.2tn which put a lot of strain on bond yields over Oct-Dec 2011 until RBI intervened and conducted large OMOs (~INR 1000 bn) that helped stabilise the yields. We believe that the market borrowing over FY13 will be largely similar to FY12, around INR5.3tn assuming a fiscal deficit of 5.1% is achieved. The gross market borrowing will however be similar to FY12 if the state fiscal deficit stabilises at 2.5% (of GDP). The financing will not be an issue with growth in bank deposits, insurance and pension funds. The government could also go for a further relaxation in foreign investment in government bonds. As far as bond yields are concerned, they remain artificially low as of now due to heavy OMOs. Post the announcements of the borrowing programme coupled with signs of fiscal consolidation and monetary easing, yields should stabilise in ~8.0% range over FY13E.

Risks to our expectations

We continue to maintain that assembly elections results hold the key to the fiscal consolidation. The downside risks will emanate from a defeat of ruling UPA in majority of assembly elections that will force the government to go soft on subsidies restructuring (food, fuel and fertilisers alike) and raise expenditures on MNREGA and an early implementation of the Food Security Bill that in turn will bloat the deficit further. Add to that rising crude prices and a weak growth scenario and the situation could get worse. A second scenario where the government can make an impact is through passthrough of oil prices and other subsidy restructuring and revive the sentiments in the economy by unleashing reforms that will aid (1) greater buoyancy in tax revenues (2) raise receipts by meeting the disinvestment targets and 2G auction.

What does a large fiscal deficit mean for India?

Exhibit 16: Gross government liabilities has been declining on the back of high nominal growth
65

Sectoral expectations
Construction, Infrastructure abhinav.bhandari@elaracapital.com Tax exemption under section 80CCF for investments up to INR20,000 in infrastructure bonds is expected to be doubled or raised even further, with a need to infuse additional liquidity to fund the ambitious investment target of USD1tn envisaged for the XII plan. Approval to issue tax free bonds worth at least INR300bn to various government undertakings in FY13 (primarily railways, PFC & NHAI).

(% to GDP)

55

45

35 FY12E FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Source: CMIE, Bloomberg, Elara Securities Research

Final approvals to financial institutions like IIFCL, ICICI etc. to go ahead with their respective Infrastructure Debt Fund proposals. IIFCL disbursements target to be raised.
5 5

Economics

Even as a large fiscal deficit is a serious concern for an emerging economy like India, the fact that it is largely financed domestically means that it is not a sovereign issue. The government bonds have a captive demand from banks, insurance and pension funds. The domestic economy funds its own deficit and chances of a large scale selling by overseas participants are small. However, cut to present circumstances, a large fiscal deficit results in a high aggregate demand in the economy that has inflationary implications and significant spillover to the current account deficit. This in turn puts pressure on the monetary policy to firefight inflation even as loose fiscal policy means rising bond yields. In such a scenario, private sector funding is crowded out by government borrowing and kills much needed capacity creation in the economy. In the unforeseen circumstance of a global shock, there is little scope for maneuvering.

India Budget 2012

Due to high global price and shortage of domestic coal, steps in the direction of easing the import duty over coal to support power generation companies and infrastructure utilities may be taken. At present, there is 5% customs duty on non-coking coal and 1% excise duty. Corpus of Rural Infrastructure Development Fund (RIDF) expected to be raised from INR180bn to INR200bn. Pertinent issues relating to execution and ministries complying with annual targets need to be addressed. Hike in annual corpus of development schemes like Bharat Nirman, JNNURM and RGGVY. Any further hike in MAT rates could be materially negative for asset owners which are already reeling under the high interest rate burden. Continuation of full exemption from basic customs duty to bio-asphalt and specified machinery for construction of national highways; parallel excise duty exemption for domestic suppliers producing capital goods for expansion of existing mega/UMPP power projects expected to continue as well. Oil & Gas alok.deshpande@elaracapital.com Excise duty cuts in Jun11 might be rolled back as the government looks for more revenue avenues and this impact might be equivalently offset through a diesel retail price hike, leaving the under-recoveries and OMCs unaffected. Extension for eligibility dates for 7-year tax holidays for new refineries under construction. Beneficial for IOC as it is setting up the greenfield 15MMT refinery in Paradip. Impact: If the excise duties on diesel are rolled back and if the government doesnt implement a price hike to offset the impact, it can be a huge short term negative for OMCs. However, eventually the impact may be borne by the government and upstream players for the added under-recovery. Further, it would be interesting to see the governments view on implementing a duty on purchase of diesel vehicles and how these will be routed to eventually offset the diesel under-recoveries.

Consumption anand.shah@elaracapital.com Specifics Excise hike of ~10% in cigarettes (Impact partially ve for ITC but discounted, anything higher would impact stock, however ITC well placed to pass on the same via price hikes) Excise cut roll back by ~200bps (from 10% to 12%) would impact margins. However, expect most companies to pass on the same to consumers negating any material impact Macro positives Any increase in budgetary allocations for agriculture/farmers or implementation of food security bill Change in tax slabs any increase leading to higher disposable incomes Clarity on roadmap for implementation of GST Automobiles mohan.lal@elaracapital.com Excise duty hike on diesel vehicles Excise duty hike from 10% currently to 12% for small passenger cars, three wheelers and two wheelers Impact Excise duty hike on diesel vehicles will be negative for M&M, Tata Motors and Maruti, in that order. Negative impact can be reduced if the excise hike is 2-5% as it can be passed on without severely impacting the demand for diesel vehicles. Maruti may indirectly benefit from it too, if the demand for passenger cars shifts back to petrol models due to price hikes in diesel models, as it has strong petrol model portfolio If the overall excise duty is hiked from 10% to 12%, it would be negative for the sector as a whole, as, if passed on, it could mute the already modest demand sentiments. If the players choose not to pass or partially pass the hike, then two wheelers players will be least impacted as they derive significant production from excise free zones and thus pay the lowest excise rates (6-7% as compared to 9-10% for four wheeler manufacturers). Absorption of excise hike, thus would be least margin dilutive for two wheeler players v/s four wheeler players.

Elara Securities (India) Private Limited

India Budget 2012

Banking and Financial parees.purohit@elaracapital.com On the macro front: A prudent fiscal budget and borrowing programme will facilitate price stability and liquidity of the g-sec market Sector specific: Commitment to capitalise PSU banks in the run up to Basel III conformation Firm guidelines and intent on issuing fresh bank licenses Passing of Insurance Bill, enabling insurance companies to increase foreign ownership to 49% Tax code change with respect to increasing eligibility amount of long term deposits under Section 80C. Other: Policy reforms in power sector, and infrastructure, which will improve financial viability and assurance of project completion. This will influence extent of restructuring required by banks, improve overall asset quality and improve scope for further bank lending. Information Technology pralay.das@elaracapital.com Even though there is a persistent buzz about removal/lowering of MAT on SEZs, given the tight fiscal conditions, we believe it is unlikely. We expect clarification on taxation norms for the onsite portion of revenue to clear IT claims on technology services firms. Metals ravindra.deshpande@elaracapital.com Possible increase in import duty of steel to 10% from 5% (doesnt materially affect Indian steel producers as pricing is not aligned to import parity prices). Increase in base rate of excise duty (negative for the industry as ability to pass on increase for ferrous players remains questionable). Nothing material expected for the non-ferrous sector. Cement ravindra.deshpande@elaracapital.com ravi.sodah@elaracapital.com Excise duty for cement may be hiked. (Neutral for the industry as any increase in excise is likely to be passed on by the industry due to strong seasonal demand).

Increase in outlay for infrastructure projects could impact cement demand favourably. Tours and Travels sumant.kumar@elaracapital.com Service tax exemption is expected on tour operator's foreign exchange earnings Increase service tax abatement to 90% for domestic tour operators Export industry status to tourism

Uniform state luxury tax at 5%. Infrastructure status for hotels and convention centres. Pharmaceuticals surajit.pal@elaracapital.com Seldom do we expect any significant benefit for pharmaceutical sector as the budget does not venture into specifics for the pharmaceutical sector except social schemes/plans targetting BPL families. Majority of the policies which impact the manufacturing sector, apply to the pharmaceutical sector. We, however, expect a few specific policies targetting the pharmaceutical sector: Rise in excise duty, which is expected across the board would impact pharmaceutical sector, especially API (active pharmaceutical ingredients) producers in India (this would directly impact all domestic pharmaceutical companies and some MNC pharmaceutical companies as their low value products are often produced through contract manufacturers) Rise in import duty (this would decrease profitability of MNC pharmaceutical companies as majority of high value/lifestyle drugs/patented drugs are imported. Domestic pharmaceutical companies would benefit from rise in import duty as it could increase competitiveness of their drugs and encourage more contract manufacturing business to replace import drugs) Corporate tax rate increase: This would impact the sector overall as tax outflow will impact net profit. Increase in tax benefits rate for R&D expenses: To encourage more clinical trials and fundamental research in NCEs/NBEs, industry expect more tax benefits from the current 150% of capital R&D expenses. This would benefit R&D focussed companies such as Biocon, Glenmark, Dr Reddys Lab, Lupin, Sun Pharma Advance Research, Piramal
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Economics

Domestic airfares- Taxes on ATF expected to be revisited

India Budget 2012

Healthcare etc. Hike in tax benefits would also encourage CROs (clinical research organisation) such as Suven Pharma, Vimta Labs etc as well as MNC CRO companies to expand Indian research and clinical trials. Overall, this would expand CRO segment in India. Rise in governments welfare schemes for polio and other epidemic diseases: This would benefit vaccine producers such as Panacea Biotech, Pfizer and Glaxo Pharmaceuticals. While additional funds would encourage more vaccine production in India, we believe that market cap of pharmaceutical companies would increase marginally as major beneficiaries are private companies in vaccine and ATM (Anti-TB and Malaria) segment.

Power koushik.vasudevan@elaracapital.com Reduction of customs duty on imported coal expected which currently stands at 5%. Power equipment import duties are unlikely to be hiked in the current budget given limited ability of government to pass on tariff hikes. Tax sops for setting up power projects based on renewable energy expected to continue.

Elara Securities (India) Private Limited

India Budget 2012

Exhibit 17: Government of India Accounts
(INR bn) FY11RE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Revenue Receipts Tax Revenue (net to centre) Non-Tax Revenue Capital Receipts (5+6+7) Recoveries of Loans Other Receipts Borrowings and other liabilities Total Receipts (1+4) Non-Plan Expenditure Revenue Account Interest Payments Defense expenditure Subsidies of which Food Fertilizer Fuel Others Subsidies 17 18 19 20 21 22 23 24 25 26 27 MNREGA Capital Account Plan Expenditure On Revenue Account On Capital Account Total Expenditure (9+19) Revenue Expenditure (10+20) Capital Expenditure (18+21) Revenue Deficit (23-1) Fiscal Deficit (22-1-5-6) Primary Deficit (26-11) 7,838 5,637 2,201 4,327 90 227 4,010 12,166 8,216 7,267 2,408 907 1,641 606 550 384 101 401 948 3,950 3,269 681 12,166 10,537 1,629 2,698 4,010 1,602 FY12BE 7,899 6,645 1,254 4,678 150 400 4128 12,577 8,162 7,336 2,680 952 1,436 606 500 236 94 400 826 4,415 3,636 779 12,577 10,972 1,606 3,073 4,128 1,448 FY12EE 7,460 6,310 1,150 5,875 150 300 5,425 13,335 8,870 8,150 2,680 952 2,480 780 950 650 100 400 720 4,136 3,636 500 13,006 11,786 1,220 4,326 5,096 2,416 FY13EE 8,750 7,500 1,250 5,801 150 300 5,351 14,551 10,025 9,175 2,950 1,050 2,450 1,100 800 450 100 400 850 4,450 3,700 750 14,475 12,875 1,600 4,125 5,275 2,325 FY11RE 10.2 7.3 2.9 5.6 0.1 0.3 5.2 15.9 10.7 9.5 3.1 1.2 2.1 0.8 0.7 0.5 0.1 0.5 1.2 5.1 4.3 0.9 15.9 13.7 2.1 3.5 5.2 2.1 (% to GDP) FY12BE 8.8 7.4 1.4 5.2 0.2 0.4 4.6 14.0 9.1 8.2 3.0 1.1 1.6 0.7 0.6 0.3 0.1 0.4 0.9 4.9 4.0 0.9 14.0 12.2 1.8 3.4 4.6 1.6 FY12EE 8.2 7.0 1.3 6.5 0.2 0.3 6.0 14.7 9.8 9.0 3.0 1.0 2.7 0.9 1.0 0.7 0.1 0.4 0.8 4.6 4.0 0.6 14.3 13.0 1.3 4.8 5.6 2.7 FY13EE 8.4 7.2 1.2 5.6 0.1

5.2 14.0 9.7 8.8 2.8 1.0 2.4 1.1 0.8 0.4 0.1 0.4 0.8 4.3 3.6 0.7 14.0 12.4 1.5 4.0 5.1 2.2

Source: India Budget, Elara Securities Research

Economics

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Elara Securities (India) Private Limited Disclosures & Confidentiality for non U.S. Investors
The Note is based on our estimates and is being provided to you (herein referred to as the Recipient) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this information. Elara or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Elara or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is subject to change without any prior notice. Elara or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Elara is under no obligation to update or keep the information current. Neither Elara nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private Limited / the company.

Disclaimer for non U.S. Investors

The information contained in this note is of a general nature and is not intended to address the circumstances particular individual or entity. Although we endeavor to provide accurate and timely information, there can guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the No one should act on such information without appropriate professional advice after a thorough examination particular situation. of any be no future. of the

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Elara Securities (India) Private Limited Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it should not be relied upon as such. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investors currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Certain statements in this report, including any financial projections, may constitute forward-looking statements. These forward-looking statements are not guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these forward-looking statements and financial information.

Global Markets Research

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Elara Securities (India) Private Limited

India
Elara Securities (India) Pvt. Ltd. Kalpataru Synergy,6th Level,East Wing, Opp Grand Hyatt, Santacruz East, Mumbai 400 055, India

Europe
Elara Capital Plc. 29 Marylebone Road, London NW1 5JX, United Kingdom

USA
Elara Securities Inc. 477 Madison Avenue, 220, New York, NY 10022, USA Tel:212-430-5870

Asia / Pacific
Elara Capital (Singapore) Pte.Ltd. 30 Raffles Place #20-03, Chevron House Singapore 048622

Tel : +91 22 4062 6868

Tel : +4420 7486 9733

Tel : +65 6536 6267

Harendra Kumar
Sales Anuja Sarda David Somekh Nikhil Bhatnagar Samridh Sethi Amit Mamgain Himani Singh Prashin Lalvani Saira Ansari Sales Trading & Dealing Ananthanarayan Iyer Dharmesh Desai Manoj Murarka Vishal Thakkar

Managing Director
London New York New York New York India India India India India India India India +44 77 3819 6256 +1 646 808 9217 +1 718 501 2504 +1 718 300 0767 +91 98676 96661 +91 99875 56244 +91 9833477685 +91 98198 10166 +91 98334 99217 +91 98211 93333 +91 99675 31422 +91 98694 07973

harendra.kumar@elaracapital.com

+91 22 4062 6871

anuja.sarda@elaracapital.com david.somekh@elaracapital.com nikhil.bhatnagar@elaracapital.com samridh.sethi@elaracapital.com amit.mamgain@elaracapital.com himani.singh@elaracapital.com prashin.lalvani@elaracapital.com saira.ansari@elaracapital.com

+44 20 7299 2577 +1 212 430 5872 +1 212 430 5876 +1 212 430 5873 +91 22 4062 6843 +91 22 4062 6801 +91 22 4062 6844 +91 22 4062 6812

ananthanarayan.iyer@elaracapital.com +91 22 4062 6856 dharmesh.desai@elaracapital.com manoj.murarka@elaracapital.com vishal.thakker@elaracapital.com +91 22 4062 6852 +91 22 4062 6851 +91 22 4062 6857

Research Abhinav Bhandari Aliasgar Shakir Alok Deshpande Anand Shah Ashish Kumar Henry Burrows Koushik Vasudevan, CFA Mohan Lal Pankaj Balani Parees Purohit Pralay Das Ravi Sodah Sumant Kumar Surajit Pal Mona Khetan, FRM Pooja Sharma Stuart Murray

Analyst Analyst Analyst Analyst Economist Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Associate Associate Associate

Construction, Infrastructure Mid caps Oil & Gas FMCG, Paints & Agri Derivative Strategist Power & Utilities Media , Automobiles Derivative Strategist Banking & Financials Metals & Cement Cement Travel & Hospitality, Mid caps Pharmaceuticals, Real Estate Strategy Automobiles Oil & Gas

abhinav.bhandari@elaracapital.com aliasgar.shakir@elaracapital.com alok.deshpande@elaracapital.com anand.shah@elaracapital.com ashish.kumar@elaracapital.com henry.burrows@elaracapital.com koushik.vasudevan@elaracapital.com mohan.lal@elaracapital.com pankaj.balani@elaracapital.com parees.purohit@elaracapital.com

+91 22 4062 6807 +91 22 4062 6816 +91 22 4062 6804 +91 22 4062 6821 +91 22 4062 6836 +91 22 4062 6854 +91 22 4062 6841 +91 22 4062 6802 +91 22 4062 6811 +91 22 4062 6859 +91 22 4062 6808 +91 22 4062 6817 +91 22 4062 6803 +91 22 4062 6810 +91 22 4062 6814 +91 22 4062 6819 +91 22 4062 6898

Information Technology, Strategy pralay.das@elaracapital.com ravi.sodah@elaracapital.com sumant.kumar@elaracapital.com surajit.pal@elaracapital.com mona.khetan@elaracapital.com pooja.sharma@elaracapital.com stuart.murray@elaracapital.com

Ravindra Deshpande, ACA, ACS, Analyst

ravindra.deshpande@elaracapital.com +91 22 4062 6805

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