[Investors Please Listen] The impact of third fiscal stimulus

The third fiscal stimulus: Key points Excise tax General rate of Central Excise duty reduced from 10% to 8%. Retain the rate of central excise duty on goods currently attracting ad valorem rates of 8% and 4% respectively. Reduce the rate of central excise duty on bulk cement from 10% or Rs. 290 PMT, whichever is higher to 8% or Rs.230 PMT, whichever is higher. Service Tax Service tax on taxable services has been reduced from 12% to 10%. Naptha imported for generation of electric energy has been fully exempted from basic Customs Duty.   Changes are being made to Section 10 AA to extend the benefit of Income Tax exemption for export profits for units located outside SEZ. The government has also allowed states to exceed the 3% fiscal deficit target in the next fiscal to 3.5% of GDP. These measures to Boost Consumption…. These measures are expected to boost consumption with more than 2% cut in retail prices if the tax cuts are passed on to consumers. Consumers will benefit significantly since over 90% of excise duty collections come from the 10% slab rate that is levied on durable goods, metals, commercial vehicles, iron and steel and cement. Tyre makers have already responded by announcing a 2% cut in prices. Colour television sets, washing machines, refrigerators, soap, detergents, cola, hybrid cars and commercial vehicles etc to get cheaper. Service tax cuts will result in lower phone bills, airline tickets, credit card charges, insurance premia, tour packages. ….further lower Inflation…. Softening prices of manufactured products across industries as well as recent fuel cut and higher base will bring down WPI inflation to record low by Mar'09 and a deflationary scenario sooner than expected. .…and drive Fiscal Deficit high in FY10 These measures will translate into an additional Rs 300 bn of revenue losses (Rs 140 bn on service taxes, Rs 66 bn on account of customs and countervailing duty and Rs 85 bn on excise duties) over and above the revenue losses estimated earlier. (Govt has already foregone about Rs 400 bn of revenues on account of previous two fiscal stimuli). As the new Govt will provide additional fiscal stimulus amid dwindling revenue collection, fiscal deficit will move up further from the estimated 5.5% of GDP for FY10. State fiscal moving to more than 3% of GDP for FY10, the combined fiscal deficit can be higher than 10% of GDP for FY10. This will translate into even higher Govt borrowings for FY10 from the already announced gross borrowings of Rs 3,617 bn. This certainly means that the major rally of G-sec is certainly behind us. Yields can marginally dip as inflation declines and RBI cuts policy rates. Impact on Various Sectors Sectors Impact Auto This will lead to reduction in prices of commercial vehicles (CVs) as they used to attract 10% excise earlier. Buses, small cars, two wheelers and three wheelers will continue to attract 8% excise duty. Further, the reduction in Service Tax would likely benefit fleet operators. It is a positive for CV sector along with previous measures. But sustainable recovery for the CV sector would come only with a revival in economic activity. Cement We expect cement companies to pass on the benefit of the reduced excise duty (approx Rs3-4/bag) on bulk cement to their customers. It will boost infra projects and construction activities But as bulk cement sales constitute about ~8-10% of volumes for most cement companies, there may not be any material impact on earnings. Engineering The 2% reduction in service tax will be passed on to the clients. The provision of additional Rs 14 bn towards the Textile Upgradation Fund (TUF) may boost some demand for textile machinery. Exemption of customs duty on imported Naptha for electric energy generation is positive for power sector. Logistics This results in cheaper logistics services. Not much impact on the demand led by the reduction of the service tax Steel Steel companies have indicated that they will pass on the benefit. HRC prices to reduce by Rs500-600 per tonne.  As benefits are passed on, no significant impact on company financial. Lower Steel and cement prices are positive for infra, real estate companies. Prices of cars and other consumer durables, that use steel extensible, expected to come down. Telecom Telecom companies will benefit from two ways The service tax reduction will increase affordability, Cost of procurement of equipment will fall through a reduction in excise duty / CVD Major part of cost reduction will be passed on with rest likely be kept by the telcos, marginally improving profitability. IT The ambiguity over computation of export profits at SEZ has been removed. It has been now clarified that 100% of SEZ profits are tax free. The impact can be minimal as with around 0% revenue growth over the next year, contribution from SEZs is very low for Indian IT services vendors.

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