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Key Highlights of Union 
Budget 2011‐12 

2011 

ICICI PRUDENTIAL ASSET MANAGEMENT COMPANY LTD.
  

Union Budget FY12 at a glance

In the Union Budget proposals presented today to the parliament, the Finance
Minister has managed to tread cautiously over the tightrope. The stated Fiscal
consolidation with a fiscal deficit estimation of 4.6% (of GDP) for FY12 vis-à-vis 5.1%
for FY11 seems difficult to achieve. Without any substantial change on the taxation
front, the revenue assumptions look aggressive. Tax buoyancy (25% yoy) will play a
decisive role in meeting the projected deficit target.

On the spending side, allocation has been increased on infrastructure (RIDF and
Bharat Nirman), social sectors including education. NREGA wages have been
indexed to CPI. Overall budget spending has been increased by 13.4% over Budget
estimates of the current fiscal and 3.3% over the revised estimates of the current
fiscal. Only 3% growth in overall spending leaves room for a fiscal slippage during
the year. The projections on the subsidy bill also look aggressive. The budget
proposal expects oil subsidy to decline to Rs. 23,000 Cr (from Rs. 38,000 Cr),
fertilizer subsidy to Rs. 49,000 Cr (from Rs. 54,000 Cr) and a flat food subsidy spend.

The total planned expenditure has increased by 18.3% vis-à-vis an increase of 10.3%
in the Non-planned expenditure. The Finance Minister in his speech reiterated the
need to reduce fiscal deficit to 3.5% by FY14. All subsidies related liabilities have
been brought into fiscal accounting now. The net market borrowing program for the
Government now stands at Rs 3.4 trillion, much lower than the market expectations
and hence positive.

Central Fiscal Deficit (Rs bn) FY12 (BE)

Total Revenue 10,578
Tax receipts 9,324
After devolution to states 6,644
Non tax receipts 1,254
Total Expenditure 12,577
Non Plan Expenditure 8,160
Plan Expenditure 4,417

Equity market outlook

The excise duties have not been increased with a view to keep consumption rolling.
This will certainly benefit the consumer durable sectors. On the infrastructure side,
making infrastructure financing easy while maintaining tax sops for investing in
infrastructure bonds is a positive. It is heartening to see a road map for better
subsidy targeting through roll out of programs such as UID.
  

The printed deficit estimation however is extremely vulnerable to the crude oil
prices. We would have liked a more conservative estimation of fuel and fertilizer
subsidies, especially in the current geopolitical situation. Persistently high crude oil
prices may derail the fiscal pruning. Also, a relaxed approach to fiscal management
may result in a continuous tightening on monetary front, certainly an issue for gross
block creation. We believe the markets will continue to remain volatile, in response
to these global happenings. The ICICI Prudential Dynamic Plan therefore would be
an appropriate vehicle for equity investors.

Debt market outlook

No significant change in our view as far as short term interest rate is concerned. As
far as the longer end of the yield curve is concerned, the Budget numbers look very
good and have exceeded most expectations. Some of the assumptions in the
calculations for arriving at a lower deficit number appear to be optimistic. It appears
as if the subsidy numbers are understated given the market conditions. In a scenario
where the oil prices come down, there should be no problem. There is a large
amount of optimism built into the numbers for both fertilizer and oil subsidy.
Keeping this aside, the borrowing program remains reasonably large. No structural
view on interest rates coming down. The fact that deficit numbers are lower than
expectations and initial borrowing numbers are low should keep the market stable
for now. Also considering that no supply is available, and as per the borrowing
program for this financial year another supply of Rs. 10,000 Cr may possibly come.
If this auction is available in March 2011, then we can expect rates to move up a little
bit. There have been some comments from the Finance Ministry that this supply
may not come and they may use other funding sources. In that case, we expect the
markets to remain buoyant till the borrowing program for next year starts. The other
assumption in fiscal numbers is the assumption of liquidity improving and therefore
MSS of another Rs 20,000 Cr coming in the system. If that doesn’t happen, then
potentially the borrowing program may go up by that much which will take the
numbers to what the markets were expecting.

The view on inflation remains same even though next couple of numbers may tend
to look good but underlying inflation remains strong. In our view therefore, a
structurally bullish call is still some time away. The inflation expectations are likely
to remain buoyant for some months since commodity prices are not showing any
signs of cooling off.

The positive of the budget is definitely a lower fiscal deficit number. The
government has shown some amount of restraint in unnecessary spending and
putting to rest the worry that existed on spending in a big way just before the state
elections.
  

We continue to recommend to investors ICICI Prudential Regular Savings Fund, ICICI

Prudential Short Term Plan, ICICI Prudential Long Term Plan, One Year and plus
Fixed Maturity Plans.

Key highlights

BORROWING

• Gross market borrowing for 2011-12 seen at 4.17 trillion rupees – lower than
most forecasts.
• Net market borrowing for 2011-12 seen at 3.43 trillion rupees – lower than
most forecasts.
• Revised gross market borrowing for 2010-11 at 4.47 trillion rupees

FISCAL DEFICIT

• Fiscal deficit seen at 5.1 percent of GDP in 2010-11

• Fiscal deficit seen at 4.6 percent of GDP in 2011-12
• Fiscal deficit seen at 3.5 percent of GDP in 2013-14

SPENDING

• Total expenditure in 2011-12 seen at 12.58 trillion rupees

• Plan expenditure seen at 4.41 trillion rupees in 2011-12, up 18.3 percent

REVENUE

• Gross tax receipts seen at 9.32 trillion rupees in 2011-12

• Corporate tax receipts seen at 3.6 trillion rupees in 2011-12
• Tax-to-GDP ratio seen at 10.4 percent in 2011-12; seen at 10.8 percent in
2012-13
• Customs revenue seen at 1.52 trillion rupees in 2011-12
• Factory gate duties seen at 1.64 trillion rupees in 2011-12
• Non-tax revenue seen at 1.25 trillion rupees in 2011-12
• Service tax receipts seen at 820 billion rupees in 2011-12
• Revenue gain from indirect tax proposals seen at 113 billion rupees in 2011-12
• Service tax proposals to result in net revenue gain of 40 billion rupees in
2011-12
  

SUBSIDIES

• Subsidy bill in 2011-12 seen at 1.44 trillion rupees

• Food subsidy bill in 2011-12 seen at 605.7 billion rupees
• Revised food subsidy bill for 2010-11 at 606 billion rupees
• Fertiliser subsidy bill in 2011-12 seen at 500 billion rupees
• Revised fertiliser subsidy bill for 2010-11 at 550 billion rupees
• Petroleum subsidy bill in 2011-12 seen at 236.4 billion rupees
• Revised petroleum subsidy bill in 2010-11 at 384 billion rupees
• State-run oil retailers to be provided with 200 billion rupee cash subsidy in
2011-12

GROWTH, INFLATION EXPECTATIONS

• Inflation seen at 5 percent in 2011-12

• Economy expected to grow at 9 percent in 2012, plus or minus 0.25 percent

TAXES

• Standard rate of excise duty held at 10 percent

• Service tax rate kept at 10 percent
• To widen scope of service tax
• To raise minimum alternate tax to 18.5 percent from 18 percent
• Iron ore export duty raised to 20 percent
• Personal income tax exemption limit raised to 180,000 rupees
• To reduce surcharge on domestic companies to 5 percent

DISINVESTMENT

• Disinvestment in 2011-12 seen at 400 billion rupees

POLICY REFORMS

• Foreign direct investment policy to be liberalised further in 2011-12

• To create infrastructure debt funds
• To boost infrastructure growth with tax-free bonds of 300 billion rupees
• Raised foreign institutional investor limit in 5-year corporate bonds for
investment in infrastructure by $20 billion
• Food security bill to be introduced this year
  

• To permit Securities and Exchange Board of India (SEBI) registered mutual

funds to access subscriptions from foreign investments
• Public debt bill to be introduced in parliament soon

SECTOR SPENDING

• To allocate more than 1.64 trillion rupees to defense sector in 2011-12

• Corpus of rural infrastructure development fund raised to 180 billion rupees in
2011-12
• To provide 201.5 billion rupees capital infusion in state-run banks in 2011-12
• To allocate 520.5 billion rupees for the education sector
• To raise health sector allocation to 267.6 billion rupees

AGRICULTURE

• To focus on removal of supply bottlenecks in the food sector in 2011-12

• To raise target of credit flow to agriculture sector to 4.75 trillion rupees
• Gives 3 percent interest subsidy to farmers in 2011-12
• Cold storage chains to be given infrastructure status
• Capitalisation of National Bank for Agriculture and Rural Development
(NABARD) of 30 billion rupees in a phased manner
• To provide 3 billion rupees for 60,000 hectares under palm oil plantation
• Actively considering new fertiliser policy for urea

Source: www.indiabudget.nic.in; www.in.reuters.com

______________________________________________________________________________
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