GOVERNMENT OF INDIA BUDGET 2016-17 Union Budget for 2016-17 reinforces the Government of India’s commitment to fiscal consolidation FEBRUARY 2016

OVERVIEW The key challenge for the Union Budget for 2016-17 was the extent to which it could adhere to the medium term agenda for fiscal consolidation and at the same time provide enhanced allocations in the much-needed areas such as infrastructure, social sector schemes and recapitalisation of banks, given the constraints imposed by the higher outgo on pay and pension post the recommendations of the Seventh Central Pay Commission (SCPC) and the One Rank One Pension (OROP) scheme for the defence services. With strong global headwinds and domestic growth showing only a modest and uneven recovery, the Union Budget for 2016-17 was also expected to put forth some reform measures to boost economic growth, raise finances from extra-budgetary sources and simultaneously create fiscal space by rationalising subsidies to the extent possible.

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The most laudable aspect of the Union Budget for 2016-17 is the commitment to the previously announced fiscal deficit target of 3.5% of GDP despite the competing expenditure claims. Additionally, the Government of India (GoI) has not deviated from the fiscal deficit target of 3.9% of GDP that was included in the Budget Estimates (BE) for 2015-16 in the Revised Estimates (RE) for this fiscal. Moreover, the stated fiscal consolidation trajectory is likely to allow for a final 25 bps cut in the Repo rate in 2016, if the monsoon is normal. Despite the revenue augmentation measures, the higher outlay towards salaries and pensions has limited the fiscal space available to provide higher budgetary allocations for capital spending. As a result, a substantial portion of the increase in the Central Plan Outlay would be funded through extra budgetary sources, including institutional finance and market borrowings to be raised by NHAI, Indian Railways etc. Such market funding for the Central Plan Outlay may push up bond yields and crowd out the private sector, even though the GoI’s own borrowing programme is lower than the consensus expectation. To create fiscal space, the GoI had to resort to various revenue augmentation measures, including raising the surcharge on personal income tax on those with incomes in excess of Rs. 10 million and imposition of additional tax (@ 10%) on recipients with a gross amount of dividend in excess of Rs. 1 million per year. Moreover, some new cesses have been introduced, such as the Krishi Kalyan cess and infrastructure cess, whereas existing rates have also been increased, for instance a doubling of the renamed clean environment cess, which may prove inflationary. Benefitting from such measures, the overall tax revenue growth assumed in the Union Budget for 2016-17 appears realistic. However, the limited progress on the intention stated in the Union Budget for 2015-16 to reduce the Corporate tax rates is a disappointment. Some of the sectors adversely affected because of change in tax rates would include automobiles, branded apparels and upstream oil & gas companies. The achievement of the targets for inflows from spectrum auctions (~Rs. 980.0 billion) and disinvestment (Rs. 360.0 billion) and strategic divestment (Rs. 200.5 billion) may be somewhat optimistic, which would affect the eventual fiscal turnout for 2016-17. The disinvestment process would need to be kicked off early and spaced out over the course of 2016-17 to garner adequate funds. In addition, while monetisation though divestment of CPSEs’ individual assets could augment funds, the manner in which it is executed remains to be seen.

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As expected, there has been an emphasis on increasing allocation in the agriculture, rural and social sectors as well as infrastructure sectors like roads and railways. The thrust on agriculture and rural sector, especially irrigation, as well as on affordable housing, is likely to have some beneficial impact in terms of reviving demand. This would complement the impact of the implementation of the SCPC’s recommendations on boosting consumption. Additionally, the step up in NREGA allocation (to Rs. 385.0 billion in 2016-17 BE from Rs. 357.5 billion in 2015-16 RE) would augment the social security net in the event of weather-related and other disruptions in rural areas. The significant increase in disbursements planned under MUDRA and other measures towards financial inclusion are in line with the Government’s emphasis on improving the social infrastructure. Other reform measures proposed include improving the eco system in the transportation sector, setting up of specialised resolution mechanism to deal with bankruptcy situations in the financial sector and expanding the coverage of Direct Transfer Benefits to products like Fertilisers. Reviving investments has been the focus area of the Government for the last two years. For instance, the total outlay for infrastructure stands at Rs. 2.2 trillion in 2016-17 BE. However, the lack of fiscal space has restricted the growth of capital expenditure and gross lending at 3.9% to Rs. 2.5 trillion in 2016-17 BE. Nevertheless, there have also been some announcements with respect to setting up a mechanism for dispute resolution and renegotiation of PPP contacts, which should augur well for a lot of stranded infrastructure projects. Improving the targeting of beneficiaries for various subsidies and schemes through the planned greater use of Aaadhar is expected to result in fiscal savings over medium term. However, key disappointments include the limited focus on the National Investment and Infrastructure Fund for funding investments. Although the Government’s commitment to the PSU Banks was reiterated in the Budget Speech, the Budget has restricted the allocation for Bank recapitalization at the Rs. 250.0 billion that was announced in the Indradhanush, despite the stress in the balance sheets of Public Sector banks. This, in addition to the lack of any major incremental measures in terms of governance and management reforms for these Banks, is a key disappointment. The Union Budget has announced that in case of contributions made from April 1, 2016 onwards to superannuation funds and recognized provident funds, including the Employees Provident Fund, only 40% of the corpus would be tax free at the time of withdrawal (at par with the tax treatment for the National Pension Scheme), which is a somewhat adverse development. However, the house rent exemption has been raised to Rs. 60,000/annum from Rs. 24,000/annum. In a boost to fiscal federalism, the total resources to be transferred to the State Governments are also forecast to rise by a healthy 12% in 2016-17 BE relative to 2015-16 RE, although it remains uncertain whether these will be used to finance higher capital spending, given the looming fiscal impact of participation in the UDAY Scheme as well as staggered pay revision at the State level going forward. The move to do away with the plan/non-plan classification from FY18 onwards as well as the plan to review the FRBM framework are welcome developments.

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Assessment of Government of India’s Fiscal Situation In its BE for 2015-16, the GoI had pegged its fiscal deficit at Rs. 5.6 trillion (3.9% of GDP; based on the assumption that nominal GDP for 2015-16 would be Rs. 141 trillion). The RE for 2015-16 has pared the projection for the fiscal deficit to Rs. 5.4 trillion (refer Table 1 and Chart 1). Moreover, the CSO’s advance estimate for nominal GDP for 2015-16 is a lower Rs. 136 trillion. As a result, the fiscal deficit remains at 3.9% of GDP in 2015-16 RE, in line with the budgeted target. The BE for 2016-17 indicates continued fiscal consolidation, with a reduction in the fiscal deficit to 3.5% of GDP (Rs. 5.3 trillion; assuming nominal GDP of Rs. 151 trillion in 2016-17), in line with the target announced previously. However, the quality of the fiscal deficit is expected to worsen, with the revenue deficit accounting for 66.3% of the total fiscal deficit in 2016-17 BE, as compared to 63.8% in 2015-16 RE. Fiscal Situation as per 2015-16 RE: At an absolute level, both the revenue and fiscal deficits in 2015-16 RE are lower than the BE for 2015-16, on the back of healthier-thanexpected indirect tax and non-tax receipts, even as direct tax receipts and disinvestment proceeds fell short of the budgeted amount. The fiscal deficit for April-January 2015-16 (Rs. 5.3 trillion) is 6.3% lower than the same recorded in April-January 2014-15 (Rs. 5.7 trillion), with the substantial growth of capital expenditure funded through the fiscal space provided by the higher-than-budgeted growth of taxes and low fuel subsidies. The fiscal deficit for April-January 2015-16 is equivalent to ~99% of the RE for 2015-16. Given the seasonal uptick in tax inflows in Q4 of each fiscal, we expect the fiscal deficit in 2015-16 to be restricted at the level projected in the RE, despite potential risks arising from the implementation of the OROP scheme for the defence services as well as lower-than-forecast disinvestment proceeds. The projections for all the major indirect tax revenues have undergone an upward revision in the RE for 2015-16 as compared to the BE for this year (refer Table 2). The largest revision has been made in the case of excise duty (Rs. 543.3 billion), which partly follows from the five hikes in excise duty on petrol and diesel since November 2015, that are expected to boost inflows by ~Rs. 170 billion in the last five months of the fiscal year. Muted upward revisions have been pencilled in for customs duty (Rs. 11.6 billion) and service tax (Rs. 2.3 billion). In contrast, direct tax collections have been revised downwards in 2015-16 RE relative to 2015-16 BE, by Rs. 176.6 billion in the case of corporation tax and a higher Rs. 283.2 billion for personal income tax.

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Table 1: GoI’s Fiscal Balances 2014-15 Actual 11,014.7 9,036.2 1,978.6 14,669.9

Rs. billion 2015-16 RE 12,060.8 9,475.1 2,585.8 15,476.7

2016-17 BE 13,770.2 10,541.0 3,229.2 17,310.4

Revenue Receipts Tax Revenues$ Non Tax Revenues Revenue Expenditure Revenue Deficit 3,655.2 3,415.9 3,540.2 % of GDP 2.9% 2.5% 2.3% Capital Receipts 514.8 442.2 671.3 (Non Debt) Capital Expenditure 1,966.8 2,377.2 2,470.2 Fiscal Deficit 5,107.3 5,350.9 5,339.0 % of GDP 4.1% 3.9% 3.5% Source: GoI Budget Documents; CGA; ICRA Research $ Net of Refunds, Net of States’ share in Central Taxes

Growth 2015-16 2016-17 RE BE 9.5% 14.2% 4.9% 11.2% 30.7% 24.9% 5.5% 11.8%

-14.1%

51.8%

20.9%

3.9%

Chart 1: GoI’s Revenue and Fiscal Deficit as a Percentage of GDP 7% Revenue Deficit

Fiscal Deficit

6% 5%

4% 3% 2% 1%

0%

Source: GoI Budget Documents; CGA, Ministry of Finance, GoI; ICRA Research

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Overall, gross tax revenues of the GoI have been revised upward in the RE for 2015-16 relative to the BE for that year by Rs. 101.2 billion, with higher indirect taxes (boosted by various cesses that are not shareable with State Governments) being partly offset by lower direct taxes. As a result, States’ share in Union taxes has been revised downward by Rs. 177.7 billion. Hence, the Centre’s net tax revenues have been revised upwards by a larger Rs. 276.7 billion. Overall, net tax revenue growth of the GoI is a modest 4.9% in 2015-16 RE, lower than the 10.8% witnessed in 2014-15 FFC . In the first ten months of this fiscal, 72.5% of the RE for 2015-16 for gross tax revenues had been collected based on the provisional data released by the CGA (refer Chart 2 and Table 3). Non tax revenues have been revised upwards by a healthy Rs. 368.4 billion, to Rs. 2.6 trillion in 2015-16 RE from Rs. 2.2 trillion 2015-16 BE, benefitting from higher inflows from telecom auctions and larger dividends (following the change in dividend policy for PSEs as well as larger surplus transferred by the Central Bank). Around 78.2% of the 2015-16 RE for non tax revenues had been raised by January 2016. In contrast, the estimate for disinvestment proceeds has been revised downwards, from Rs. 695.0 billion in 2015-16 BE to Rs. 253.1 billion in 2015-16 RE. As compared to the latter, the GoI has raised a modest Rs. 128.7 billion through disinvestment of its stake in PSUs in April-January FY16. Subsequently, the GoI has divested a 10% stake in Engineers India Limited and a 5% stake in NTPC, which would boost disinvestment proceeds by a subdued ~Rs. 57 billion. Unless further disinvestment is conducted in the last month of this fiscal, the actual proceeds from disinvestment may be lower than the level forecast in the RE for 2015-16. Revenue expenditure has been revised upwards by Rs. 116.3 billion in 2015-16 RE as compared to the budgeted level, resulting in a growth of 5.5% relative to 2014-15. Non plan revenue expenditure has been revised upwards by Rs. 66.4 billion, led by higher subsidies (Rs. 139.9 billion; refer Table 5), pensions (Rs. 72.1 billion) and CST compensation (Rs. 12.9 billion), and offset by lower interest payments (Rs. 135.3 billion) and defence outgo (Rs. 89.0 billion). 80.6% of the RE for 2015-16 for non plan revenue expenditure had been incurred in April-January 2015-16. The allocation for food subsidy (refer Table 4) has been revised up to Rs. 1,394.2 billion in the RE for 2015-16 from Rs. 1,244.2 billion in 2015-16 BE. 93.9% of the RE for 2015-16 had already been released by January 2016. The rise in food subsidy relative to the outgo of Rs. 1,176.7 billion in 2014-15 may be on account of arrears. The allocation for fuel subsidy has been maintained at the budgeted level of Rs. 300.0 billion in 2015-16 RE, 93.2% of which was released in April-January 2015-16; the fuel subsidy allocation for 2015-16 is considerably lower than the outgo of Rs. 602.7 billion in 2014-15. ICRA expects the RE for 2015-16 to be adequate to ensure only a minimal carry-over of the fuel subsidy burden for

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Table 2: Trends in Tax Revenue Receipts in 2015-16 RE and 2016-17 BE Rs. billion

2015-16 BE (1)

2015-16 RE (2)

2016-17 Variation BE (3) in 2015-16 (2)-(1)

Growth in 2016-17 BE (3)/(2)

Gross Tax Revenues 14,494.9 14,596.1 16,308.9 101.2 11.7% - Corporation Tax 4,706.3 4,529.7 4,939.2 -176.6 9.0% - Income Tax 3,273.7 2,990.5 3,531.7 -283.2 18.1% - Customs Duty 2,083.4 2,095.0 2,300.0 11.6 9.8% - Union Excise Duty 2,298.1 2,841.4 3,186.7 543.3 12.2% - Service Tax 2,097.7 2,100.0 2,310.0 2.3 10.0% Source: GoI Budget Documents; CGA; Economic Survey 2014-15; ICRA Research

Chart 2: Trends in Tax Collections (Net of Refunds, Gross of States’ share in Central Taxes, Rs. billion) Rs. billion 5,000

Q1

Q2

Q3

Q4

4,000 3,000 2,000 1,000 0 FY15

FY16

Corporation Tax

FY15

FY16

Income Tax

FY15

FY16

Customs Duty

FY15

FY16

Union Excise Duty

FY15

FY16

Service Tax

Source: GoI Budget Documents; CGA; ICRA Research Note: Data for Q4FY16 refers to available data for January 2016

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FY16 to FY17, which is a positive development as compared to the past practice. The allocation for fertiliser subsidy has undergone a marginal downward revision to Rs. 724.4 billion in the RE for 2015-16 from Rs. 729.7 billion in the BE for 2015-16, nevertheless remaining higher than the outgo of Rs. 710.8 billion in 2014-15. 96.7% of the RE for fertiliser subsidy had been released in the first ten months of this fiscal. The outlay for pensions has been estimated at a higher Rs. 957.3 billion in 2015-16 RE as compared to the budgeted Rs. 885.2 billion, which is attributed to a rise in defence pensions, in line with the implementation of the OROP scheme. Moreover, plan revenue expenditure has been revised upwards by Rs. 49.8 billion in the RE for 2015-16, despite a Rs. 4.7 billion reduction in grants for capital assets. Total grants to State Governments (plan and non plan) have been cut by Rs. 38.6 billion in 2015-16 RE as compared to 2015-16 BE. Notably, 74.4% of the RE for 2015-16 for plan revenue expenditure had been incurred in April-January 2015-16.

Table 3: Trends in Tax Revenue Receipts in 10MFY16 2015-16 RE Rs. billion 14,596.1

10MFY16 % of RE 72.5%

Growth 21.3%

70.0% 68.6% 84.5% 68.6% 72.9%

10.2% 12.6% 16.6% 64.9% 25.0%

Rs. billion Gross Tax 10,577.0 Revenues^ Corporation Tax 4,529.7 3,171.6 Income Tax 2,990.5 2,050.3 Customs Duty 2,095.0 1,771.2 Excise Duty 2,841.4 1,948.4 Service Tax 2,100.0 1,530.3 Source: GoI Budget Documents; CGA; ICRA Research ^ Net of Refunds, Gross of States’ share in Central Taxes

Capital expenditure has been revised downward by Rs. 37.1 billion in 2015-16 RE as compared to the budgeted level, led by defence (Rs. 131.9 billion) and other items, allowing for a substantial Rs. 170.6 billion enhancement in the outlay for Bank recapitalisation. The growth of capital expenditure in 2015-16 RE as compared to 2014-15 is projected at a robust 20.9%. 94.7% and 83.4%, respectively, of the RE for 2015-16 for non plan and plan capital expenditure had been incurred by January 2016. Fiscal Situation as per 2016-17 BE: The following sections briefly discuss the revenue and expenditure trends forecast by the GoI in the Union Budget for 2016-17. Revenue Receipts: The GoI’s revenue receipts are estimated to rise by a substantial 14.2% in 2016-17 BE as compared to 2015-16 RE, with moderate growth in net tax and robust expansion in non tax revenues (11.2% and 24.9%, respectively). In line with the nominal GDP growth forecast of 11.0% in 2016-17, the GoI has projected its gross tax revenues to expand by 11.7% in 2016-17 BE. However, the latter is substantially lower than the growth of 17.2% in 2015-16 RE, led by indirect taxes, namely excise duty (12.2% vs. 49.6%), service tax (10.0% vs. 25.0%) and customs duty (9.8% vs. 11.4%), despite a number of cesses being introduced. In contrast, the growth of personal income tax and Corporate tax is estimated to rise to 18.1% and 9.0%, respectively, in 2016-17 BE from 12.5% and 5.6%, respectively in 2015-16 RE. Benefitting from the introduction of measures to augment revenue, curb black money and discourage cash transactions, the overall tax revenue growth assumed in the Union Budget for 2016-17 appears realistic. For instance, domestic taxpayers can declare undisclosed income (or such income represented in the

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Table 4: Non-Plan Revenue Expenditure for Key Ministries/Departments in FY16 Rs. billion

2015-16 RE Department of Fertiliser 724.6 Department of Food & Public Distribution 1,404.0 Ministry of Petroleum & Natural Gas 301.5 Total 2,430.1 Source: GoI Budget Documents; CGA; ICRA Research

10MFY16 Percentage (Prov.) of RE 700.6 96.7% 1,318.1 93.9% 281.1 93.2% 2,299.8 94.6%

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form of any asset) by paying tax at 30%, surcharge at 7.5% as well as penalty at 7.5%, i.e. a total of 45% of the undisclosed income. However, the oil industries development cess was reduced (from Rs 4,500/MT to 20% ad valorem) and 13 other cesses with revenue collection under Rs. 500 million per year were abolished.

Table 5: Trends in Revenue and Capital Expenditure

The growth of personal income tax collections is estimated at 18.1% in 2016-17 BE, benefitting from measures such as a hike in the surcharge on personal income tax on those with incomes in excess of Rs. 10 million to 15% from 12%. Other revenue augmentation measures include the imposition of additional tax at the rate 10% on recipients with a gross amount of dividend in excess of Rs. 1 million per year. Tax is also to be deducted at source at the rate of 1% on purchase of luxury cars with a value in excess of Rs. 1 million and cash purchases of goods & services above Rs. 0.2 million. The growth of Corporate tax collections is estimated to improve modestly to 9.0% in 2016-17 BE from 5.6% in 2015-16 RE. The limited progress on the intention stated in the Union Budget for 2015-16 to reduce the Corporate tax rate from 30% to 25% over the subsequent four years (i.e. from 2016-17 onwards), accompanied by rationalisation and removal of various exemptions and incentives for corporate taxpayers, is a disappointment. The Budget for 2016-17 has stipulated that domestic companies with a total turnover or gross receipts not exceeding Rs. 50 million in 2014-15 be charged income tax at the rate of 29%. Besides, the domestic companies incorporated on or after March 1, 2016 and engaged solely in manufacture and production of articles and things, may, at their option, pay tax at a rate of 25% if they do not claim any accelerated depreciation, investment allowance, profit linked deductions and investment linked deductions.

Revenue 15,360.5 15,476.7 17,310.4 Expenditure Interest 4,561.5 4,426.2 4,926.7 Subsidies 2,438.1 2,578.0 2,504.3 729.7 724.4 700.0 Fertiliser 1,244.2 1,394.2 1,348.3 Food Fuel 300.0 300.0 269.5 Pensions 885.2 957.3 1,233.7 Defence 1,521.4 1,432.4 1,627.6 CST Compensation 150.3 163.2 104.7 Grants Capital Assets 1,324.7 1,320.0 1,668.4 Balance 4,479.3 4,599.7 5,245.0 Capital Exp. Gross 2,414.3 2,377.2 2,470.2 Loans & Adv. Defence 945.9 814.0 863.4 Recapitalisation of 79.4 250.0 250.0 Banks etc. Balance 1,389.0 1,313.2 1,356.8 Source: GoI Budget Documents; CGA; ICRA Research

The GoI has forecast excise duty collections to rise by 12.2% in FY17 BE, benefiting from hike in the duties on tobacco products, aereated beverages and aviation turbine fuel, in addition to excise duty of 2% (without CENVAT credit) and 12.5% (with CENVAT credit) being imposed on branded readymade garments and made up articles of textiles of retail sale price of Rs. 1,000 or more. Excise duty of 1% (without CENVAT credit) and 12.5% (with CENVAT credit) is being imposed on articles of jewellery (excluding silver jewellery, other than studded with diamonds/other precious stones). Moreover, the Clean Energy Cess has been renamed as the Clean Environment Cess and the rate of the same has been doubled to Rs. 400/tonne on coal, lignite and peat. Additionally, infrastructure cess of 4% is being levied on certain motor vehicles.

Rs. billion

2015-16 BE (1)

2015-16 RE (2)

2016-17 Variation BE (3) in 2015-16 (2)-(1) 116.3

11.8%

-135.3 139.9 -5.3 150.0 0.0 72.1 -89.0 12.9 -4.7 120.3 -37.1

11.3% -2.9% -3.4% -3.3% -10.2% 28.9% 13.6% -35.8% 26.4% 14.0% 3.9%

-131.9 170.6

6.1% 0.0%

-75.8

3.3%

The GoI has forecast service tax collections to rise by 10.0% in 2016-17 BE, benefitting from a Krishi Kalyan Cess of 0.5% on all taxable services w.e.f. June 1, 2016.. Moreover, the Finance Act, 2016 has made an enabling provision to exclude all services provided by the Government or local authority to a business entity from the Negative List, and the notified

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Growth in 2016-17 BE (3)/(2)

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amendments shall come into effect from April 1, 2016. Thus, all services provided by the Government or local authority to a business entity, except the services that are specifically exempted, or covered by any other entry in the Negative List, shall be liable to service tax. Moreover, customs duty collections are forecast to expand by a moderate 9.8% in 2016-17 BE, with no major changes in levy. Growth of net tax revenues is budgeted to rise to 11.2% in 2016-17 BE from the muted 4.9% in 2015-16 RE, with the latter dampened by the rise in States’ share in Central taxes to 42% from 32% as per the recommendations of the Fourteenth Finance Commission. The BE for 2016-17 forecast a robust 24.9% growth in non tax revenues to Rs. 3,229.2 billion from Rs. 2,585.8 billion in 2015-16 RE. Revenues from other communication services (including telecom) are estimated to rise to Rs. 989.9 billion in 2016-17 BE from Rs. 573.8 billion in 2015-16 RE, which appears optimistic in our view. ICRA expects the actual receipts to be around 40% lower than the BE for 2016-17 based on our forecast of the likely demand for spectrum from industry and its expected purchasing power. However, higher spectrum sale as compared to ICRA’s estimate would net a larger amount of revenues to the GoI. Dividends & profits are estimated to rise by a subdued 4.7% to Rs. 1,237.8 billion in 2016-17 BE from Rs. 1,182.7 billion in 2015-16 RE. The BE for 2016-17 for non-loan capital receipts at Rs. 565.0 billion, is more than twice as high as the Rs. 253.1 billion included in the RE for 2015-16. The former includes Rs. 360.0 billion as receipts from disinvestment of GoI’s stake in PSUs and Rs. 205.0 billion from strategic divestment. The likelihood of achieving this target will depend on how swiftly the stake sale programme is started in addition to market conditions. In addition, while monetisation though divestment of CPSEs’ individual assets could augment funds, the manner in which it is executed remains to be seen. Revenue Expenditure: Revenue expenditure is budgeted to increase by 11.8% in 2016-17 BE, bloated by the expected rise in the salary and pension bill post the implementation of the SCPC’s recommendations and the OROP scheme. While non plan revenue expenditure is expected to rise by 9.5% in 2016-17 BE, plan revenue expenditure is expected to display a sharper expansion of 20.5%, with a 26.4% rise in grants for creation of capital assets. Non plan revenue expenditure excluding interest and subsidies is forecast to rise by Rs. 720.6 billion in 2016-17 BE, similar to the burden related to the SCPC’s recommendations on the General Budget. The allocation for major subsidies has been reduced to Rs. 2.3 trillion in the BE for 2016-17 from Rs. 2.4 trillion in the RE for 2015-16, led by fuel subsidy (to Rs. 269.5 billion from Rs. 300.0 billion) following the continued correction in global crude oil prices. The BE for 2016-

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Table 6: Fiscal Deficit Targets for GoI Performance/ Targets Performance/ Targets in Budget 2016-17 in Budget 2015-16 2015-16 3.9% 3.9% 2016-17 3.5% 3.5% 2017-18 3.0% 3.0% 2018-19 3.0% NA Source: GoI; FFC Report; ICRA Research

Targets set by FFC 3.6% 3.0% 3.0% 3.0%

Table 7: Fiscal Balances for GoI Rs. billion

2015-16 BE

2015-16 RE

2016-17 BE

2017-18 Rolling Targets

2018-19 Rolling Targets

Revenue Deficit 3,944.7 3,415.9 3,540.2 Percentage of GDP 2.8% 2.5% 2.3% 1.8% 1.3% Effective Revenue 2,680.0 2,095.9 1,871.8 Deficit Percentage of GDP 2.0% 1.5% 1.2% 0.6% 0.0% Fiscal Deficit 5,556.5 5,350.9 5,339.0 Percentage of GDP 3.9% 3.9% 3.5% 3.0% 3.0% Total Outstanding 46.1% 47.6% 47.1% 46.8% 44.4% Liabilities as a Percentage of GDP# Source: GoI Budget Documents; CGA; ICRA Research # Does not include the portion of National Small Savings Fund and Market Stabilisation Scheme that are not used to finance GoI’s fiscal deficit

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17 for fuel subsidy appears adequate, in a scenario of crude oil price of upto USD 40/barrel. Moreover, the outlay for food subsidy has been reduced to Rs. 1,348.3 billion in 2016-17 BE, from Rs. 1,394.2 billion in 2015-16 RE, which may have included some arrears. In addition, the allocation for fertiliser subsidy has been pared to Rs. 700.0 billion in 201617 BE from Rs. 724.4 billion in 2015-16 RE. However, a reduction in the budgeted subsidy at a time when the subsidy requirement is high ~Rs. 950-1,000 billion (including likely subsidy backlog of Rs. 300 billion) is likely to lead to continuation of delays in disbursement of subsidy for the fertiliser sector. However, due to the anticipated decline in domestic gas prices in 2016-17, downward revision in RasGas R-LNG prices and fall in urea IPP prices, the urea subsidy requirement is expected to reduce by Rs. 65-70 billion during 2016-17 and hence the subsidy backlog may decline at the end of the coming fiscal. Capital Expenditure: Capital expenditure and gross lending is budgeted to rise by a low 3.9% to Rs. 2,470.2 billion in 2016-17 BE, which is only marginally higher than the BE for 2015-16 (Rs. 2,414.3 billion). While non plan capital expenditure is expected to rise by 5.4% in 2016-17 BE, plan capital expenditure is expected to expand by 2.9%. The allocation for defence has been increased by 6.1% to Rs. 863.4 billion in the BE for 2016-17 from Rs. 814.0 billion in 2015-16 RE. Notably, the allocation for Bank recapitalisation has been restricted to the Rs. 250.0 billion in 2016-17 BE that was announced in the Indradhanush, despite the stress in the balance sheets of PSU Banks. Fiscal Balances: In line with the previously announced target (refer Table 6), the GoI has indicated that it would restrict its fiscal deficit to 3.5% of GDP in 2016-17. As a percentage of GDP, the revenue deficit, effective revenue deficit and fiscal deficit are all budgeted to improve in 2016-17 BE relative to 2015-16 RE. At an absolute level, the revenue deficit is estimated to widen, while the effective revenue deficit and fiscal deficit are estimated to narrow in 2016-17 BE as compared to the RE for 2015-16 (refer Table 7). Notaby, the quality of the fiscal deficit is expected to deteriorate, with the revenue deficit accounting for around 66.3% of the total fiscal deficit in 2016-17 BE compared to 63.8% in 2015-16 RE. The rolling targets indicated by the GoI in the Union Budget for 2016-17, aim to curtail the fiscal deficit to 3.0% of GDP each in 2017-18 and 2018-19. Outstanding liabilities are projected to decline to 46.8% of GDP in 2017-18 and further to 44.4% of GDP in 2018-19, an improvement from 47.6% in 2015-16 RE and 47.1% in 2016-17 BE.

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Table 8: GoI’s Long-Term Market Borrowings (Rs. billion) Net Borrowings Redemptions Gross Borrowings Source: RBI; ICRA Research

2015-16 4,406.1 1,443.9 5,850.0

2016-17 4,251.8 1,748.2 6,000.0

Growth -3.5% 21.1% 2.6%

Borrowings: The GoI has indicated gross borrowings of Rs. 6.0 trillion in 2016-17 (refer Table 8), marginally higher than the level in 2015-16. The net long term borrowings are placed at Rs. 4.3 trillion in 2016-17, 3.5% lower than the borrowings of Rs. 4.4 trillion in 2015-16. This in addition with the expectation of a further 25 bps of reduction in the Repo rate in 2016, is likely to dampen yields of dated Government securities. The RE of 2015-16 indicates that GoI would repurchase securities amounting to Rs. 386.8 billion in the ongoing year; so far, the GoI has repurchased securities amounting to Rs. 353.8 billion in 2015-16. Further, the target of switching of G-sec has been revised to Rs. 363.2 billion in the RE for 2015-16 from Rs. 500.0 billion proposed in the BE for 2015-16. In continuation with this strategy of easing the near-term redemption pressure, further buy-back/switching of shorter tenor securities worth Rs. 750.0 billion is proposed in 2016-17.

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ICRA Sectoral Analysis

AUTO: AUTO COMPONENTS Proposals  Benefits of deduction for R&D limited to 150% from April 2017 onwards and 100% from April 2020, as compared to 200% currently  Basic Custom Duty (BCD) on Aluminium Oxide (for wash coats used in catalytic converter) reduced from 7.5% to 5.0%  Retail Sale Price (RSP) based assessment of excise duty extended to accessories of motor vehicle and certain other specified goods [with abatement of 30%].  Increased outlay for Pradhan Mantri Kaushal Vikas Yojana (PMKVY) to set up 1,500 multi skill training institutes across India

Impact: Neutral Increasing thrust on infrastructure spending and road development augurs well for the automotive industry, especially M&HCV and construction equipments as well as their suppliers. However, proposed reduction in weighted deduction for R&D expenses to 150% from April 2017 as against 200% is a deterrent for the domestic auto component industry which has to make sizeable R&D investments to compete with global majors amidst changing emission and safety norms in India. Custom duty cut on aluminium oxide and certain components of electric vehicle is a positive for the industry. The extension of RSP based excise duty assessment could increase the cost for certain auto component manufacturer to an extent, depending on the product, though impact of the change in abatement is minimal. 1

Government has set aside Rs 1,700 crore towards setting up 1,500 multi skill training institutes which should provide access to a more skilled pool of manpower for the industry, an issue which could hinder industry growth over the longer term if left unaddressed.

AUTO: COMMERCIAL VEHICLES Proposals  Significant increase in allocation (Rs. 97,000 crore) towards development of roads & highways infrastructure  Opening up of the private sector in providing passenger road transport services

Impact: Neutral The Commercial Vehicle (CV) sector will reap benefits of Government’s plans to significantly increase allocation for development of roads & highways including those in rural areas. These investments will not only support sales of vehicles used for providing last mile connectivity but will also be positive for tipper sales that constitute 25% of M&HCV Truck sales in India. Further, the proposal to open up passenger road transport services to private players will support demand for buses. At present, the bus segment accounts for ~13% of industry sales. Such initiatives along with greater thrust towards smart cities and urban development are likely to benefit the segment. 1

100 lakh = 1 crore = 10 million

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However, in absence of any direct benefits such as scrappage scheme for older vehicles or greater incentives to promote usage of electric/hybrid vehicles, the announcements made in Budget 2016-17 would overall be neutral for the sector.

AUTO: PASSENGER VEHICLES Proposals  An infrastructure cess of 1% on small petrol, LPG, CNG cars, 2.5% on small diesel cars and 4% on other higher engine capacity vehicles and SUVs  Levied of tax at 1% on purchase of cars exceeding value of Rs 1 million

Impact: Negative Government has proposed infrastructure cess of 1% on small petrol cars and 2.5% on small diesel cars having length less than 4 metre and engine capacity not exceeding 1,200 cc and 1,500 cc for petrol/CNG and diesel vehicles, respectively. For vehicles exceeding 4 metre, infra cess of 4% is levied. Infra cess could result in price hike of Rs ~1,000 for small cars to ~Rs 10,000 for larger vehicles, which will be ultimately passed on to the end customer. Also, in order to broaden tax payer base, tax at source of 1% is proposed for vehicles exceeding value of Rs 1 million, which could impact sales of premium vehicles to some extent in the near term. However, in absence of any direct benefits such as scrappage scheme for older vehicles or greater incentives to promote usage of electric/hybrid vehicles, the announcements made in Budget 2016-17 would overall be neutral for the sector.

AUTO: TRACTORS Proposals  Institutional farm credit target increased by 6% to Rs. 9 lakh crore and provision of Rs. 15,000 crore for interest subvention on loans extended to farmers  Total allocation of Rs. 35,984 crore towards agriculture and farmer welfare schemes  Allocation of Rs. 87,765 crore to the corpus of Rural Development Fund; Rs. 86,500 crore for irrigation projects over next 5 years for fast tracking 89 projects; dedicated irrigation fund worth Rs 20,000 crore to be set up under NABARD  Allocation of Rs. 38,500 crore to rural employment programme, Rs. 5,500 crore for crop insurance programme for 2016-17  Rs. 500 crore under National Food Security Mission allocated to Pulses  Allocation of Rs. 368 crore for soil health and fertility program; Rs. 6,000 crore for implementation of programme for management of ground water resources  Unified National Agriculture market and online procurement systems under Food Corporation of India to be launched

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Impact: Positive The government’s thrust on rural development and farmer welfare in the budget is likely to augment the demand for tractors going forward. The government’s commitment to improved farm credit availability through increased institutional agri-credit targets and allocations to development and credit funds is expected to have a positive impact on farm mechanization levels in the country. Additionally, enhanced allocation to schemes aimed at enhancing irrigation penetration and increasing the coverage of crop insurance schemes would help reduce dependence of agricultural sector on rainfall and improve crop yields. The impending launch of a National Agriculture Market, an online platform to sell agricultural produce, is expected to help enhance farmer’s access to markets and positively impact farm incomes.

AUTO: TWO-WHEELERS Proposals  Significant increase in allocation towards rural development and welfare schemes  Sharpened focus on irrigation schemes and crop insurance to reduce volatility in farm income  Proposal to make amendments in the Motor Vehicles Act and open up the road transport sector in the passenger segment

Impact: Positive Given that the rural market accounts for a significant share of two wheeler volumes (motorcycles), large budgetary support for the up-liftment of farmers, is expected to aid in demand revival for the two-wheeler industry. While the proposal to make amendments in the Motor Vehicles Act to open up the road transport sector is expected to improve the public transport facilities thereby acting as a deterrent to the two wheeler demand in the medium term, ICRA believes that the overall budgetary announcements remain positive to the two-wheeler industry by way of bringing in enablers for demand revival.

AVIATION Proposals  Increase of excise duty on Aviation Turbine Fuel (ATF) from 8% to 14%; other than for supply to Scheduled Commuter Airlines (SCA) under the Regional Connectivity Scheme (RCS)  Revival of some of the 160 un-served or underserved airports at an indicative cost of Rs. 50 crore to Rs. 100 crore each in partnership with state governments  10 out of 25 non-functional air strips with Airport Authority of India will be developed  Customs single window project to be implemented at major airports  Exemption from basic customs duty, countervailing duty, special additional duty for tools and tool kits imported by Maintenance, Repair and Overhaul (MRO) companies  Exemption from excise duty to tools and tool kits procured by MROs

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 Restriction of one year for utilization of duty free parts for MRO of aircrafts being removed  Procedure for availing customs duty and excise duty exemptions for MROs being simplified  Stay for foreign aircrafts for MRO extended up to six months from existing 60 days

Impact: Neutral The union budget has increased excise duty on ATF from 8% to 14%. The move is likely to hurt all the airlines, as they typically look to pass on lower fuel price benefits to passengers to improve load factors. The move may not have significant immediate impact, given prevailing lower fuel prices; however the impact will be tangible in case the fuel prices increase. The SCAs [a new category of airlines proposed in Draft National Civil Aviation Policy (DNCAP) – which are essentially lower capacity carriers connecting remote locations] will enjoy the current excise duty of 8%, indicating government’s focus on supporting regional connectivity. In line with government’s efforts to improve regional connectivity, the union budget proposes to develop some of the non functional airports and air strips into no-frills airports, which will increase penetration for the aviation industry. Carrying on with ‘Make in India’ theme, the union budget provides several duty exemptions for MRO operators along with removal of restriction on utilization of duty free parts, extension to stay for foreign aircrafts and simplified processes. All these exemptions/incentives would facilitate developing India as MRO hub, not only for servicing Indian airlines, but also foreign airlines. Growth in domestic MRO industry will have the duel effect of augmentation of airport operators’ revenues as well as reduction in costs for the airlines.

BFSI: ASSET RECONSTRUCTION COMPANIES Proposals  Maximum sponsor stake permitted in Asset Reconstruction Companies (ARCs) raised from 50% to 100%; FDI limit in ARCs also raised from 74% to 100% under automatic route  Non-institutional investors permitted to invest in Security receipts (SRs); Foreign Portfolio Investors (FPIs) can invest up to 100% in each tranche of SRs issued by ARCs subject to sectoral caps  Complete pass-through of income for securitisation trusts set up by ARCs; income to be taxed directly at the hands of the investors  Debt Recovery Tribunals (DRTs) to be strengthened; computerised processing of court cases for faster resolution

Impact: Positive  Equity capital availability should cease to be a constraint for ARCs with strong sponsors. Easing of limits placed on sponsor stake and FDI flows should help ARCs significantly augment their capital base and scale up business volumes.  Foreign investors operating in distressed assets segment may be more inclined to look at the Indian ARC market. Similarly, access to FPIs and non-institutional investors and clarity around taxation will help widen the investor base for SRs and enable ARCs in scaling up business.  Any improvements in the judicial system resulting in faster resolution and disposal of cases should provide a long-term impetus to the industry.

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BFSI: BANKS Proposals  No change in capitalization plans for Public Sector Banks (PSBs); Government of India (GoI) capital infusion to remain at Rs. 250 billion in FY17 (as announced in Indradhanush plan). GoI will consider the option of reducing its stake in IDBI Bank to below 50%  Relaxation in norms for maximum sponsor ownership for Asset Reconstruction Companies (ARCs) (up to 100% vs. 50% currently) and permit non-institutional investor to invest in Security Receipts (SRs); FDI limit in ARCs also raised from 74% to 100% under automatic route  Guidelines for renegotiation of PPP Concession Agreements in the Infrastructure sector will be issued  A comprehensive Code on Resolution of Financial Firms will be introduced in the Parliament during 2016-17  Provision of Rs. 55 billion for Crop Insurance Scheme  Measures for deepening of corporate bond market; LIC of India will set up a dedicated fund to provide credit enhancement to infrastructure projects. The fund will help in raising the credit rating of bonds floated by infrastructure companies and facilitate investment from long term investors.  Lower allocation to National Investment & Infrastructure Fund (NIIF)

Impact: Negative for PSBs  Given the significant stress on the PSBs’ balance sheets, (with gross NPAs crossing Rs. 4 trillion as on December 31, 2015) as well large Tier I capital raising requirement for FY17 (Rs. 400-600 billion1 as against the GoI’s current plan of Rs. 250 billion), the ability of PSBs to provide adequate credit for the revival of the economy is extremely constrained. Moreover, significant weakness in PSBs asset quality and profitability profile (post RBI’s asset quality review exercise) in Q3, FY16 has increased PSBs dependence on GoI for capital infusion while GoI’s capital infusion plan remain same as was announced in Indradhanush plan and is a negative for PSBs.  However, GoI’s commitment to provide additional capital, if required by these banks, is positive.  Privatization of IDBI Bank may reduce the Tier I capital requirement for PSBs by up to Rs. 150 billion during FY17-FY19 (out of ICRA estimate on PSBs’ total Tier I requirement of Rs. 1.9-3.0 trillion during FY17-FY19)  Relaxation in norms for maximum sponsor ownership for ARCs as well as widening of investor base for SRs of ARC is positive for strengthening of ARCs capacity to take over stressed assets from banks. Furthermore, foreign investors operating in distressed assets segment may be more inclined to look at the Indian ARC market. As on December 2015, In ICRA’s estimate stressed advances (Gross NPAs and restructured advances) of banks2 are around Rs 8.25 trillion.  Renegotiation of PPP Concession Agreements in the Infrastructure sector could improve viability of some infrastructure projects funded by banks/ FIs and a credit positive as it would reduce the stress for banks/FIs  Crop Insurance scheme could be positive for banks’ asset quality in agriculture loan segment; Banks; NPAs in agriculture loan segment are around 5.5%3. 2

PSBs + Private banks

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 LIC’s credit enhancement fund could be negative for banks’ credit growth and profitability as projects get better credit rating and opt for lower cost bond market vs. bank funding  The limited focus on the National Investment and Infrastructure Fund for funding investments is negative

BFSI: FINANCIAL INSTITUTIONS AND NBFCS Proposals  100% deduction for profits to an undertaking from a housing project for flats up to 30 sq. metres in four metro cities and 60 sq. metres in other cities.  Exemption of service tax on construction of affordable houses up to 60 square metres under any scheme of the Central or State Government including PPP Schemes  Additional tax deduction for interest of Rs. 50,000 per annum for loans up to Rs. 3.5 million sanctioned during the next financial year provided the value of the house does not exceed Rs. 5.0 million.  National Land Record Modernisation Programme being revamped under the Digital India Initiative and will be implemented as a Central sector scheme with effect from 1st April, 2016  Deduction of interest payable on capital borrowed for acquisition or construction of a self-occupied house property to be allowed if such acquisition or construction is completed within five years instead of three years earlier  Tax deduction on credit provisions for NBFCs (to the extent of 5% of income)  Distribution tax levied presently on income distributed by securitisation trust shall be discontinued; income from investment in securitised debt shall be taxable directly in the hands of the investor; tax to be deducted at source by the securitisation trust  Foreign Portfolio Investors (FPIs) will be allowed to be invested in Pass Through Certificates (PTCs)

Impact: Positive  As per government estimates, total shortage under “Housing for All” is around 20 million urban units. With service tax exemption and 100% deduction on profits for affordable housing segment, the supply of such projects could improve. Some of the benefits in terms of lower tax rates could be passed on to the end buyers improving affordability  New buyers under housing segment to benefit from additional Rs. 50,000 tax exemption on interest payment of home loans leading to improved affordability. This could lead to the effective interest rate for borrowers reducing by 200-250 bps due to the higher tax exemption. As per ICRA estimates, around 50% of disbursements for HFCs have been for loans up to Rs. 2.5 million. Therefore a large number of new buyers could benefit from this  Revamp of Land Record System could reduce the risk of frauds and hence credit risk for banks and Housing Finance companies  ICRA estimates that the tax deduction on credit provisions could provide a 20-30 bp increase in return on assets and 120-180 bp increase in return on equity of NBFCs 3

Source: RBI

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 Removal of the distribution tax regime is a major positive for the securitisation market. Under the prevailing framework, tax is levied (@30% where the investor is a tax paying entity) at the time of distribution of income by the securitization trust. The distributed income thus received by the investor is then deemed to be tax free. As per Income Tax rules, the expenses incurred in respect of such investment (in this case, interest on borrowed funds) are proportionately disallowed while computing the taxable income. Thus, the post-tax return for an investor in securitization transaction gets significantly impacted.  The revised framework will bring the income from investment in securitized debt at par with the other sources of income for the investor. The securitization trust will be required to deduct tax at source on the amounts distributed, but there will be a tax credit subsequently to the extent of the amounts withheld by the trust, against the taxes payable by investors on its other income. Also, expenses incurred to earn the income from securitisation investment, will be allowed to be deducted, while determining total taxable income. This would significantly improve the post-tax returns of the investor.  Permitting FPIs to invest in PTCs should help in widening the investor base and deepening the securitization market. HFCs and NBFCs The government continued with its focus on “Housing for All” and announced initiatives on both supply side as well as demand side. On the supply side, government announced service tax exemption and 100% deduction on profits for affordable housing segment, which could encourage builders to launch such projects. On the demand side, the affordability for the new buyer could improve on account of higher tax exemptions leading to around 200-250 bps reduction in effective interest rate of the borrower and also on account of developers passing on some of the benefits of the lower tax rates to the buyers. The revamping of land record system is also a positive for the sector, as it could reduce the risk of frauds and hence credit risk for banks and Housing Finance companies. Tax deduction on credit provisions (to the extent of 5% of income) would improve the earnings of NBFCs by 20-30 bps increase in return on assets through lower effective tax rate.

BFSI: INSURANCE AND PENSION Proposals  New health insurance scheme to protect poor and economically weak up to Rs 1 lakh per family.  Provision of Rs. 55 billion for Prime Minister Fasal Bima Yojana, a government sponsored Crop Insurance Scheme  Listing of public sector General Insurance Companies  Withdrawal up to 40% of the corpus at the time of retirement to be tax exempt in the case of National Pension Scheme (NPS). However, an equivalent tax treatment has been suggested for other superannuation funds and recognized provident funds for contributions made on or from April 1, 2016, which is an adverse development.

Impact: Marginally Positive  The new proposals on health and crop insurance to help improving the penetration levels in the Industry in addition o providing much needed cover to the policyholders.  Listing public sector insurance companies could provide the Government with an opportunity to part monetize its investments.  The proposed tax benefits on withdrawals at retirement could help increase the contribution towards these products.

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CAPITAL GOODS Proposals  100% Rural Electrification to be achieved by May 2018; Rs. 8500 crore allocated for part-funding of the distribution capex oriented schemes namely Deendayal Upadhayaya Gram Jyoti Yojna (DUGJY) and Integrated Power Development Scheme (IPDS)  Rs. 3000 crore per year allocated towards development of nuclear based capacity for power generation  Accelerated depreciation (AD) benefit limited to 40%

Impact: Neutral Thrust towards 100% rural electrification by May 2018 and higher allocation under DUGJY and IPDS is a positive for equipment manufacturers and EPC contractors in the T&D segment. Higher allocation on nuclear power segment is a positive for the OEMs and EPC players in the power generation segment. On the negative side, reduction in accelerated depreciation benefit is a negative for OEMs in the renewable energy segment especially wind turbine manufacturers, which are already impacted by overcapacities, given likelihood of reduced demand from financial/corporate investors in the non-IPP segment.

CEMENT Proposals  Higher Central plan outlays for Roads and Highways (increased to Rs. 1.0 trillion in 2016-17 BE from Rs. 694.2 billion in 2015-16 RE) and Railways (increased to Rs. 1.2 trillion in 2016-17 BE from Rs. 975 billion in 2015-16 RE) to support infrastructure projects.  10,000km of highways to be awarded in FY17, completion target also at 10,000 km in FY17  Rural Roads: Central government allocation of Rs. 190 billion along with state governments’ share of Rs. 80 billion will provide Rs. 270 billion towards rural road development under Pradhan Mantri Gram Sadak Yojna (PMGSY)  Fast tracking of 89 irrigation projects under Accelerated Irrigation Benefits Programme (AIBP). Outlay on these projects estimated at Rs. 170 billion in next year and Rs. 865 billion over the next five years.  Revival of 160 unserved and underserved airports to be taken up  Execution of Sagarmala project and National Waterways to be expedited. Plans to develop new greenfield ports both in the eastern and western coasts of the country.  Allocation of Rs. 40 billion for National Investment and Infrastructure Fund (NIIF) as compared to proposed annual flow of Rs. 200 billion last year  As a measure towards deepening of corporate bond market, LIC will set up a dedicated fund to provide credit enhancement to infrastructure projects  Exemption from service tax for certain affordable housing projects and 100% deduction for profits of a developer from specific affordable housing projects

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 Excise duty exemptions extended to Ready Mix Concrete (currently 12.5% excise duty is payable)  Increase in clean energy cess on coal from Rs. 200/MT to Rs. 400/MT

Impact: Neutral Government measures to promote investment in ports, roads, rail, irrigation and other infrastructure projects, besides revival of stalled road projects are likely to provide a fillip to cement demand. This apart, cement demand will also be boosted by fiscal concessions for certain housing projects. Cement companies are also likely to benefit from increase in long term funding availability for infrastructure projects which is likely to facilitate more investment in these sectors. On the negative side, the increase in clean energy cess on coal by Rs. 200/MT is likely to impact cost of production by about Rs. 1.50-2.0 per bag (depending upon factors like plant efficiency levels and clinker to cement ratio). It is likely to impact the operating margins of cement companies (albeit marginally by around 0.5-1%) given that they may not be fully able to pass on the costs given the competitive pressures.

CHEMICALS & PETROCHEMICALS Proposals  Reduction in basic customs duty on denatured ethyl alcohol from 5% to 2.5%  Reduction in basic customs duty on all cyclic and acyclic hydrocarbons from 5%/2.5% to 2.5%  Reduction in Special Additional Duty on orthoxylene for the manufacture of phthalic anhydride from 4% to 2%  Reduction in basic customs duty on electrolysers, membranes and their parts required by caustic soda/potash units using membrane cell technology from 2.5% to Nil

Impact: Positive The reduction in basic customs duty on denatured ethyl alcohol would reduce the input/import parity price of this important feedstock for several downstream products such as Mono ethylene glycol, acetic acid, pyridine, ethyl acetate, acetic anhydride etc, many of which are exported. While the country is expected to remain a net importer of ethyl alcohol in the foreseeable future, the reduction in the basic customs duty would reduce the input costs of and boost the competitiveness of manufacturers of these products such as India Glycols, Laxmi Organics etc. Besides, it will enable OMCs import ethanol for the blending programme at competitive rates. The reduction in basic customs duty on all cyclic and acyclic hydrocarbons would reduce the input costs for these chemicals for importers and manufacturers in several industries such as agrochemicals, plasticizers, pharmaceutical, speciality chemicals etc. Accordingly the lowering of input costs would benefit the manufacturers such as Insecticides India, KLJ Plasticisers etc. The reduction in the special additional duty on orthoxylene for the manufacture of phthalic anyhydride would reduce the import parity price/input cost for phthalic anhydride manufacturers such as IG Petrochemicals, Thirumalai Chemicals etc. The reduction in basic customs duty on electrolysers, membranes and their parts required by caustic soda/potash units using membrane cell technology would reduce the costs for new plants being set up and/or the recurring cost of existing manufactures such as Grasim Industries, DCM Shriram, Gujarat Alkalies and Chemicals etc.

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FERTILISERS Proposals  Reduced budgetary provision for subsidy: Rs. 70,000 crore for 2016-17 (BE) against Rs. 72,438 Cr. for 2015-16 (RE) 

Subsidy on urea: Rs. 51,000 crore (BE) against Rs. 50,500 crore (RE)



Subsidy on decontrolled fertilisers: Rs. 19,000 crore (BE) against Rs.21,938 crore (RE)

 Reduced excise duty on micronutrients from 12.5% to 6%  Reduced excise duty paid on physical mixture of fertilizers by Co-operative Societies for supply to their members to 0%  Launched Direct Benefit Transfer (DBT) scheme on pilot basis for the fertilisers  Allocated Rs. 17000 crore for implementation of irrigation projects for 2016-17; set up of a long term dedicated irrigation fund under NABARD

Impact: Marginally Negative The GoI has reduced the budgeted subsidy by ~Rs. 2,500 crore to Rs. 70,000 crore for 2016-17 as compared to the revised estimate for 2015-16. Reduction in the budgeted subsidy at a time, when the subsidy requirement is high ~Rs. 95,000-100,000 crore (including likely subsidy backlog of Rs. 30,000 crore) is likely to lead to continuation of delays in disbursement of subsidy for the fertiliser sector. Consequently, liquidity profile of the industry will continue to be weak with spikes in short term borrowings in the second half of the year and higher interest costs on the same. However, due to expected decline in domestic gas prices in 2016-17, downward revision in RasGas R-LNG prices and fall in urea IPP prices, the urea subsidy requirement is expected to reduce by Rs. 6500-7000 crore during 2016-17 and hence the subsidy backlog would be lower as on next year end. For the P&K fertilisers, 13% downward revision in the budgeted subsidy indicates that the GoI might reduce the Per nutrient subsidy rates, which in turn would mean MRPs for farmers are unlikely to change and the benefit from lower international prices of intermediates/finished fertilisers has been retained by the GoI. The GoI also announced Direct Benefit Transfer (DBT) for urea to be launched on a pilot basis, wherein the fertiliser subsidy would be directly transferred to farmer’s bank account. If successfully implemented, it would reduce the working capital requirement of industry, besides reducing urea leakages. However, successful implementation would be a major challenge as setting up the required infrastructure to correctly identify the targeted beneficiaries remains critical for the success of the scheme. The GoI has reduced the excise duty on micronutrients from 12.5% to 6%, while it has exempted the excise duty on physical mixture of fertilizers paid by Co-operative Societies for supply to their members. Additionally, there has been increased focus on the irrigation front besides other initiatives on agri front, which will be beneficial to the fertiliser industry from the long-term demand perspective.

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FMCG & CONSUMER DURABLES Proposals  Increased outlay for farm and rural sector as well as proposed 7th pay commission, will boost consumption demand  Excise duties on various tobacco products other than beedi raised by about 10 to 15%  Reduction in excise duty on components for mobiles, set top boxes, routers, CCTV cameras and other digital components  Custom duty on magnetrons (used in microwave oven) reduced from 10% to NIL

Impact: Positive th

Increased outlay for farm and rural sector and proposed 7 pay commission hike will boost consumption demand and is overall positive for the industry. Further, in order to provide impetus for GoI’s “Make in India” theme, government has significantly reduced excise duty on mobiles, set top boxes, CCTV cameras and other digital components which are predominantly imported from overseas market. In order to discourage tobacco consumption, excise duty on tobacco products including cigarettes and gutkha (including filter khaini) has been rased by 10%-15%, which will be eventually passed to the end consumer by the manufacturers.

HEALTHCARE Proposals  Increase in allocations with special focus on sectors including healthcare; budgetary allocation of Rs 39,533 crore proposed during 2016-17, an increase of 13% over 2015-16 estimates  New health protection scheme to reduce high out of pocket hospitalization expenses for BPL section of the population;  3000 stores to be opened under Jan Aushadhi Yojana, to ensure availability of generic drugs at an affordable cost  Proposal to start ‘National Dialysis Services Programme’ through PPP mode for providing dialysis services in all district hospitals  Exemption of service tax (existing rate of 14%) on general insurance services provided under ‘Niramaya’ Health Insurance Scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability  Focus on preventive healthcare by way of increasing awareness of hygiene and cleanliness through Swachh Bharat programme (Rs 9000 Cr allocated towards the same)  Investment linked tax deduction available for operating hospitals in specific areas to be reduced from 150% to 100% with effect from 1st April 2017

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Impact: Positive The budgetary allocations for healthcare have increased - a positive which is likely to aid in capacity creation and deeper penetration of medical services in the Country. Health insurance scheme for the below the poverty line population, with cover of Rs 1 lakh per family and additional Rs 30,000 for senior citizens, would provide protection for BPL households and also improve demand for hospitals. In addition, the government has provided a national agenda to support patients affected by renal diseases through its National Dialysis Services Program and exemption of service tax on general insurance services rendered for Autism, Cerebral Palsy etc among few others. Despite the reduction in investment linked tax deduction for hospitals operating in specific areas, the overall impact of the budgetary measures on the sector is positive though the same might be lower than industry expectations of an even higher budgetary allocation and according infrastructure status to the sector.

HOTELS AND TOURISM Proposals  Development of non-functional airports / airstrips to improve regional connectivity for tourists  Continued emphasis on improving sanitation and cleanliness under the Swachh Bharat Abhiyan scheme  Imposition of Krishi Kalyan Cess of 0.50% to increase effective service tax rate to 15.00%; to marginally impact tourists and diners

Impact: Neutral The proposed spend on improving connectivity infrastructure with a focus on developing more airports, and continued emphasis on sanitation / cleanliness to augur well for the industry over the long-term. On the other hand, increase in service tax rate will lead to marginally higher costs for hotel guests and diners.

HOUSING Proposals  Affordable housing projects (having unit size capped at 30 square meter in the four metropolitan cities and 60 square meter in other cities) exempted from income tax; Minimum Alternative Tax (MAT) rate to be levied  Construction of affordable houses up to 60 square meter under any Government scheme, including PPP projects, exempted from service tax  Income tax exemption for interest on home loans of up to Rs. 35 lakh sanctioned during the next fiscal, (provided the cost of house is under Rs. 50 lakh) increased by Rs. 50,000  Income Tax deduction under 80GG increased from Rs. 24,000 per annum to 60,000 per annum  Extension in time allowed for deduction of interest payable on home loan for acquisition or construction of a self-occupied house property from three years to five years from acquisition

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Impact: Neutral The Union Budget 2016-17 did not offer any noteworthy measures or incentives for housing sector much to dismay of various stakeholders. The Budget, however, offered positive measures for affordable housing projects, in line with the Government’s stated intent of having housing for all by 2020. In a bid to attract greater participation of developers in this segment, affordable housing projects (of specified sizes) have been exempted from income tax, though would attract MAT. Considering the incentive can be claimed by projects completed within three years of receipt of approvals would also help ensure timeliness of these projects. The exemption of service tax on affordable houses of Government promoted schemes would help reduce the final cost to the buyer thus supporting the demand. The increase in limit of deduction in respect of rent paid under 80GG is expected to positively affect the rental demand for affordable housing units. The budget also included a provision of increase in tax exemption on home loans up to Rs. 35 lakh for first time buyers. However, given the cost of property in such cases is capped at Rs. 50 lakh, the impact of this scheme on demand for homes in metros and other tier 1 cities is expected to be limited.

INFORMATION TECHNOLOGY Proposals  Truncation of Section 10AA relating to tax exemption for SEZs effective 31.03.2020  100% Tax exemption to new start-ups (incorporated between April 2016 to March 2019) for three out of the first five years  Additional tax benefit to companies under Section 80JJAA of Income Tax Act for specific fresh hiring  Focus on Digital literacy and Skill development mission through outlay of Rs. 1,700 crore  Reduction in custom duty/excise duty for specific IT hardware

Impact: Neutral The phasing out of Section 10AA pertaining to tax exemption available to exports made out of Special Economic Zone from 31.03.2020 will lead to higher tax outgo for Indian IT Services company in the long run. Since profits generated out of SEZ are already subjected to MAT, the incremental impact will be moderate. However, IT companies will benefit from additional 30% deduction for specific hiring (up to 25,000 per months) for a period of 3 years as entry level jobs to IT services will qualify for same. The IT sector that boasts of large number of start-ups will benefit from proposed tax exemption for new start-ups. The impact will be positive though moderate as they will be liable to pay MAT coupled with the fact most of the start-ups will incur losses in initial years of operations. Focus on Digital Literacy through covering six crore household over next three years will create additional demand for the domestic IT Industry. Government focus on Skill development will address the issues faced by Indian IT services Industry regarding mismatch between Industry expectations and availability of skilled labour. The reduction in custom duty/excise duty for routers, broadband modem or its subcomponents (other than used for mobile devices) will lead to addition demand for same and provide impetus to IT hardware industry. Overall, the budget is neutral for the Indian IT Industry.

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INFRASTRUCTURE Proposals  Higher Central plan outlays for Roads and Highways (increased to Rs. 1.0 trillion in 2016-17 BE from Rs. 694.2 billion in 2015-16 RE) and Railways (increased to Rs. 1.2 trillion in 2016-17 BE from Rs. 975 billion in 2015-16 RE) to support infrastructure projects.  Highways: 10,000km to be awarded in FY17, completion target also at 10,000 km in FY17  Rural Roads: Central government allocation of Rs. 190 billion along with state government’s share of Rs. 80 billion will provide Rs. 270 billion towards rural road development under Pradhan Mantri Gram Sadak Yojna (PMGSY)  Irrigation: Fast tracking of 89 irrigation projects under Accelerated Irrigation Benefits Programme (AIBP). Outlay on these projects estimated at Rs. 170 billion in next year and Rs. 865 billion over the next five years. Creation of a long term irrigation fund under NABARD with initial corpus of Rs. 200 billion  Airports: Revival of 160 unserved and underserved airports to be taken up  Execution of Sagarmala project and National Waterways to be expedited. Plans to develop new greenfield ports both in the eastern and western coasts of the country.  Steps to revive Public Private Partnership  Public Utility (Resolution of Disputes) Bill to be introduced in FY17  Guidelines for renegotiation of PPP concession agreements to be issued  A new credit rating system for infrastructure projects which gives emphasis to various inbuilt credit enhancement structures will be developed  Exemption from Dividend Distribution Tax (DDT) for distribution made out of income of SPV to the REITs and INVeiTs having specified shareholding  Allocation of Rs. 40 billion for National Investment and Infrastructure Fund (NIIF) as compared to proposed annual flow of Rs. 200 billion last year  As a measure towards deepening of corporate bond market, LIC will set up a dedicated fund to provide credit enhancement to infrastructure projects  Exemption from service tax for certain affordable housing projects and 100% deduction for profits of a developer from specific affordable housing projects  Excise duty exemptions extended to Ready Mix Concrete (currently 12.5% excise duty is payable)

Impact: Positive With an objective of reviving the investment cycle, the budget has increased outlay on roads and railways to Rs. 2.21 trillion. While the outlay on Railways and Roads have been increased, the outlay on Ports and shipping has been reduced to Rs. 27 billion in FY17 from Rs. 37 billion in FY16. The budget also proposes to revive 160 unserved/underserved airports & airstrips at an estimated cost of Rs. 0.5-1.0 billion per strip/airport. Further, the budget proposes to increase allocation towards Irrigation sector so as to fast-track 89 projects, with an estimated outlay at Rs. 170 billion in next year and Rs. 865 billion over the next five years. Other major positive measures include proposals to revive public private partnership by tackling key impediments like lengthier dispute resolution, lack or provision for renegotiation, and infrastructure project funding related issues. In this regard, the finance minister has mentioned introducing Public Utility (Resolution of Disputes) bill, and guidelines for renegotiation of PPP concessions and a more effective credit rating system specifically for infrastructure projects. Furthermore, Rs. 40 billion allocation has

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been made for NIIF, and a proposal wherein LIC will set up a dedicated fund to provide credit enhancement to infrastructure projects. On the housing construction side, the budget gives a push to affordable housing segment through various incentives like exemption of service tax and corporate tax on certain affordable housing projects. Furthermore on the construction side, extension of excise duty exemption for Ready Mix Concrete is a positive for construction companies.

INFRASTRUCTURE: PORTS Proposals  Announced setting up of new Greenfield ports and inland waterways; planned outlay of Rs, 3184.0 crore by Ministry of Shipping, which includes Gross Budgetary Support (GBS) of Rs. 1000.0 crore for development of Indian Shipping, Ports, Inland Waterways and Ship Building sector. Of the GBS of Rs. 1000.0 crore, provision of Rs. 350.0 crore for Inland Waterway Projects and Rs. 450.0 crore for Sagar Mala Project.  Announced the plans to issue guidelines for re-negotiation of PPP concession agreements

Impact: Neutral The Sagar Mala project had been announced in mid-FY15, and had proposed several initiatives to improve port infrastructure and connectivity, which would in turn contribute to economic growth. The government had also announced plans for development of inland waterways to reduce transportation costs. While the total funding requirement for the implementation of the planned initiatives is expected to be significantly higher, the announcement of Rs 800 crore to be allocated in the budget for the development of these projects should facilitate progress on these initiatives and is a positive for the incumbents in the port sector and trade overall. However, the allocation remains moderate compared to the overall requirements for these projects. The GoI’s plan to issue guidelines for the re-negotiation of PPP concession agreement is also a positive step for the private developers. While the detailed guidelines are awaited, this measure could infuse a fresh leash of life to some of the PPP projects mired in tariff related litigations. Besides, it could attract more private investment if the private developers’ concerns are addressed adequately in the new proposal.

JEWELLERY RETAIL INDUSTRY Proposals  Imposition of 1% excise duty (12.5% with input tax credit) on Jewellery (excluding silver)  Concessional CVD on Gold dore bar and concessional excise duty on refined gold bars has been increased to 8.75% (previously 8%) and 9.5% (previously 9%), respectively  Relaxation of capital gains tax on Gold Bond Scheme (GBS) and Gold Monetization Schemes (GMS); GMS interest to be tax free; indexation benefits on capital gains tax for GBS transfer  Customs duty on imitation jewellery raised to 15% from 10%  Several schemes aimed to help secure and augment rural sector incomes

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Impact: Neutral There are no major measures announced in the budget for 2016-17 which could have a material impact on the jewellery retail industry. The proposal to re-introduce the 1% excise duty on gold and studded jewellery is expected to be neutral, as jewellers are likely to pass on the costs. Further given the high exemptions given for small scale manufacturers, jewellery supply from goldsmiths is unlikely to be impacted much. The increase in duties for gold dore imports and manufacturing of gold bars (refined from dores) will effectively remove the arbitrage enjoyed by gold dore imports (against direct bullion imports); the same could marginally reduce supply and increase costs for jewellers, which would be passed on. The impact on jewellery demand owing to the above two factors is likely to be minimal given the already low gold prices. Tax exemptions on GBS and GMS are expected to drive increased patronage for these schemes, where the same could reduce investment demand for physical gold. Demand for imitation jewellery is also likely to be impacted with the proposed rise in duty. The announcement of several welfare and financing schemes for the rural economy is a positive for the industry offsetting the impact of the above measures, as rural markets drive more than 50% of the domestic jewellery volumes.

MEDIA & ENTERTAINMENT Proposals  Removal of basic customs duty on newsprint and removal of excise duty and basic customs duty on parts and components used in the manufacture of television Set Top Boxes to encourage Make in India  Improving literacy rates with 62 new Nvodaya Vidyalayas and increasing focus on quality of education through Sarva Shiksha Abhiyan  Increased focus on digital literacy in rural areas with the rollout of two schemes to cover 6 crore additional households

Impact: Neutral There were no specific announcements by the Finance Minister in the budget speech which can have a material impact on the media & entertainment industry. However, measures such as removal of basic customs duty on newsprint (from 5% earlier) along with sustained focus on improving literacy rates, quality of education and higher penetration of digital literacy in rural areas will be a positive for the newspaper and digital media industry. As the television distribution industry progresses towards the final phases of digitization, removal of basic customs duty and excise duty on parts, components and sub-parts for manufacture of Set Top Boxes (STBs) as well as change in excise duty structure for STBs is aimed at making indigenous STBs more price competitive and improving domestic production in line with the Make in India initiative. Infrastructure development across the country has over the years, created a sizeable asset base for the growth of transit media advertising and continued focus on the segment especially roads and rail remains a positive for the advertising media space going forward.

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METALS: IRON AND STEEL Proposals  Clean environment cess on coal raised from Rs. 200/MT to Rs. 400/MT  Investment quantum raised for roads and railways; 160 un-served and under-served airports to be rejuvinated  Export duty removed from iron ore lumps and fines with Fe content below 58%  Infrastructure cess ranging from 1% to 4% imposed on passenger vehicles

Impact: Neutral The budget impact on the steel sector is largely neutral. Increased allocation of Rs. 97,000 crore towards the road sector (over 20% YoY growth) and Rs. 121,000 crore towards the railways (around 21% YoY growth) in 2016-17 are expected to provide a fillip to domestic steel consumption. Also, proposed revival of 160 airports and a push to affordable housing are positives for the steel sector. However, an infrastructure cess of up to 4% on passenger vehicles is likely to have an adverse impact on automobile demand, which has remained a key demand driver for steel in the recent past. Iron ore exports, which have declined to a multi-year low, are expected to get a help from the removal of export duty on iron ore lumps and fines with Fe content below 58%. On the other hand, increased clean environment cess on coal is likely to result in a drop in the operating margin of sponge iron producers by around 1.8-2%, and a drop in the operating margin of steel producers by 0.5-0.8%, depending on their choice of technology.

METALS: NON-FERROUS METALS Proposals  Import duty on primary aluminium raised from 5% to 7.5%, other aluminium products from 7.5% to 10% and zinc alloys from 5% to 7.5%  Clean environment cess on coal raised from Rs. 200/MT to Rs. 400/MT  Focus maintained on rural electrification, with a target of electrification of all households by 1st May 2018  Infrastructure cess ranging from 1% to 4% imposed on passenger vehicles

Impact: Moderately Positive The overall budget impact on the non-ferrous metals sector is positive. Primary aluminium players will benefit from a 2.5% hike in import duty from 5% to 7.5% provided they can pass it on to their customers. However, a large part of this potential gain will be neutralised by the doubling of clean environment cess on coal. Power cost typically accounts for over one third of the production cost of aluminium, and higher coal costs because of higher cess can impact the operating margin of a player by 1.5-2% at current price levels.

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The focus on rural electrification is likely to increase domestic demand for aluminium, copper and zinc because of usage of these metals in transmission and distribution lines and towers. However, an infrastructure cess of up to 4% on passenger vehicles is likely to have an adverse impact on automobile demand, which in turn would have a negative effect on demand for non ferrous metals.

OIL & GAS Proposals  Change in cess on crude oil production to 20% ad-valorem from Rs. 4500 /MT  Allocation of Rs. 20 billion for new LPG connections to poor (BPL) families  Provision of subsidy for sensitive petroleum products of Rs. ~269 billion for 2016-17 (BE)  Incentives for deep water and high-temperature/high-pressure natural gas fields which are yet to commence natural gas production

Impact: Marginally Positive Upstream companies (ONGC, Cairn and Oil India) to benefit in the near term; may get adversely impacted over the longer term if crude oil price goes beyond US$ ~40 /bbl unless rates are reduced. Increased LPG penetration to aid sales volumes and marketing profits of OMCs Adequate provision for under-recoveries up to crude oil price of US$ 40/bbl to help OMCs to contain short-term debt and interest costs Domestic gas production to increase; upstream companies like ONGC, GSPC for their new discoveries which are yet to commence gas production from challenging fields will get higher gas realisations

PHARMACEUTICALS Proposals  Launch of new health protection scheme with health cover of up to Rs. 1 lakh/family and additional Rs. 30,000 for senior citizens  Plans to open 3,000 additional ‘Jan Aushadi’ stores for providing low-cost drugs  Proposal to start ‘National Dialysis Services Programme’ through PPP mode for providing dialysis services in all district hospitals  Exemption of basic custom duty on certain parts used in dialysis equipment  Gradual reduction in weighted deduction on R&D to 150% by April 2017 and 100% by FY 2020

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Impact: Neutral Improving access to cost effective drugs and healthcare services was the key theme of the measures announced by the Finance Minister. For instance, proposals like Government-sponsored insurance scheme for lower-income families, opening up of additional pharmacy stores for providing low-cost drugs and setting up dialysis service centres (in districts hospitals) through PPP mode are likely to improve access to healthcare services. From taxation perspective, the proposal to gradually reduce weighted income tax deduction to 150% by FY 2018 and 100% by FY 2020 is unlikely to impact the momentum of R&D investments by pharmaceutical companies. However, it is likely to increase the tax outgo, which would possibly be offset by lower corporate tax rate going forward.

POWER Proposals  100% Rural Electrification to be achieved by May 2018; Rs.8500 crore allocated for part-funding of the distribution capex oriented schemes namely Deendayal Upadhayaya Gram Jyoti Yojna (DUGJY) and Integrated Power Development Scheme (IPDS)  Rs. 3000 crore per year allocated towards development of nuclear based capacity for power generation  Clean energy cess raised from Rs. 200/MT to Rs. 400/MT  Accelerated depreciation (AD) benefit limited to 40%  Guidelines proposed to address the concerns in renegotiation of contracts in Public Private Partnership (PPP) based projects

Impact: Neutral The Government of India’s (GoI) focus on 100% rural electrification by May 2018, coupled with higher funding under DUGJY and IPDS schemes, is likely to improve the energy demand and offtake and hence increase in PLF levels for power generation entities. However, the extent to which this improvement in energy demand will materialise would also depend upon the health of distribution utilities which in turn would depend upon implementation of reform measures, including UDAY. Increased allocations for nuclear power would help the sector diversify its fuel mix in the long-term. Proposed guidelines for renegotiation of PPP contracts is a positive for generation projects, which have been affected by unviable tariffs quoted in past bids. On the negative side, increase in clean energy cess on steam coal by Rs. 200/MT would lead to a rise in cost of coal based power generation by about 10-12 paise/unit which will put a modest upward pressure on retail tariffs and also on margins of merchant power producers. Power generators supplying power under competitive bids or on cost plus basis will however not be impacted as such costs will be pass through. Reduction in accelerated depreciation benefit from 80% to 40% is a negative for the renewable energy sector, as it is likely to affect the demand from financial & corporate investors in the non-IPP segment.

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REAL ESTATE Proposals  Income distributed by the Special Purpose Vehicles (SPV) to the Real Estate Investment Trusts (REIT) exempted from Dividend Distribution Tax (DDT)  Affordable housing projects (having unit size capped at 30 square meter in the four metropolitan cities and 60 square meter in other cities) exempted from income tax; Minimum Alternative Tax (MAT) rate to be levied  Construction of affordable houses up to 60 square meter under any Government scheme, including PPP projects, exempted from service tax  Income tax exemption for interest on home loans of up to Rs. 35 lakh sanctioned during the next fiscal, (provided the cost of house is under Rs. 50 lakh) increased by Rs. 50,000  Income Tax deduction under 80GG increased from Rs. 24,000 per annum to 60,000 per annum  Extension in time allowed for deduction of interest payable on home loan for acquisition or construction of a self-occupied house property from three years to five years from acquisition  Ready mix concrete used for construction exempted from excise duty (from 12.5%)

Impact: Neutral The Union Budget 2016-17 did not offer any noteworthy measures or incentives for the real estate sector much to dismay of various stakeholders. The Finance Minister broadened the scope of tax incentive available to REITs by providing exemption on DDT on the income transferred by the SPV to REIT. However tax inefficiencies continue to prevail in the system, given the presence of capital gains for sponsors incase of transfer of asset in lieu of REIT units, and applicability of stamp duty, which are expected to hinder the introduction / take-off of REITs in the country. The Budget, however, offered positive measures for affordable housing projects, in line with the Government’s stated intent of having housing for all by 2020. In a bid to attract greater participation of developers in this segment, affordable housing projects (of specified sizes) have been exempted from income tax, though would attract MAT. Considering the incentive can be claimed by projects completed within three years of receipt of approvals would also help ensure timeliness of these projects. The exemption of service tax on affordable houses of Government promoted schemes would help reduce the final cost to the buyer thus supporting the demand. The increase in limit of deduction in respect of rent paid under 80GG is expected to positively affect the rental demand for affordable housing units. The budget also included a provision of increase in tax exemption on home loans up to Rs. 35 lakh for first time buyers. However, given the cost of property in such cases is capped at Rs. 50 lakh, the impact of this scheme on demand for homes in metros and other tier 1 cities is expected to be limited.

RETAIL Proposals  Increased allocation to agriculture and famer’s welfare at Rs. 35,984 crore and support under various schemes and target to double farmer’s income by 2022  Excise duty on branded garments with retail price of Rs. 1,000 or more raised to 2% (from nil earlier) without input tax credit or 12.5% with input tax credit.

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 Excise duty of 1% without input tax credit or 12.5% with input tax credit on articles of jewellery [excluding silver jewellery, other than studded with diamonds and some other precious stones], with a higher exemption and eligibility limits of Rs. 6 crore and Rs. 12 crore respectively.  Tax of 1% on purchase of goods & services in cash exceeding Rs. two lakhs  Allowing small retail shops to open seven days a week.

Impact: Neutral Increased focus on agriculture and farmer’s welfare and rural development shall support growth in rural income and is expected to provide impetus to rural consumption. However, increase in excise duty on branded readymade garments is a negative for the sector. Imposition of excise duty on jewellery is expected to increase their cost, though the impact of the same is likely to be low given prevalent low gold prices. Further the imposition of 1% tax on cash purchase of goods & services could also impact demand. The proposal of allowing retail shops to remain open seven days a week shall provide a boost for generating additional employment opportunity.

SHIPPING AND SHIP BUILDING Proposals  Focus on Inland Waterways sector and Sagar Mala project with plan outlay of Rs, 3184.0 crore by Ministry of Shipping, which includes Gross Budgetary Support (GBS) of Rs. 1000.0 crore for development of Indian Shipping, Ports, Inland Waterways and Ship Building sector. Of the GBS of Rs. 1000.0 crore, provision of Rs. 350.0 crore for Inland Waterway Projects and Rs. 450.0 crore for Sagar Mala Project.  Provision of Rs. 50.0 crore for subsidy to Non –Central PSU Shipyards and Private Sector Shipyards for 2016-17 as against nil for 2015-16 (RE)  Reduction in the excise duty on capital goods, raw materials, etc for repairs of ocean-going vessels by a ship repair unit to 0%; further, procedure for availment of exemption from Basic Customs Duty, CVD and SAD by ship repair units is being simplified.

Impact: Neutral The focus on Inland Waterways Sector and Sagar Mala project is positive for the Shipping sector, with potential to boost coastal as well as inland shipping in the medium term. The budget allocation however remains moderate compared to the overall requirements for these projects. The provision of Rs. 50.0 crore for subsidy for “Non – Central PSU Shipyards and Private Sector Shipyards” compared to nil allocation for 2015-16 (RE) is also modest against the expectation of adequate subsidy provision for the sector in-line with the policy announced in December 2015. However, the excise duty on capital goods and spares, raw materials, parts, material handling equipment and consumable for repairs of ocean-going vessels by a ship repair unit has been reduced to 0% from the earlier applicable level. Further, the procedure for availment of exemption from Basic Customs Duty, CVD and SAD by ship repair units is being simplified. These would improve the competitiveness of the domestic ship repair units. Overall, while the budget is marginally positive for the domestic shipping & shipbuilding industry; absence of any announcement for mandatory routing of certain portion of cargo for state-owned importers through local shippers has been a dampener.

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TELECOMMUNICATION Proposals  Clarity on spectrum assignment/trading and sharing that it is a service and leviable to service tax instead of being treated as sale of intangible good  Proposal to end retrospective taxation disputes by waiving interest and penalties  Basic Customs Duty of 10% levied on preform of silica for manufacture of telecom grade optical fibre /cables. Further, other exemption of 10% on specified telecommunication equipment withdrawn.  Budget estimate of non-tax revenues from communication services for FY2017 stands at Rs. 98,995 crore. For FY2016, revised estimate stands at Rs. 57,384 crore which is 34% higher than the budgeted estimate.

Impact: Positive The budget has provided much awaited clarity on transfer of right to use spectrum. Any assignment of spectrum by Government of India (GoI) and its subsequent transfer would be construed as a service and not as sale of intangible goods. This would bring it under the ambit of service tax - on first time assignment of spectrum by GoI as well as its further transfers under the spectrum trading guidelines. This would be a cash neutral structure for the telecommunication companies (telcos) as any service tax paid by telcos towards spectrum would be credited back against their service tax liabilities. This step would bring clarity on the tax treatment of spectrum trading transaction thereby providing an impetus to such transactions. The withdrawal of customs duty exemptions on optic fibre manufacturing and specified telecommunication equipment would drive the domestic manufacturing of such products but in the interim raise the cost of these products for the telcos. The revised estimate of non-tax revenues from communication services for FY2016 stands at Rs. 57,384 crore which is 34% higher than the budgeted estimate. This is primarily on account of higher than projected receipts from spectrum auctions and other collections especially spectrum liberalisations fees. For FY2017, the GoI expects to raise Rs. 98,995 crore FY2017 from communication services, which include receipts from spectrum sale, licence fees and spectrum charges. This represents growth of 73% over the revised estimates for F2016. ICRA expects the actual receipts to be around 40% lower than the BE for 2016-17 based on our forecast of the likely demand for spectrum from industry and its expected purchasing power. However, higher spectrum sale as compared to ICRA’s estimate would net a larger amount of revenues to the GoI.

TEXTILES Proposals  Levy of basic excise duty of 2% (without cenvat credit) or 12.5% (with cenvat credit) on branded readymade garments and made up articles of textiles of Retail Sale Price (RSP) of Rs 1000 and above

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 Basic excise duty on recycled polyester fibre (manufactured from plastic scrap) changed to 12.5% (with cenvat credit) from 6% (with cenvat credit) earlier. In case cenvat credit is not availed, duty remains unchanged at 2%.

Impact: Negative Since fabric sector does not attract excise duty, cenvat credit is not available to garment manufacturers. Therefore garment manufacturers would opt for 2% (without cenvat credit) excise duty rate. With a tariff value of 60%, the excise duty of 2% would effectively translate to 1.2% duty on the RSP of branded garments. While this is negative for the players in the branded apparel sector, the current rate of duty incidence is lower than that levied in budget of 2011-12 (12% excise duty with tariff value of 30% leading to effective duty of 3.6%) and was applicable across all the price segments. Given that the domestic waste collected by recyclers is not subject to excise duty, most of the recycled polyester fibre manufacturers operated under 2% (without cenvat credit) structure. Hence the change in the duty structure to 12.5% (with cenvat credit) from 6% (with cenvat credit) earlier will not have any significant impact on the duty incidence on the recycled polyester manufacturers.

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