Farmgate Goodies | Value Research Lack luster, it may have been, but some sectors surely felt the heat in the budget. If 'financial inclusion' was the tool to rake in the votes, then the IT sector was not amused.
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Farmgate Goodies

Lack luster, it may have been, but some sectors surely felt the heat in the budget. If 'financial inclusion' was the tool to rake in the votes, then the IT sector was not amused.

Lack luster, it may have been, but some sectors surely felt the heat in the budget. If 'financial inclusion' was the tool to rake in the votes, then the IT sector was not amused. While the industry whined over lack of sector specific reforms, nobody could find fault with large outlays for agriculture and healthcare. Even though some sectors were brought under the tax net, robust demand will ensure that economy keeps rolling

While the country is no longer an agrarian one, majority of the population is still employed in this sector. Increasing farm credit, rehabilitation of districts, positive incentives for R&D, re-plantation fund for tea, with similar proposals for coffee, rubber, spices, cashew and coconut are just some of the goodies announced in the budget. The outlay for Accelerated Irrigation Benefit Programme has been increased to Rs 11,000 crore. The duty on drip irrigation systems and agricultural sprinklers has been brought down. The controversial fertilizer subsidy has been increased by 30 per cent. Then there is a Rs 12,000-crore allocation to the Rural Infrastructure Development Fund with an additional corpus of Rs 4,000 crore for rural roads. The sector has always been highly under-insured. To this end the FM set the ball rolling for insurance as a means of mitigating seasonal risk in crop production. These spends will translate into windfall gains for telecom, infrastructure, FMGC, auto and ancillary, pipe manufacturers and the financial sector.

The budget was positive for the pharma and healthcare sector. A renewed focus and large outlays towards health and family welfare, immunization and communicable diseases will benefit companies such as Panacea Biotec and GSK. Clinical trials of new drugs have been exempted from service tax while the deduction of expenditure on in-house R&D has been extended. A further impetus for the industry came from the reduction of the duty on specified machinery. The industry is likely to receive more funding from venture capital (VC) firms on account of the pass through granted to them.

The FM reaffirmed the objective of making 'financial services' the next growth engine for India. The first step towards bringing in reverse mortgage for senior citizens has been taken. The Micro Financial Sector Bill and an Insurance amendment Bill will be passed. The use of PAN as the sole identification number for securities market has brought direction to better KYC compliance. VC funds, hitherto enjoyed a pass-through status, and this has been limited to funds deployed in certain sectors. The increase in DDT for money market and liquid funds brought cheer to the banks, which saw funds flowing away from them to mutual funds on account of this arbitrage. Apart from this, the real hit on earnings came from the reduction in benefits under Section 36(i) (viii) to 20 per cent of profits as against the earlier 40 per cent for any financial entity providing long-term finance. HDFC and IDFC are likely to be most affected on account of this amendment.

The income tax benefits for infrastructure companies have been done away with retrospective effect from April 2000, this is likely to have an adverse effect on the cash flows of certain infrastructure companies. A differential excise duty on cement has been introduced, adversely affecting high grade cement. All pipes of diameter exceeding 200 mm used in water supply systems have been relieved of excise duty. The inclusion of commercial rents under service tax will negatively impact demand in metro cities where rentals are already at a premium. On the flip side, the large outlays in the agricultural space as well as measures to improve fund flow in the infrastructure sector will keep the optimism high in this space. The budget was also extremely favourable to the power transmission sector with increased budgetary allocation as well as the duty exemption on coal which will lower costs.

Many products in the FMCG sector received a fillip especially on account of raising concerns on inflation. Edible oils have been exempted from the additional countervailing (CV) duty of 4 per cent, while the duty on sunflower oil reduced by 15 percentage points. Excise duty on certain biscuits and all kinds of food mixes has been removed. There has been an increase in specific rates of excise duty on cigarettes by about 5 per cent. Excise duty on biris has been raised with an exemption from excise duty for unbranded biris up to 20 lakh biris in a year. For pan masala not containing tobacco, the duty has been reduced, while exemption for tobacco manufacturers in the north-eastern states has been done away with. Also the duty on food processing machinery has been brought down from 7.5 per cent to 5 per cent. The reduction in peak custom duty and import duty on certain materials used for making plastics will benefit the sector owing to reduction in the packaging costs. The increase in DDT will impact the sector given that FMCG companies are high dividend paying. Further, service tax applicable on development and supply of content for advertising will hit these FMCG companies given the large outlays on advertising for such companies. While on the whole the budget has been positive for the sector, there was no drastic amendment that will impact the earnings. Companies such as ITC, HLL, Nestle and Britannia will benefit owing to the weight age of biscuits and instant mixes in their product portfolios.

In addition to the cut in fuel prices, the FM reduced the ad valorem component of excise duty on petrol and diesel. Reduction in sales tax on crude oil has been proposed from 4 per cent to 3 per cent. New gas pipelines will be exempt from income tax for 10 years. The customs duty on polyester, PTA and MEG has been reduced from 10 per cent to 7.5 per cent.

The budget proved to be quite costly for the IT sector, with the export income being brought under Minimum Alternate Tax, resulting in an effective tax of 11.22 per cent on book profits. The government has upped its allocation to e-governance initiatives by 82 per cent and has provided for a manpower development scheme which will greatly benefit the industry in the long-run. Also the tax break given to VCs for investments in the IT space will benefit the sector through accelerated fund flow.

There was good news for the steel industry with the duty on seconds and defectives of steel reduced from 20 per cent to 10 per cent. All coking coal is to be exempt from duty. Further, the government has imposed a duty on export of iron ores and chrome ores. Given that India is the largest exporter of iron ore, the export duty will add to the global competitiveness of the domestic steel industry.

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