Pre-Budget 2008-2009 Analysis by Investorline

Pre-Budget Analysis

WITH JUST few days to go for the annual budget of 2008-09, it is time to speculate as to what changes can be expected in this budget. Budget is an important & most awaited event in the economic life of our country, with key pronouncements on taxes, financial allocations and benefits, and on developmental agenda. But what changes can be expected? There are questions galore and the expectations from the Finance Minister are sky-high. Will this be the budget where building the infrastructure backbone of the economy be further advanced by extending support to the Bharat Nirman program? Will the budget bring in cheers to millions through a much-awaited cut in income tax rates? Or will the Finance Minister succumb to the electoral necessities and present a 'populist' budget? Will there be any measures to counteract the effects of the recession of the United States economy?

Economic Outlook:

The Indian economy has been one of the best-performing economies globally in CY07. The Government of India and the Reserve Bank of India (RBI) have been able to mitigate the threat of rising inflation and inflationary expectations through several fiscal and monetary measures. According to the Central Statistical Organisation estimates, the economy is on course to grow by 8.6% in 2007- 08. The government, in its bid to sustain the high growth, is looking at policy adjustments to capture the mood of the nation. This is especially in view of recent global uncertainties and developments. In earlier Bugdets, more emphasis was laid on reducing the inflation rate, but it is expected that in the current budget emphasis would be laid on both controlling the inflation as well as sustaining high GDP growth rate. Needless to say, these twin issues will remain high on the priority list of the Finance Minister, as he gives final touches to the Budget document. Along with these, increased allocations for a balanced and inclusive growth will be important for him in his last full Budget before the general elections in 2009. For the first time, direct tax collections have surpassed indirect tax collections which are in line with the developed economies across the globe. During the first nine months of the current fiscal, personal income-tax collections rose by50%and corporate tax revenues by 39.84% compared with the same period last year. Such a phenomenal increase in the net tax collection could be attributed to strong economic growth, better tax administration and relatively improved compliance levels. Finance Minister had indicated that there could be a significant revamp in the taxation schemes. The direct taxes could be reduced from the existing 33.6 per cent, inclusive of surcharge to about 25 - 30 per cent. Thus, the reduction in the direct taxes would come as a sigh of relief to the several individuals as well as corporate who are affected by the direct taxes. Reducing the tax rates could also provide an incentive to taxpayers to declare their entire income honestly so that the overall tax collections can be improved. Plus the surcharge on tax, which is paid, by individuals and association of people who have an annual income greater than Rs 10 lakh is expected to reduce. Currently, there is 10 per cent surcharge on personal and corporation income tax, which may plummet in this budget. It could come down to as low as 5 per cent. Partnership firms and domestic organizations, whose income is greater than Rs 1 crore would also benefit from this. With such positive signs on the tax compliance and collections front, the common man is definitely looking at great expectations from the finance minister.

Domestic and global developments that will shape Budget 2008-09:

We are probably in the midst of the strongest growth run in the post-independence India. All the structural factors necessary for a sustained high growth phase seems to be in place but some cyclical headwinds are probably making our journey a little more turbulent than what we would have otherwise liked. The key concerns for the 2008-09 year are: a) possible inflationary pressure from food and oil, b) a slowdown in the growth rate from the heights of the past two years, c) increased pressure on fiscal, and d) the continued availability to funds to complete the ongoing investment cycle at viable interest rates. Our achievement on growth front, over the Tenth Plan period was very close to target and it is no surprise that the Eleventh Plan wants to take us closer to our aspirational target of double-digit growth. While the growth process has gathered its own momentum, Union Budget 2008-09 is expected to remove the hurdles towards conquering the next frontier by extending the reforms process to reap long-term gains. In the short run, maybe a little demand fillip will do wonders for an economy where incoming data have been flashing some intermittent signs of growth concerns. Let us take a look at the economic and political backdrop against which the contours of the Union Budget 2008-09 will be drawn up.

1) Focus on GDP Growth & Sustained Balanced Growth:

With regards to the composition of GDP, the percentage shares of various sectors have largely changed. The percentage share of the agriculture in the total GDP has declined, on the contrary the percentage share of services in theGDPis rising faster. The percentage share of various sectors of India's Economy in the total GDP in the earlier years is as follows:

As to the above diagram, the contribution of India's agriculture to the total GDP of the country is experiencing a declining trend. On the contrary the percentage share of services sector to the total GDP is rising at a faster pace. In the latest data we can see that the share of services has increased to 55.1% and that of agriculture has reduced to 18.5%. Keeping in view the poor performance of the agriculture in India's Economy, the upcoming Budget 2008-09 is expected to come with more perks for the farmers in India. More over the Budget 2008-09 is expected to draw more attention on consumption led growth, which is needed for strengthening and sustaining the economic growth of the country. India's GDP growth has averaged about 8.8% over the past four years. This has been made possible by continued investments over these years, ably supported by growing consumption. The main focus of the government is to maintain the GDP growth rate as the recent weakness in global economies has added an element of uncertainty to the prospects of sustained high growth rates in the future. The target GDP growth rate for the Eleventh Five Year Plan is9%and this year's budget is expected to contain such measures, which will facilitate sustenance of healthy GDP growth rates. Towards this, continued measures for the power, roads, highways, ports and other infrastructure are expected. The fund requirement for this purpose is put at more than $450 bn (Rs.18 trn) over the 2007-12 Five Year Plan. Of these, the estimated requirement in the transport infrastructure segment alone is over Rs.6 trn comprising railways (Rs.2.5 trn), roads (Rs.3 trn), ports (Rs.740 bn) and airports (Rs.350 bn).

2) Political Angle to the Budget:

One thing we cannot ignore is that this will be the last budget of the current coalition government. The Lok Sabha election is due, in 2009, and the United Progressive Alliance, with the dispute over the nuclear deal with the Left, has been on the brink of divorce. Thus, the FM might not present a budget that could stir up a political storm and bring the ruling government down. He would rather play safe. We might expect a popular budget with the aim of appeasing specifically targeted sections of the voting community. Thus vote bank politics could again play a vital role in this year's annual budget. However, Finance Minister P Chidambaram would be in a tight corner to maintain a fine balance between fiscal discipline and political demands arising from the next General Elections. With the first year already gone without a Plan in place, political constraints in the second year of the Plan, will further diminish the chances of the Eleventh Plan (2007-11) being implemented in letter and spirit. This being the terminal year for the Fiscal Responsibility and Budget Management Act (FRBMA), the Finance Ministry will not be in a position to create extra resources needed to meet both political requirements and economic demands for growth. Indications are that the Budget will depend heavily on generating extra funds through Public Sector Undertakings. However, the Budget would have to make provision for the schemes already announced during the course of the year. Thus, funds would have to be provided for the Skill Development Mission, schemes relating to the agricultural sector like Rashtriya Krishi Vikas Yojna and the Food Security Mission, clubbed with additional commitments in the education and health sectors. Availability of funds will be further constrained, as both the Central government and States will have to earmark funds for implementing the Sixth Pay Commission Report. With the Railway Ministry already being asked to keep apart Rs 9,000 crore for this purpose, indications are that the burden on the Central government alone would be to the tune of Rs 30,000 crores. Mr Chidambaram would thus have to keep a careful watch so that inflation does not get out of hand while ensuring that positive trends in the core sectors of the economy are not adversely affected beyond a point. In short, the Budget is set to witness a tug of war between demands economic growth and political wish lists.

3) Focus on Inflation Control:

Headline inflation for most part of FY08 has been benign to say the least. This could be a positive outcome of a judicious mix of fiscal and monetary policies and could be highlighted as one of the success stories of last year's budget. Inflation management has been accorded top priority by policymakers across the globe. The conscious policy choice of reducing import duties and banning futures trading in some agri commodities has helped in reining in headline inflation numbers. Global inflation has been on an uptrend in the later half of 2007, riding on crude oil reaching the magical 3 figure mark and food prices forcing inflation to reach multi-year highs in both developed and developing nations. The apparent immunity of Indian inflation to these global developments should not be thought of as resilience. Although a rapidly appreciating rupee has mitigated some of the impact of imported inflation, there is still incomplete pass-through. Some harsh decisions need to be taken as early as possible to align domestic prices with international prices in both the energy and food sectors because increasing off-balance sheet exposure (oil bonds) is making the financial health of the government a little more fragile.

4) Education & Rural Development:

Education and Rural development would get top priority in the coming Union Budget as said by the Finance Minister. Education sector is being given importance as literacy alone could make India a super power. The UPA Government in the last three years had allocated Rs 28,600 crore for the education sector lending, of which Rs 17,636 crore had already been distributed. The amount was four times more than what was allocated during the BJP-ledNDA regime, the Finance Minister said. The government could announce a special scheme in the coming Union Budget. “It (the scheme) may be christened Rashtriya Madhyamik Shiksha Abhiyan (RMSA) and may be in line with the 11th Plan (2007-12) objective of improving gross enrolment ratio and also to reduce inequalities. A tentative allocation of Rs500 crore for preparation work for the scheme is being worked out to be announced in the Union Budget of 2008-09,” said a senior government official, who did not wish to be identified. The Centre plans to spend Rs 35,567 crore on improving secondary education in the 11th Plan and will contribute75%of the total funds required for the programme, with the states putting up the rest. In the 12th Plan, this ratio is expected to be 50:50. Rural development may get substantially more funds in this budget - about Rs 50000 crore from Rs 41000 crore last year. Allocations for rural development in the national budget have been rising steadily in India. In 2004-05, it was Rs 16000 crore, which went up to Rs 24700 crore in 2005-06 and Rs 31000 crore in 2006-07. It was Rs 41000 crore in the 2007-2008. Substantial increase is likely to be announced in the social sector schemes and those relating to rural development, including the Horticulture Mission, Rural Water Supply Scheme, Rural Sanitation Programme, Sarv Siksha Abhiyan, National Rural Health Mission, NREGP, Indira Awas Yojna (rural housing), Pradhan Manrti Gram Sadak Yojna, Accelerated Power Development Programme(APDP), Integrated Child Development Scheme, Jawaharlal Nehru Urban Renewal Mission, Rashrtriya Krishi Vikas Yojna, and Backward Region Grant Fund.

5) Capital Flows:

The other macroeconomic factor, which has dominated economic debates in the last year or so and will be a crucial consideration for this year's budget, is the deluge of capital flows that the country has received. Finance Minister has himself dubbed them as 'copious' and it seems that this process of receiving foreign flows is going to sustain for some time to come. While in FY07 there was a BoP surplus of USD 35bn on the back of around USD 46bn of capital flows, it will not be a surprise if both these numbers would double in FY08! Monetary policymakers have been torn between letting the rupee appreciate and intervening in the currency markets to inject more rupee liquidity, which could be potentially inflationary in nature. Rupee has been one of the strongest appreciating currencies in the Asian region in 2007 even while RBI has continued its policy of back-to-back intervention and sterilization of the rupee liquidity through issuance of Market Stabilization bonds and CRR hikes.

6) Stock Markets:

Riding on robust economic growth and extremely positive business sentiment, the buoyant and largely bullish stock market, has also contributed significantly to the excellent growth in tax collections, with collection of securities transaction tax (STT) growing by a sharp 57.61% in the current fiscal. To top it, increased investor interest in equities induced by strong economic fundamentals, robust flows from foreign institutional investors and an attractive short-term capital gains tax rate have also contributed to the increased tax collections. People are investing like never before and the per capita income has increased manifold. The government must be keen to capitalize on this investment boom and strike a balance between inflation and growth.

7) Mutual Fund Industry:

Indian Mutual Fund industry has recorded and astonishing growth of 71% in AUM in this year. The AUM increased from about 3.21-lakh crore in Dec 2006 to 5.49 lakh crore in Dec 2007. The mutual fund industry has become more mature now and has given more products this year. TheMFindustry also has certain expectations from the coming budget. Its wishlist includes: Indian mutual fund firms have asked the government to allow them to offer investors multiple tax planning equity funds, seeking relaxation of a rule that limits the options they can offer to customers. A regulation framed in 2005 restricts them to just one such fund or equity linked savings scheme (ELSS), limiting options for investors who have been increasingly using them to save tax. Two years ago, India allowed savers to claim tax benefit on investment of up to 100,000 rupees in ELSS, making them hugely popular among investors with assets of such funds rising nearly 25 times to 154 billion rupees in past three years The industry also wants fund of funds (FoFs), which invest in equity schemes, and other funds investing in overseas equities to be treated as equity funds to enable them to pay less tax. Indian regulations classify funds investing more than 35 percent of assets in foreign equities and FoFs as debt funds and subject to higher taxes, making them unattractive. Dividend Distribution Tax on corporates and equity and non-liquid Mutual Funds to be reduced to 10%from 15% at present. Dividend Distribution Tax on money market and Liquid Mutual Funds to be reduced to 10% from 25% at present. Sec 80C deduction level to be raised from Rs1 lakh to Rs3 lakh. Howmuch of this wishlist gets achieved waits to be seen, given our coalition based policy.

8) Managing the Exchange rate shock:

The recession of the United States economy has meant that the rupee has appreciated a great deal. The exporters are feeling the brunt as their profit margins continue to go down. It is predicted that this trend is likely to continue. The RBI is expected to address this issue through its monetary policy and tax cuts in order to reduce the load on the exporters can also be expected. The suddenness and the magnitude of the exchange rate shock has affected several sectors in the economy which were export dependent with limited import content and did not have enough profit margins. Anecdotal and industry estimates suggest possibility of huge job losses in several industries including textiles and the approach of Finance Minister to address this issue could be one of the highlights of Budget 2008-09. Most likely this is going to be the last budget of Finance Minister before the general elections. So there will be expectations from him to satisfy a large number of pressure groups who will be the key to electoral success. It will be the Finance Minister's endeavor to see that the resultant force of these often opposing demands does not lead to a lopsided budget, which will be a setback for economic reforms. The last piece in the backdrop for this year's budget will be the slowly unfolding global developments. After almost 4 years of unprecedented global growth, there is a possibility that the global economy might enter a phase of moderation in 2008, mainly on the back of a severe slowdown in the US economy. At a macro level budget policy formulation by the Finance Minister will have to take into account all the above factors.

1) Indirect Taxes:

In the previous Budget, the peak import duty was brought down to 10%. The Government is committed to bringing down import duties to Asean levels. In addition to this, currently there is an overriding concern of rising inflation. On the other hand, adequate protection is needed for several emerging/weaker sectors. Moreover, the Finance minister also has to consider the revenue implications. The slowing global growth can impact India's GDP growth, going ahead and consequently tax collections also. Taking into account these factors, we expect moderation in import duties with continued protection to few sectors. The Finance Minister has already indicated that diverse rates of excise duty on various goods are expected to converge at the Cenvat rate of 16%.We expect further steps in this direction. Growth in excise duty collections in the first nine months of FY08 has been about 5.1%, which is lower than the target growth of about 11% for the fiscal. Thus, there may not be significant reduction in excise duty rates.We also expect the CST rate to be further reduced from 3% levels, in line with the process started in the previous Budget. The contribution of service tax to overall tax revenues of the Government is lower when compared to the fact that services account for more than 50% of the GDP. For 9MFY08, collections from service tax were up about 37% YoY v/s a targeted rise of 32% for FY08. We believe the Finance Minister will bring in more services under the tax net to increase the contribution of services to tax revenues

2) Direct Taxes:

Direct taxes have been the high point of FY08, with collections having grown by40%in the first 10 months against the fiscal target growth of 17%. Exceeding indirect tax receipts for the first time, direct tax collection now looks set to cross Rs 3 lakh crore or (Rs 3 trillion) this fiscal. The budget estimate of a tax (both direct and indirect) to GDP ratio of 11.8% is likely to be exceeded. The government had set a target of Rs 2.67 lakh crore for direct tax receipts for this fiscal. The Government's initiatives for bringing in more people under the tax net have paid dividends with an increase in the number of taxpayers. The rising income levels of Indians have also resulted in more taxpayers. In the backdrop of a strong growth in tax collections, some relief to smaller taxpayers in the form of a higher exemption limit can be expected. Investments in long-term savings instruments may be encouraged with specifically directed tax exemptions. Some reduction in dividend distribution tax (DDT) is also expected.

Issue of Tax Compliance in Budget 2008 (expected)

On 6th of December 2007, the Finance Ministry announced the issue of tax compliance in budget 2008. It is learnt that the taxpayers would be benefited reviewing the direct tax rates and increasing the voluntary compliance. The level of tax compliance is increasing significantly for the last two or three years. During the fiscal year 2006-07, almost 31.9 million tax payers of India have filled their income tax returns, which is not an exciting figure at all keeping in mind the population in India. Government would like to get in more and more people to pay taxes in this fiscal. But the government has announced that it will focus more on the tax compliance issues. The Finance Ministry will not increase the maximum marginal rate of personal income tax further, for it may result in voluntary compliance. The Advisor to the Union Finance Minister of India has said that, the government will now be able to keep track on the ups and downs of voluntary compliance. Maximum marginal rate of personal income tax will be 30%. However, the base of the taxpayer is not large, as it ought to be because a big portion of the population of the Indian economy lies below the poverty line.

Sector Wise Expectations:

Automobilies:

Industry expects a uniform excise duty rate of16%for all cars- large and small. Currently, small cars are levied16%excise duty whereas all other cars and SUV's are levied 24%. Expectations of reduction of excise duty rate on two-wheelers from 16% to 12%or 8%.

Banking:

The moderating credit growth (22-23% YoY) and a relatively higher deposit growth would make RBI comfortable. The headline inflation has also moderated in the last couple of months. The interest rates have almost peaked and are likely to move southward from the next quarter purely due to demand and supply factors. Even though RBI has not given any signal by cutting benchmark rates, banks are expected to start reducing rates in due course of time. This is also evident from recent moves by many banks like SBI, Canara Bank, Allahabad Bank and Bank of India. Industry expects Relaxation in lock in period for savings to qualify for tax benefits, increase in ceiling for TDS on fixed deposits, tax exemptions on infrastructure financing. If the above expectations are fulfilled, it would have a positive impact on the sector as a whole and would help banks correct their asset liability mis-match. Increase in FII/FDI limits in PSU Banks from currently 20% to 49%. This would be a positive move, as it will help these banks raise capital for funding their growth and meeting the Basel II norms.

Capital Goods:

In the power sector, India expects to add a capacity of 80,000MWby 2012 and provide power for all. To attain this ambitious target, the Government had outlined a proposal for nine ultra mega power projects (each project having a capacity of 4,000 MWor more). Till date, only two of theseUMPPs have taken off. Investments in key industrial sectors are expected to soar to Rs.6924 bn over the next five years as compared with Rs.2274 bn worth of investments made over the past five years. Over the next five years, growth in investments will be driven by strong capacity additions, led by healthy growth in demand and high existing operating rates across some of the key industries. Reduction in excise duties on power equipment: Currently, while there is zero customs duty on mega power projects and 5% customs duty on non-mega size projects, excise duty continues to stay at 16%. Project developers are demanding reduction in excise duty to 8%, which is intended to translate into lower operational cost for consumers. Reduction in excise duty on energy efficient ACs: With a view to promote energy conservation, it is expected that the Government may reduce excise duty from 16% to 8% for ACs meeting Bureau of Energy Efficiency (BEE) standards. This should benefit consumer durables manufacturers like Voltas and Blue Star.

Construction:

Union Budget 2008-09 is expected to be positive for the infrastructure sector with higher budgetary allocations in different segments such as roads, irrigation, ports, airports, power etc. With infrastructure development requiring around $492 bn in the next five years, companies with significant experience in executing projects in this key segments are likely to benefit significantly.

Information Technology:

The IT/BPO services industry is expected to achieve 25% growth in FY08 to about $50 bn. Of these, exports are expected to grow by more than26%to nearly $40 bn. The sector has been facing significant challenges in FY08. Over the past three quarters, the challenge has been in the form of an appreciating rupee. The rupee has appreciated by about 10% in FY08, posing challenges for the sector and more so, for smaller companies. Since Q3FY08, the economic growth in the US has been slowing with an increasing probability of a recession. In case there is a prolonged recession in the US, the volume growth for Indian IT services/BPO sector can be impacted. Industry on the whole expects extension of tax exemption beyond FY10 & also Deemed fringe benefit at higher levels v/s IT service companies- should be treated at par. Nasscom expects extension of the Software Technology Parks (STPI) scheme beyond 2009.

FMCG:

India continues to remain a domestic consumption driven economy. To some extent, this insulates the Indian economy from global shocks in the form of a possible US recession or a financial credit crunch gripping other developed economies. Last year, the FMCG sector grew to Rs.750 bn at 10-15%, backed by growth in urban markets and a surge in demand for premium products. There are indications that the Sixth Pay Commission, expected to be passed this year, will recommend salary hike. This will put more purchasing power in the hands of the 4mn strong central government work force and induce households to upgrade to premium brands in personal care and non-durable consumer goods. Industry expects Relief on existing 16% excise duty on soaps and detergents & hoping reduction in the CST from 3% to 2%. Other expectations include reduction in VAT across food processing industry from 12.5% to around 4%. Reduction in CST will help boost consumption and demand buoyancy and would prove to be beneficial for food processing industry.

Healthcare:

Healthcare has emerged as one of the largest service sectors in India. Strong economic growth, along with increasing percapita income, growing healthcare awareness and expanding insurance coverage is creating a new and continuously expanding group of consumers. In the coming Budget the sector is hoping for incentivizing research and development, hoping to receive more tax benefits in order to enhance healthcare service/delivery. Significant medical needs of the Indian population provide huge potential for Indian healthcare service/delivery sector. This sector requires enormous investment over the next five years (approximately US$5 bn for bed additions). The Finance Minister may provide a boost to the sector's prospects by qualitative measures like, infrastructure status, increasing health spending allocation and providing incentives for the sector to grow.

Media:

From a longer-term perspective, it can be said that on the back of greater spending power, growing consumerism – offshoots of the healthy economic growth being projected -consumer discretionary sectors like media and entertainment will continue to enjoy healthy growth prospects. India's evolving demographics, with a high proportion in the income earning age, is expected to support consumption growth. Broadcasters are subject to levy of service tax@ 12.24% unlike print media that is exempt from the levy of service tax, therefore broadcasters expect parity to be drawn between the print and electronic medium. Multiplex alongwith the retail industry expects the removal of 12.36% service tax or allow set off against sales tax. Other expectations include reduction in excise duty and customs duty on equipments like set top boxes.

Metals & Mining:

Indian steel consumption is growing at a record rate of 12.6%. This is almost twice the 6.6% growth in supply (April-December 2007 period). India will turn net importer of steel for the first time in a decade as Indian steelmakers are struggling with greenfield expansions, primarily due to problems in mine allocations and land acquisition. Steel product prices are expected to rise sharply(>15%) during the year. However, unlike in the past, it would not boost the net profits of most of the Indian steel companies as the price rise is mainly driven by sustained raw material cost pressures. The environment is extremely positive for companies engaged in key raw materials of steel like coking coal, ferroalloy ores and iron ore. These companies are price takers and dependant of international product prices. Coal is fast emerging as a scare commodity. There has been sharp surge in coal prices globally driven by a massive fall in inventory levels and emerging supply constraints. Industry expects that customs duty of5%should be scrapped on import of coke and refractories. This move is very necessary for the Indian steel industry as it is unable to cope up with the sharp jump in coke prices, which is one of the critical raw materials and Indian industry is import dependent at large. Other expectations include cut in Import duty of nickel from present 5% to 2% & also reduction in ceiling on chrome ore xport. Current ceiling of 0.40MMTto be reduced to 0.30MMT.

Oil & Gas:

The Oil Ministry is seeking a series of tax and duty changes related to petroleum products retailing and energy exploration in a bid to reduce prices, subsidies and attract greater investment. Oil - FY08 has been negative for the Indian oil industry. With rising crude prices, the industry did quite well at the upstream front. However, the downstream sector faced severe problems regarding subsidies, taxes and pricing. OMCs continue to remain dependent on oil bonds. The practice of issuing oil bonds does not resolve the problem as it only defers the resolution while compounding economic and financial costs. Gas - The country's natural gas supply by FY10 is likely to more than double from current levels due to expected supply from the KG basin. Currently, a majority of the gas consumption in India is industrial, with city gas distribution (CNG and PNG) accounting for less than10%of the total consumption. Key expectations from this budget include equalization on import duty, which is presently 5% for crude and 7.5% for petroleum products.

Pharmaceuticals:

The pharmaceutical industry is facing several challenges like an appreciating rupee against foreign currencies, domestic pricing pressure and pressure on finding and developing new molecules. Given the huge potential held by the Indian Pharma sector, the Finance Minister is likely to give a boost to the sector's prospects by qualitative measures like reduction in duties, extending time line for exemption in respect of profits of a 100%EOU, tax exemption on income from intellectual properties. Industry expects to extend income tax exemption by another 5 years or till 2012, relaxation in certain conditions to avail 150% weighted average deduction on R&D expenditures. Expenditures on clinical trials and patent filings should be eligible for tax benefits.

Power:

In the Eleventh Five Year Plan period, the Government is aiming to add 78 GWcapacity and another 80 GWduring the Twelfth Five Year plan. Of the Eleventh Five Year Plan's additions, 50GWof capacity is already under construction and the orders for the rest are expected to be placed in the next six months. The Government has awarded three ultra mega power projects (UMPPs) and has plans to award another four projects. The recently awarded UMPPs and the other upcoming ones are expected to get an extension of tax holidays from 2010 to 2017, though they will continue to pay the Minimum Alternate Tax (MAT). The decision to extend is mainly due to noncommissioning of any of theUMPPunits by the stipulated period. To partially offset sharp spikes in prices of imported natural gas, the government is likely to withdraw the 5% customs duties for theLNGthat is used in the power generation projects. The above move will be welcome one for the power sector.

Aviation:

India's air carriers want the sales tax on jet fuel to be slashed to a uniform rate of four percent across the country and import duty to fall to five percent in the forthcoming budget to ease cost pressures. Jet fuel, which is almost three fourths costlier than international benchmarks, accounts for 40 percent of the operating cost of an Indian airline.

Pre-Budget 2008-2009 Analysis Report by Investorline (NJ IndiaInvest)

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The story of Rupee Appreciation & Depreciation and Forex Reserves

Re falls, yields at two-week high

The foreign exchange and bond markets witnessed volatile movements on Monday, propped by global concerns and dwindling cash conditions in local markets.

While the rupee ended the day at 39.77 levels versus the dollar, bond yields rose to a two-week high. Rates in the inter-bank call money market rose to 8%. The rupee, which had closed at 39.67 on Friday, fell against the dollar as sentiment was hit by risk aversion felt in Asian markets which increased the probability of capital outflows.

In the domestic market, there was considerable demand for dollars from oil companies, while foreign fund inflows remained stunted. In the government bond market, demand for bonds was largely affected as most traders were wary of a severe crunch in cash conditions going forward. The central bank has not been intervening in the forex market as the rupee has been on a weakening mode, given that there are no significance dollar inflows.

The yield on the benchmark paper, the 7.99% bond maturing in 2017, ended at 7.54%, above Friday’s close of 7.51%. It rose to as high as 7.57% levels during the day. The market is taking cognisance of the liquidity drying up, and where the rates are headed towards, depends on what kind of cash conditions we see in the market,” said a bond dealer. Another factor is that companies will be making advance tax payouts in March, which will further take a toll on liquidity. (Full Story)



Rupee falls on oil payment, global concerns
The rupee eased on Monday on import payments, while a bout of risk aversion across Asian markets raised the prospect of further capital outflows from local shares, dealers said.

The partially convertible rupee ended at 39.775/785 per dollar, off the previous close of 39.672/682.

"Importer demand from oil companies which was not covered by the forward market caused the depreciation," said a trader with a foreign bank. "Plus, there were not too many inflows on the capital side," he added.

Inflows of foreign capital are a key driver of the rupee. Foreign funds have been net buyers of nearly $500 million of stocks so far this month, according to official data, after selling about $4 billion in January. (Full Story)


Rupee strengthens on strong Asian stocks, inflows eyed
MUMBAI: The rupee rose in early trade on Monday, with demand for the local unit bolstered by gains in Asian equity markets, which raised the prospect of higher foreign capital inflows, dealers said.

The partially convertible rupee was at 39.647/655 per dollar, a shade stronger than Friday's close of 39.672/682. (Full Story)


Dollar steadies as clues awaited to US econ health
TOKYO: The dollar steadied against the yen and the euro on Monday as many investors stayed on the sidelines ahead of US data this week waiting for further clues on the health of the economy.

The dollar slid late last week when US reports revived fears that the economy was slipping into a recession, but sentiment was improving slightly after a drop in Wall Street share prices on Friday was relatively limited, traders said. (Full Story)


Rupee weakens despite market rally; forward premia hit
MUMBAI: The bond market fell victim to uncertainty over a government official’s comments that special oil bonds could be used by banks to meet statutory liquidity ratio (SLR) requirements. The yield on the 10-year benchmark bond rose to a high of 7.54% during the day and closed at 7.51%, above its previous close of 7.45%.

Petroleum secretary MS Srinivasan had told mediapersons that the finance ministry had approved a move to allow oil bonds issued in the current fiscal year to be used by banks to meet their SLR requirements.

Banks reacted to the comment by selling bonds, only to hear that the finance minister had later clarified that he hoped the bonds, which are given to state-owned fuel retailers to compensate them for selling fuel at government-set prices, would be given SLR status. According to market sources, the minister’s comments resulted in a knee-jerk reaction by banks, which made considerable losses because of the rumour.(Full Story)



Forex reserves down $1.8 bn
MUMBAI: Bank credit has been showing signs of a gradual pick up over the past few fortnights. Data released by the Reserve Bank of India (RBI) in its weekly statistical supplement (WSS) show that bank-credit growth has risen to 22.8%. This figure has progressively risen over the past few weeks, from 21.5% in the second week of January this year. At current levels, the year-on-year bank credit stands at Rs 4.09 lakh crore.

Outstanding bank loans touched Rs 22,07,312 crore on February 1, up Rs 40,465 crore, from the previous fortnight’s levels. While food credit rose Rs 2,009 crore, non-food credit moved up Rs 38,456 crore during the fortnight. Simultaneously, outstanding deposits with commercial banks touched Rs 30,89,540 crore as on February 1, rising Rs 58,899 crore over the previous fortnight’s levels. While demand deposits rose Rs 57,794 crore, term deposits with commercial banks rose Rs 1,106 crore. Investments in government and other approved securities by banks dropped to Rs 9,50,589 crore as on February 1, down Rs 7,908 crore from the previous fortnight’s levels. (Full Story)

Source- Economics Times

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Rising rupee reflects strong economy: IMF

Rising rupee reflects strong economy: IMF

The International Monetary Fund (IMF) views the rising rupee as reflecting the strength in the Indian economy, amongst the world's fastest growing economies with one of the highest rates of productivity growth in the region.

"The basic question one has to ask is: why is it that the rupee is appreciating?" a senior IMF official said Monday in a conference call on India's bilateral annual consultations.

"We look at the rupee in what's called real effective terms, which is adjusted for the difference in inflation between India and its partner countries, and that's up seven to eight percent over the last year or so, which is a significant figure," he said.

"It has very excellent prospects in terms of growth, a very strong corporate sector. It's shown a significant degree of resilience."

However, IMF has one concern over Reserve Bank of India's (RBI) policy response.

The RBI "intervention is basically aimed at smoothing adjustment in the exchange rate. That is, India maintains a managed float regime", Charles Kramer, division chief in the Asia and Pacific department, noted.

"One concern with the intervention is its cost. When the RBI intervenes or when central banks intervene, generally, they accumulate foreign exchange assets. Carrying those assets has a cost.

"While the cost isn't very high right now, eventually the cost could increase. In an environment where the authorities are trying to make progress in making space on the fiscal side, that could be undesirable," he said.

On the issue of capital inflows, Kalpana Kochar, senior advisor and mission chief for India in the Asia and Pacific department, said India was not unique in facing capital inflows, but it was something that they are having difficulty coping with. "The fact is that India has been enjoying large capital inflows, which we believe to be at least partly the result of the fact that there's a strong growth story in India and investors are looking to take advantage of this, of the returns that they see coming from India," she said.

Another part is due to interest rate differentials between India and the rest of the world - certainly the advanced countries. In any event, capital inflows are large, Kochar noted.

IMF had discussed with India whether or not there were any adjustments to the policy framework that would allow them to cope better with this situation while recognising that it is, in fact, a challenging situation.

It had also discussed ways in which the financial sector could be strengthened to prepare better for these larger capital inflows, "of which we believe much of it is here to stay, reflecting the strength of India's economy", she said.

Asked how critical the problem was, Kochar said: "India is plugged into the world trade system, but India's exports have been diversified both in terms of goods as well as markets with far less reliance on the US than for many other countries.

"On service exports, for which of course the biggest destination is in fact the US, we don't have a whole lot of strong evidence but we do believe that the impact could go either way," she said.

"If, in fact, US corporates are looking to cut costs, it could be that they outsource more, and so India could benefit from that. If not, you could see a bit of a slowing in service exports. So, overall, on the spectrum of countries that are likely to be affected by this crisis, India is probably a bit further down. It is just our views on given the structure of India's economy and its exports and financial markets, at this point, we don't anticipate having huge effects," Kochar said.

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Rupee at 39.76 against US dollar

The Indian rupee lost 9.5 paise against the greenback at 39.76/77 on Wednesday, the lowest level in almost three months, on heavy demand for dollar despite a surge in stock markets.The lowest level before this was recorded on November 28 last year at 39.80/81. The rupee premiums on forward dollar also fell sharply.

The benchmark six-month forward dollar premiums payable in July ended at 4 - 6 paise, lower from 8-1/2 - 11 paise on Tuesday and the far-forward maturing in January also ended down to 32 - 34 paise from 37 - 39 paise previously.In the Interbank foreign exchange market, the domestic currency moved in a range of 39.60 and 39.89 on divergent factors after a promising start on signs of stability in Asian markets. The local currency had closed at 39.6650/6750 per dollar on February 12.

Foreign exchange dealers said the demand for dollar continued to peak as foreign banks were seen buying dollars. The demand soared after a pull-out by FIIs and also owing to funds flowing out after the refund of some initial public offers in the past 10-15 days. It seemed situation has not improved since then, the dealers said. Besides, there has been a severe shortage of the US currency in the global markets.

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