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www.crisil.com www.crisilresearch.com Analysis & Outlook 2010-11

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 Union Budget

Contents
Foreword 1

Economy

Highlights 4
Economy analysis 5

Industry

Overall sectoral impact 12

Overall company impact 18

Capital markets

Equity market 24
Mutual funds 27

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 i

 Union Budget

Foreword
The growth tide lifts the fiscal boat

The gloom prevailing at the time of the last budget in July, 2009 has given way to optimism and confidence this year.
The Economic Survey’s growth optimism is resonated by the budgetary assumption of 8.5 per cent growth for 2010-11.
The higher-than expected growth in 2009-10, nevertheless, provided an opportunity to initiate exit strategies. In order to
balance the objective of sustaining the ongoing recovery with medium-term fiscal correction, the budget has begun the
rollback of fiscal stimulus measures. As some concerns on the growth front still remain, the roll back is partial. The
budget sets the fiscal deficit target at an aggressive 5.5 per cent of GDP for 2010-11 and 4.1 per cent by 2012-13. We
believe, that fiscal year 2010-11 will close with fiscal deficit at 5.6 per cent of GDP. Beyond that, speedy
implementation of GST will be the key to achieving the medium-term fiscal targets outlined in the budget.

The roll back on indirect tax cuts will not hamper the economy’s growth prospects. The tax concessions offered to
middle class, expected to benefit 60 per cent of the tax payers, will boost private consumption and offset the impact of
rise in excise duties. Education has received the attention it needs in this budget. Further, the budget significantly raises
the allocation to key infrastructure sectors. Both these measures will help raise India’s growth potential.

Tax buoyancy response is synchronized with economic performance- going down sharply in a downturn and rising
during an upturn. Tax collections are therefore set to benefit from the rising growth tide, particularly industrial growth.
Assuming the tax buoyancy to rise to 1.2 per cent in 2010-11 from 0.4 per cent in 2009-10, the FM rightly budgets a
17.9 per cent increase in tax revenues this year. Aggressive 3G revenues and divestment are expected to further bolster
revenues. Given that elections are still not on the horizon, it was time to bite the bullet on expenditure reforms. The
good news is, fiscal correction is not riding on cuts in capital expenditure. The not so good news is that revenue
expenditure reforms have again been ignored. Without these steps, enduring correction in government finances will not
take place, in our opinion.

Inclusiveness has been top priority for the UPA government and this budget further builds on the attempts of the
previous budget, by broadly maintaining elevated allocations under its flagship safety net scheme – NREGA. Our
analysis of the scheme’s economic impact suggests that wages distributed under the NREGA added around 55 basis
points to rural household consumption and around 32 basis points to GDP in 2009-10. Spending under NREGA can
now treated as a permanent component of stimulus. Measure to improve banking penetration, re-capitalisation of
regional rural banks push the financial inclusion agenda further.

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 1

 Union Budget

Foreword
One of the major concerns for the monetary policy continues to be the bloated government borrowings. Despite
reduction, net borrowings of the government remain bloated at Rs 3450 billion. As growth gains further traction,
managing government borrowing programme of this size will be quite challenging as the private sector will start
competing for funds and RBI tightens the monetary policy further.

Overall the budget has tried to satisfy the needs of various stakeholders, but clearly growth and ‘Aam admi’ get the
most attention.

Dharmakirti Joshi

Principal Economist, CRISIL

2 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Economy

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 3

 Union Budget

Highlights
• Fiscal deficit pegged at 5.5 per cent of GDP for 2010-11
• Fiscal deficit projected at 4.8 per cent and 4.1 per cent of GDP in 2011-12 and 2012-13, respectively.
• Revenue deficit for 2010-11 projected at 4.0 per cent
• Revenue deficit for 2009-10 revised upwards to 5.3 per cent from the budget estimate of 4.8 per cent
• Net market borrowings for 2010-11 is budgeted at Rs 3,450 billion, 13.4 per cent lower as compared to the
previous year
• Total expenditure in 2010-11 to increase by 8.6 per cent over 2009-10
• Defence allocation pegged at Rs 1,473.4 billion in 2010-11 as against Rs 1,417 billion in the previous year; of this,
capital expenditure would be Rs 600 billion.
• 30 per cent increase in capital expenditure and 5.7 per cent increase in revenue expenditure over 2009-10
• Personal income tax slabs changed:
Income up to Rs 1.6 lakhs — nil
Income between Rs 1.6 lakhs and Rs 5 lakhs — 10 per cent
Income above Rs 5 up to 8 lakhs — 20 per cent
Income above Rs 8 lakh — 30 per cent
• Additional income tax deduction of Rs 20,000 allowed on long-term infrastructure bonds in addition to the Rs 1
lakh deduction allowed already.
• Standard rate of excise duty on all non-petroleum products increased from 8 per cent to 10 per cent
• Minimum Alternate Tax (MAT) to be increased from 15 per cent to 18 per cent on book profits
• Excise duty on petrol and diesel up by Re 1 per litre
• Restoration of the customs duty on crude oil to 5 per cent, on diesel and petrol to 7.5 per cent, and on other refined
products to 10 per cent
• Rate of service tax retained at 10 per cent, but coverage extended
• Disinvestment receipts for 2010-11 are estimated at Rs 400 billion
• Proceeds from 3G auction estimated at Rs 350 billion
• Government to provide oil and fertilizer subsidy in cash instead of issuing bonds
• Nutrient based fertiliser subsidy scheme to come into force from April 1, 2010
• Allocation to infrastructure at Rs 1,735.5 billion
• Spending on social sector increased to Rs 1376.7 billion, which is 37 per cent of total plan outlay
• Rs 165 billion allocated for enhancing bank’s Tier-I capital to 8 per cent by March 31, 2011
• Direct Tax Code (DTC) to be implemented by April 1, 2011
• Endeavour to introduce GST by April 1, 2011

4 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Economy analysis
Outlook 2010-11

There is a growing consensus across the world that the worst of the financial crisis is over. Economies globally have
started to stabilise and recover either from the recession or severe slowdown in the past 2 years. After having contracted
in 2009, the global economy is expected to expand by 3.9 per cent this year (International Monetary Fund, January
2010). The Indian economy has displayed remarkable resilience over the course of the downturn and is expected to have
grown at a rate of 7.2 per cent in 2009-10 (Central Statistical Organisation, February 2010). Since 2008-09, the
government had engineered a substantial increase in demand through fiscal measures to compensate for the decline in
private and export demand. The focus has now shifted to private consumption and investment, which are being viewed
as key drivers of growth in 2010-11.

A timely and orderly exit from the fiscal stimulus is crucial to maintain the credibility of government finances, and
thereby, the potential growth in coming years. If the fiscal stimulus has to generate net long-term gains, and not merely
end up as a transfer of expenditure from the private sector to the government, a realistic fiscal tightening plan is
essential. This would be the most important economic challenge facing India over the next few years. The budget of
2010-11 made some progress on this account by partially rolling back the reductions in indirect taxes. The real boost to
sustainable fiscal correction, however, would have come from expenditure reforms, which are largely missing in the
budget, with government expenditure expected to rise by around 8.5 per cent in 2010-11 (over revised estimate 2009-
10) over the exceptionally high growth of 15.5 per cent in the previous year. Against this backdrop, we discuss the
outlook for the Indian economy for 2010-11.

Table 1: Indian economy in 2009-10

2010-11
Real GDP factor cost (y-o-y percentage growth) 8.0
Supply-side
Agriculture 5.5
Industry 8.6
Services 8.4
Hotels, transport and communications 9.1
Finance 10.5
Community and social 5.0
Demand-side
Private final consumption expenditure 6.5
Government final consumption expenditure 5.7
Gross fixed capital formation 12.5
Other macroeconomic variables
WPI inflation (average) 6.5-7.0
Interest rate (10-year G-sec March-end) 8.3-8.5
Exchange rate (Rs-$ March end) 43.5-44.0
Fiscal deficit (% of GDP) 5.6
Note: Industry includes mining and quarrying, manufacturing, electricity, gas and water supply, construction
Source: CRISIL assessment

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 5

 Union Budget

Economy analysis
Based on the measures announced in the budget and also taking into account the global macroeconomic scenario, we
expect the economy to grow by 8.0 per cent at factor cost in 2010-11.

Growth in the services sector, which accounts for nearly 57 per cent of the GDP, is expected to moderate marginally
from 8.7 per cent in 2009-10 to 8.4 per cent in 2010-11 due to slower growth of government expenditure. As a result,
growth in community and social services is expected to weaken despite significant additions to several infrastructure
and development initiatives. In contrast, the hotels, transport, communication, finance and real estate sectors would
expand at a faster pace as compared to 2009-10 with the expected revival in household demand. Industrial growth is
expected to remain at 2009-10 levels on the back of sustained increase in demand - both exports and domestic. In the
event of a normal monsoon, agriculture is expected to grow at a higher rate than its trend because of a low base of 2009-
10, when the sector had contracted due to severe drought.

Investment activity is likely to pick up, with gross fixed capital formation growing at 12.5 per cent as compared to 5.2
per cent in 2009-10. The notable improvement in both domestic and export demand should enhance business prospects,
and hence, attract investments. Corporate profits are at relatively healthy levels and corporates are having increasing
access to external sources of finance. Hence, supply of funds is not expected to present any roadblocks to investment
growth, unless government borrowing programmes go beyond the budgeted numbers and crowds out private demand.
Private consumption growth should recover to around 6.5 per cent from a mere 4.2 per cent in 2009-10, as personal
disposable income would rise owing to the new direct tax slabs announced in the budget. This along with relatively
improved conditions for retail credit availability should aid household consumption growth.

The main threat to growth arises from the escalating inflation, at least in the first half of 2010-11, due to the agricultural
price shock, rising commodity prices and recent petrol and diesel price hike. In the event of an unanticipated sharp rise
in inflation, the Reserve Bank of India would have to tighten the monetary policy at a faster pace and this would impact
market interest rates, albeit with a lag. In the latter half of 2010-11, year-on-year inflation should start to slow down in
spite of demand pressures, given the exceptionally high base of this year. We expect average WPI inflation of around
6.5-7.0 per cent for 2010-11. As for the 10-year government securities rate, the pressures would arise from the RBI’s
move towards hiking interest rates from April 2010 as well as the government’s demand for funds to finance its deficit.

In recent months, the Rupee has remained relatively stable at around 45.5 to 46.5 per US$ mark. Foreign investments
are expected to start flowing back into the country at a faster pace in 2010-11, thus enabling the currency to continue on
its fundamental trend of appreciation. We expect the Rupee to stabilise in the range of Rs 43.5-44.0 per US$ by March
2011. The margin of error for the exchange rate forecast remains high in view of the continuing global economic
uncertainty.

On the fiscal front, tax receipts are expected to increase sharply by 14.8 per cent (over RE 2009-10) along with rising
economic growth. In addition, the combined expected revenues of Rs 750 billion from disinvestment in public sector
enterprises and revenues from the auction of 3-G would bring in additional revenues. As a result of a significant
increase in government revenues, the fiscal deficit to GDP ratio for 2010-11 is expected to decline to 5.6 per cent from
6.7 per percent a year earlier.

6 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Economy analysis
Table 2: Assessment of Key Macroeconomic Risks (2010-11 relative to 2009-10)
Directional change

External financing ▼
Domestic credit availability ▼
Exports ▼
Distressed fiscal position ▼
Lack of reforms
Rupee appreciation ▲
High interest Rates ▲
Increase in oil Price ▲

Note: ▼ implies the risk has diminished relative to 2009-10

Source: CRISIL

The CRISIL macroeconomic forecasts presented here are firmly based on our view of the fundamentals. However, we
recognise that the global economic outlook remains uncertain. Moreover, on the domestic front, how the monsoon pans
out and what the response of private demand to changes in the fiscal stance would be is difficult to ascertain at present.
Therefore, revisions to our outlook may become necessary as FY 2010-11 progresses. A significant deterioration in any
of the risks noted in table 2 would require a reassessment of our current forecasts.

Fiscal Scenario: Balancing growth concerns with medium-term fiscal sustainability

In 2009-10, the government managed to improve upon its deficit target. Not because of revenue buoyancy or cut in
expenditure. Total expenditure has marginally increased from the budgeted estimate, while total non-debt receipts fell
by 2 per cent from the budgeted estimates. Higher-than-expected nominal GDP growth lowered fiscal deficit as a
percentage of GDP. Had it not been for the reduced excise and service tax during the economic slowdown, the revenue
would have been higher. The budget for 2010-11 clearly begins the process of fiscal consolidation by targeting fiscal
deficit at 5.5 per cent of GDP.

The fiscal targets for 2010-11 look realistic and we only expect a marginal slippage in budgetary targets. Tax revenues
are not linearly related to economic activity. Empirical evidence from India clearly reveals that government revenues
plummet during downturns and spike up during upturns. In the coming fiscal, higher economic growth, propelled by
rising industrial activity, will lead to sharp increase in tax collections for the government. The only downside risk to the
fiscal target is the possibility of slippages in the planned aggressive 3G and disinvestment collections of Rs 75,000
crores.

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 7

 Union Budget

Economy analysis
The medium-term fiscal policy statement, which accompanied the budget, estimates the revenue deficit at 2.7 per cent
of GDP and fiscal deficit at 4.1 per cent of GDP by 2012-13. The total liabilities of the government are projected to fall
to 48.2 per cent of GDP by 2012-13. We have tested the feasibility of fiscal targets set for 2010-11 to 2012-13 by
employing our fiscal model. Our simulations show that these targets are too aggressive, and are unlikely to be achieved
in a business-as-usual scenario. By 2012-13, we expect fiscal deficit, revenue deficit and debt to stand at 5.4 per cent,
3.5 per cent and 49.7 per cent, respectively, of GDP. Fiscal projections over the medium run clearly indicate that, unless
concerted efforts are made for curbing expenditures and/or raising revenues, reducing the revenue deficit to 2.7 per cent
of GDP by 2012-13 would be a challenging task. Disinvestment and 3G auctions will help in tiding over immediate
fiscal pressures. For medium-term sustainability, setting GST implementation on the fast track, and some bold
expenditure reforms will be critical. Else, the fiscal correction axe could fall on capital expenditure, which in fact, needs
a further boost.

The debt to GDP ratio will start reducing after 2010-11, and is expected to fall to around 50.0 per cent by 2012-13. The
debt dynamics can be understood in terms of growth, interest rates and primary deficits. As long as growth remains
higher than the cost of borrowing (interest rates), the debt ratio can be kept stable even by running a primary deficit.
Despite the current downturn, the structural upward shift in growth rates and a downward shift in interest rates will help
stem any potentially explosive debt dynamics in the future.

Infrastructure
Like in the previous Budget, physical infrastructure has again taken centre stage in the Union Budget 2010-11, with a
sum of Rs 1,735.52 billion being provided for infrastructure development. This works out to a little more than 46 per
cent of the total Plan allocation. Allocation to major infrastructure sectors, including power, road transport, shipping,
urban infrastructure and railways, has been raised by 22.6 per cent in 2010-11 as compared to 2009-10 (RE). As in the
previous financial year, majority of fiscal support for power, shipping and railways has again come from internal and
extra budgetary resources (IEBR). Allocation for road transport has increased by over 13 per cent, from Rs 175.20
billion in 2009-10 to Rs 198.94 billion in 2010-11.

Figure 1: Growth in Central Plan Outlay, y-o-y%

100.0

48.1 49.3
50.0
34.2 35.7
25.2 22.7
16.9 15.5
11.9
4.7 6.9
0.0

-10.9

-50.0
Ministry of Ministry of Ministry of Ministry of Railways Total
Power Shipping Road Urban
Transport and Development
Highways

FY10 (RE over actual) FY11 (BE over RE)

Source: Government of India Budget document 2010-11

8 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Economy analysis
Inclusiveness
In line with the past trend, the Union Budget 2010-11 has continued its emphasis on social infrastructure. Concern with
regard to fiscal deficit, notwithstanding, Finance Minister Pranab Mukherjee has tried to do a fine balance between the
need to achieve fiscal prudence and social sector spending. In the Union Budget 2010-11, spending on social sector has
been increased to Rs 1,377 billion, which is 37 per cent of the total Plan outlay in 2010-11. The Budget support to social
sector as a whole, together with internal and extra budgetary resources (IEBR), is Rs 1,817 billion, a growth of 17.6 per
cent over the revised estimate of 2009-10. The government aims to utilise the proceeds from PSU disinvestment to meet
this increased capital expenditure requirements of various social sector schemes. The levels of budgeted Plan outlay has
increased across the major heads under the social sector in 2010-11 BE compared to 2009-10 RE, with the Ministry of
Rural Development still getting the maximum allocation.

Figure 2: Growth in Central Plan Outlay, y-o-y%

60.0

38.3 36.5
40.0
28.1 28.7
20.8 22.0
18.7
20.0
11.8
6.3

0.0
-0.5

-20.0
Higher Edu School Edu & Women & Child Health & Family Rural Dvlpmnt
Literacy Dvlpmnt Welfare

FY10 (RE over actual) FY11 (BE over RE)

Source: Government of India Budget document 2010-11

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 9

This page is intentionally left blank
 Industry

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 11

 Union Budget

Overall sectoral impact

Industry Effect

Airport infrastructure Negative

Increase in MAT rate will have negative impact on airport infrastructure sector
The increase in Minimum Alternate Tax (MAT) rate from 15 per cent to 18 per cent of book profits will have a
marginally negative impact on the financials of players. An additional deduction available for investment in long-term
infrastructure bonds, for individuals, will lead to improved availability of funds for airport projects.

Auto components & Tyres Neutral

Auto components and tyres demand to continue to grow despite cost push
The proposals in Union Budget 2010-11 will not have a significant impact on the auto component and tyre industries.
The increase in excise duty on auto components could be passed on to automobile manufacturers. Even if this is
absorbed by the industry, it will be offset by healthy demand. The interest subvention of 2 per cent will have a
marginally positive impact for SMEs engaged in the export of auto components. For the tyres industry, the 2 per cent
increase in excise duty will be fully passed on to the OEM and replacement segments.

Automobiles Neutral
Rise in disposable income to support demand despite increase in prices
The budget announcements for 2010-11 will have a mixed impact for different automobile segments. While the overall
impact is positive on passenger cars, the impact on the commercial vehicles sector will be marginally negative.
Continued focus on rural development will benefit two-wheeler and tractor sales. Commercial vehicle prices will rise in
line with the increase in excise duty. Further, operating expenses will be higher by around 2 per cent (with increase in
diesel prices) for a typical transporter, thus negatively impacting their profitability marginally. Passenger car prices are
expected to rise by Rs 6,000-7,000 for a typical compact car in line with the hike in excise duty. Rise in petrol and
diesel prices will also hike fuel costs by around 1-2 per cent for passenger vehicles. Increase in vehicle prices and other
costs will be more than offset by the rise in disposable income. Disposable incomes are estimated to increase by Rs
20,000-50,000 for people with income between Rs 5-8 lakh. CRISIL Research expects the benefits of increase in
disposable income to more than offset any impact of increase due to increase in excise duty.

Banking and Finance Neutral

PSBs to gain with capital support
The government has proposed a capital infusion of Rs 165 billion as Tier-I capital in 2010-11, as against the infusion of
Rs 12 billion and Rs 19 billion in 2009-10 and 2008-09, respectively. This would preserve the government’s holding in
public sector banks. At the same time, banks would be able to cater to credit growth of around 20 per cent over the next
2 years, while maintaining a healthy Capital Adequacy Ratio.

The extension of bank loan waivers to farmers by 6 months would postpone the recognition of non-performing assets,
which would have otherwise been reflected in the agriculture portfolio of banks as of March 2010. The overall impact is
neutral for the sector.

Continued…

12 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Overall sectoral impact

…continued

Industry Effect

Cement Negative
Roll back of excise duty to have negative impact on Cement sector
The Union Budget 2010-11 is expected to have an overall negative impact on the cement sector due to the increase in
excise duty by 2 per cent. Players will find it difficult to pass on the additional burden of the increased excise duty due
to falling operating rates on account of significant capacity additions. However, measures to spur housing and
infrastructure investments will have a marginally positive impact on demand for cement.

Construction Positive
Higher allocations and improved funding to increase order inflows
Higher allocation towards roads, railways, housing, urban infrastructure and continued takeout financing and
refinancing plans of IIFCL will be beneficial to the sector. Further, additional deduction available for investment in
long-term infrastructure bonds for individuals will aid in the faster execution of infrastructure projects. Payment of
import duty on depreciated value rather than the original value of resale machinery along with concession on import
duty for monorail projects will reduce the capital cost for players.

Hike in Minimum Alternate Tax from 15 per cent to 18 per cent of book profits will have a marginally negative impact
on the financials of players having operational BOT projects. Overall impact of the Union Budget 2010-11 on the sector
is positive.

Fertilisers Neutral
Subsidy reimbursement in cash to provide working capital flexibility to players
The Union Budget 2010-11 announced that fertiliser subsidy payout will be in the form of cash instead of fertiliser
bonds. This is expected to benefit players in the form of greater working capital flexibility. The government’s budgetary
allocations towards the agricultural sector in the form of higher agricultural credit, subvention of interest on farm loans
and renewed emphasis on expansion of Green Revolution in the Eastern states are also expected to lead to increased
fertiliser demand in the long term. During the transitionary period of 2010-11, farm gate prices of complex fertiliser
products post the NBS policy would be held constant at current levels. The budget allocation for fertiliser subsidy has
been reduced from Rs 529.8 billion (revised estimates) in 2009-10 to Rs 499.8 billion in 2010-11.

Hotels Neutral
No significant impact on premium segment hotels
In order to incentivise the setting up of new hotels, the Union Budget 2010-11 has provided for investment-linked tax
deductions. This is unlikely to have a significant impact on the premium hotels segment, as the segment has already
witnessed large supply additions over the last 2 years, resulting in increased competition, and consequently a reduction
in room rates. A positive development for the hotels industry is that service tax has been maintained at the reduced rate
of 10 per cent, which was introduced as part of the Central Government’s fiscal stimulus package.

continued…

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 13

 Union Budget

Overall sectoral impact

…continued

Industry Effect

Household Appliances Positive

Higher disposable income to boost demand for consumer durables
The change in income tax slabs will lead to a significant reduction in tax liability for the salaried class. This will result
in a rise in disposable income and is likely to induce higher demand for household appliances. The hike in excise duty
from 8 per cent to 10 per cent is unlikely to have a major impact on the household appliances industry, as a significant
part of the production of major manufacturers comes from excise-free zones.

Housing Neutral
Minuscule allocations neutral for housing sector
The allocation of Rs 12.7 billion for the Rajiv Awaas Yojana under the Jawaharlal Nehru National Urban Renewal
Mission (JNNURM) to provide property rights to slum dwellers will give a boost to slum redevelopment programmes.
Additionally, the budget has allocated Rs 10 billion for housing and urban poverty alleviation. The extension given to
the scheme offering 1 per cent interest subvention on housing loans up to Rs 1 million (where the cost of the house does
not exceed Rs 2 million) will help sustain the boost to affordable housing. On the rural front, Rs 100 billion has been
allocated under the Indira Awaas Yojana scheme, which will help in reducing the prevailing shortage in rural housing.
However, these allocations will not have a major impact on the organised housing sector.

Information Technology Negative

Tax rate increases to affect near term cash flows
The minimum alternate tax (MAT) has been increased from 15 per cent to 18 per cent which would impact the cash
flows for players across the board, especially for the small and mid-size players. The 3 per cent increase in MAT would
override any benefits from the reduction in surcharge from 10 per cent to 7.5 per cent for Indian IT companies.

Domestic IT services which constitute about 20 per cent of the IT services revenues are expected to get a shot in the
arm from the government’s planned expenditures for improving IT infrastructure and delivery mechanisms.

Media and Entertainment Positive

Focus on digitalisation augurs well for media sector
The Union Budget 2010-11 will have a positive impact on the media sector. Reduction in customs duty from 10 per cent
to 5 per cent and complete waiver of Special Additional Duty on the initial setting up of “Digital Head End” would
reduce input costs for multi-service operators. Rationalisation of customs duty on imported digital masters of films and
imported gaming and music software would enable proliferation of digital content in the country. Further, accredited
news agencies, which provide news feed online, will benefit from the exemption of service tax.

continued…

14 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Overall sectoral impact

…continued

Industry Effect

Non-ferrous Metals Neutral

Aluminium prices to increase by Rs 2, 000 -2, 500 per tonne
The impact of Union Budget 2010-11 is neutral on the non-ferrous metals industry as the rise in costs on account of
increase in excise duty and levy of cess on coal is likely to be passed on.

Increase in the CENVAT rate from 8 per cent to 10 per cent will result in an increase of around Rs 2,000- 2,500 per
tonne on aluminium, zinc and lead prices and Rs 7,000 – 8,000 per tonne on copper prices. The levy of cess of Rs 50
per tonne on coal will result in marginal rise in cost of aluminium production. However, with an expected increase in
demand, we expect the increase in costs to be passed on to buyers.

Oil and Gas Positive

Subsidy reimbursement in cash to reduce working capital stress on OMCs
The government has stated that subsidy on petroleum products would be accounted for in the Union Budget, and it will
be disbursed as cash to the OMCs. We believe that this would significantly reduce working capital stress on OMCs,
thus strengthening their balance sheets through short term debt reduction. The increase in customs duty across crude oil
and petroleum products would translate into higher duty protection for the refiners. However, the resultant increase in
the refinery gate prices for retail auto (petrol and diesel) and cooking fuels (LPG and kerosene), if absorbed by OMCs,
would lead to Rs 110-140 billion increase in under-recoveries to Rs 650-700 billion in 2010-11. The imposition of an
additional central excise of Re 1 per litre on petrol and diesel, if passed on to end consumers, would have no implication
on the profits of OMCs, with the retail selling prices increasing by Rs 1.25 per litre. However, in the event retail prices
are adjusted to reflect even the increase in custom duties, then the required hike in petrol and diesel retail selling prices
would be Rs 2.4-2.6 per litre.

Paper Neutral
Benefits of duty cuts to be passed on
The measures announced in the Union Budget 2010-11 would have neutral impact on the domestic paper industry. The
exemption of additional duty of customs of 4 per cent on wastepaper will reduce raw material costs for paper
manufacturers; however, players will not be able to retain this benefit and will have to pass it on to end consumers.
Hence, the overall impact remains neutral.

Petrochemicals Neutral
No impact on the petrochemical industry
The overall impact of the Union Budget 2010-11 on the domestic petrochemical industry is neutral with no changes
announced in the excise or customs duties of petrochemicals.

continued…

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 15

 Union Budget

Overall sectoral impact

…continued

Industry Effect

Pharmaceuticals Neutral
Benefit from hike in tax deduction on in-house R&D offset by increase in MAT rate
Overall impact of the Union Budget 2010-11 on the pharmaceuticals sector is neutral.

The hike in weighted tax deduction on in-house R&D expenditure (from 150 per cent to 200 per cent) is expected to be
marginally favourable for pharmaceutical companies focussing on new drug discovery such as Piramal Lifesciences,
Sun Pharma Advanced Research Company, etc. The increase in Minimum Alternate Tax (MAT) rate from 15 per cent
to 18 per cent will have a marginally negative impact for most of the pharmaceutical players. Pharma players will not be
impacted by the increase in excise duty on bulk drugs as the same is MODVATable.

Ports Negative
Increase in MAT rate will have negative impact on ports sector
The Union Budget 2010-11 is expected to have a negative impact on the ports sector. The increase in Minimum
Alternate Tax (MAT) from 15 per cent to 18 per cent is expected to have a negative impact on the returns of players
with operational projects. Additional deductions available for investment in long-term infrastructure bonds for
individuals will lead to improved availability of funds for port projects.

Power Neutral
Marginal increase in tariffs expected due to cess on coal
The budgetary allocation for the power sector excluding Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) has
been raised by 130 per cent from Rs 22.3 billion to Rs 51.3 billion. Allocation for Accelerated Power Development
Programme (APDRP) has been increased by 78 per cent from Rs 20.8 bn to Rs 37.0 bn while for RGGVY it has been
decreased by 21 per cent from Rs 70 bn to Rs 55 bn. The hike in MAT from 15 per cent to 18 per cent would have a
neutral impact, as it would be passed on to the end users. A clean energy cess of Rs 50 per tonne would be levied on
domestic as well as imported coal. As fuel costs for the power sector are a pass through, CRISIL Research expects
power tariffs to rise by 2-3 paise per kWh. On the renewable energy front, the budgetary allocation has been increased
by 61 per cent from Rs 6.2 bn to Rs 10 bn.

Roads Neutral
Higher allocation towards the roads sector offset by the increase in MAT rates
Higher allocation towards road projects, and continued take-out financing and refinancing plans of IIFCL are
marginally positive for the sector. Further, additional deduction available for investment in long-term infrastructure
bonds will help mobilise funds for the roads sector. Payment of import duty on depreciated value rather than the
original value of resale machinery will reduce the capital cost for road players. However, the increase in MAT from 15
per cent to 18 per cent of book profits will have a negative impact on the financials of players where BOT road projects
are operational. Overall, the budget’s impact on the sector is neutral.

continued…

16 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Overall sectoral impact

…continued

Industry Effect

Steel Neutral
Steel prices to go up due to excise duty pass through
The impact of the budget on the steel industry is expected to be neutral. With the increase in the Central excise duty
from 8 per cent to 10 per cent, the prices of steel products are expected to rise by Rs 500-750 per tonne. The
manufacturing cost will also increase slightly (~1 per cent of raw material cost of steel players) as cess will be levied on
coal (Rs 50 per tonne). As steel players are expected to pass on the incremental duty and cost, their profitability will
remain unaffected. Higher allocation for infrastructure investment in railways, urban development and housing is likely
to spur demand for steel marginally.

Sugar Neutral
No impact on the industry
The impact of the Union Budget 2010-11 on the sugar sector is neutral. The reduction in basic customs duty for
sugarcane harvesting equipment from 7.5 per cent to 5 per cent is expected to result in marginal cost savings for
farmers.

Telecom Negative
MAT increase to adversely impact the sector
Minimum Alternate Tax (MAT) has been increased from 15 per cent to 18 per cent which would negatively impact
profitability of the telecom service providers.

Full exemption from basic, CVD and special additional duties (SAD) on parts, components and accessories of mobile
handsets, has been extended to include battery chargers and headphones. The government has also extended the
exemption of SAD to mobile phones not imported in pre-packaged form. These measures would result in further
reduction in mobile handset prices. However, we expect the impact to be marginal as mobile handsets and accessories
are already at a very affordable level.

Textiles Positive
Interest subvention expected to benefit textile sector
Impact of the Union Budget 2010-11 is positive on the textile sector. Extension of the 2 per cent interest subvention on
pre and post shipment export credit till March 31, 2011 will help small exporters reduce their interest costs. Hike of
excise duty on man-made fibers and yarns from 8 per cent to 10 per cent will raise polyester prices by Rs. 1.5-2 per kg.
However, this will not affect demand as polyester continues to be cheaper than cotton. Additionally, the government’s
announcement of a one-time grant of Rs 2 billion to the Government of Tamil Nadu for the installation of a zero
discharge system to reduce environmental pollution at the Tirupur cluster will benefit knitwear exporters of the region
in the long term.

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 17

 Union Budget

Overall company impact

Company Impact Impact factors Industry
ABG Infralogistics A,B Ports
ACC A,B Cement
Adani Power Ltd B, C Power
Adlabs Films Ltd B Media and Entertainment
Alok Industries Ltd A,B Textiles
Andhra Pradesh Paper Mills Ltd A Paper
Apollo Tyres Ltd A, C Auto Components
Ashok Leyland Ltd A,B,D Automobiles
Aurobindo Pharma Ltd B, C Pharmaceuticals
Bajaj Auto Ltd A,B,C,D Automobiles
Bajaj Hindustan Ltd - Sugar
Balaji Telefilms Ltd - Media and Entertainment
Ballarpur Industries Ltd A Paper
Balrampur Chini Mills Ltd - Sugar
Bannari Amman Sugars Ltd - Sugar
Bharat Heavy Electricals Ltd (BHEL) D Power
Bharat Petroleum Corporation Ltd A,B,C Oil and gas
Bharti Airtel Ltd A Telecom services
Bhushan Steel Ltd A, B, C, D Steel
Ceat Ltd A, C Auto Components
Chambal Fertilisers & Chemicals Ltd A Fertilisers
Chemplast Sanmar Ltd - Petrochemicals
Chennai Petroleum Corporation Ltd A Oil and gas
Cipla Ltd B, C Pharmaceuticals
Coromandel Fertilisers Ltd A,B Fertilisers
DCW Ltd - Petrochemicals
Dish TV Ltd - Media and Entertainment
DLF Universal Ltd B Real estate - Residential
Dr Reddy's Laboratories Ltd C Pharmaceuticals
EID Parry Ltd - Sugar
EIH Ltd A Hotels
Essar Steel Ltd A, B, C, D Steel
Finolex Industries Ltd - Petrochemicals
Firstsource Solutions Ltd A Information Technology

Continued…

18 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Overall company impact

…continued

Company Impact Impact factors Industry

GAIL India Ltd - Oil and gas
Gammon India Ltd A, B, C Construction
Gammon Infrastructure Projects Ltd A, B, C Roads
GlaxoSmithKline Pharmaceuticals Ltd - Pharmaceuticals
GMR Infrastructure Ltd A,B Airport Infrastructure
Gokaldas Exports Ltd B Textiles
Goodyear India Ltd A, C Auto Components
Gujarat Ambuja Cement Ltd A,B Cement
Gujarat Gas Co. Ltd - Oil and gas
Gujarat State Fertilisers Company Ltd A,B Fertilisers
GVK Power and Infrastructure Ltd A,B Airport Infrastructure
Haldia Petrochemicals Ltd - Petrochemicals
HCL Technologies Ltd A,B Information Technology
HDFC Bank A, B, C, D, E Banking and finance
HDFC Ltd E Banking and finance
HDIL B Real estate - Residential
Hero Honda Motors Ltd A,B,C,D Automobiles
Hindalco Industries Ltd A,B,C,D Non-ferrous metals
Hindustan Construction Co Ltd A, B, C Construction
Hindustan Construction Corporation Ltd A, B, C Roads
Hindustan Copper Ltd A,B,C Non-ferrous metals
Hindustan Organic Chemicals Ltd - Petrochemicals
Hindustan Petroleum Corporation Ltd A,B,C Oil and gas
Hindustan Zinc Ltd A,B,C Non-ferrous metals
Hotel Leelaventure Ltd A Hotels
HT Media Ltd C Media and Entertainment
ICICI Bank A, B, C, D, E Banking and finance
IG Petrochemicals - Petrochemicals
India Cement Ltd A,B Cement
Indian Hotels Co Ltd A Hotels
Indian Oil Corporation Ltd A,B,C Oil and gas
Indo Rama Synthetics (India) Ltd A Textiles
Infosys Technologies Ltd A,B Information Technology
IRB Infrastructure Developers Ltd A, B, C Roads
ITI Ltd B Telecom services
IVRCL Infrastructure & Projects Ltd A, B, C Roads
IVRCL Infrastructures & Projects Ltd A, B, C Construction

continued…

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 19

 Union Budget

Overall company impact

…continued

Company Impact Impact factors Industry

JK Industries Ltd A, C Auto Components
JK Paper Ltd A Paper
JSW Energy Ltd B, C Power
JSW Steel Ltd A, B, C, D Steel
Larsen & Toubro Ltd A, B, C Construction
Larsen & Toubro Ltd A, B, C Roads
LG India A,B Household appliances
LIC Housing Finance Ltd E Banking and finance
Mahanagar Telephone Nigam Ltd B Telecom services
Mahindra & Mahindra Ltd A,B,C,D Automobiles
Mangalore Refinery & Petrochemicals Ltd A Oil and gas
Maruti Suzuki Ltd A,B,C,D Automobiles
MIRC Electronics Ltd A,B Household appliances
MRF Ltd A, C Auto Components
Mundra Port and Special Economic Zone Ltd A,B Ports
Nagarjuna construction Co Ltd A, B, C Construction
Nagarjuna Construction Company A, B, C Roads
Nagarjuna Fertilisers and Chemicals Ltd A Fertilisers
National Aluminium Company Ltd A,B,C,D Non-ferrous metals
National Thermal Power Corp Ltd B, C, D Power
Oil and Natural Gas Corporation Ltd - Oil and gas
Oil India Ltd - Oil and gas
Orchid Pharmaceuticals Ltd A, B, C Pharmaceuticals
Parsvnath Developers Ltd B Real estate - Residential
Phillips Carbon Black Ltd - Petrochemicals
Piramal Healthcare Ltd B, C Pharmaceuticals
Power Grid Corporation of India Ltd B, D Power
Punjab National Bank A, B, C, D, E Banking and finance
PVR Ltd B Media and Entertainment
Rashtriya Chemicals and Fertilisers Ltd A,B Fertilisers
Reliance Communications Ltd A, B Telecom services
Reliance Industries Ltd B Petrochemicals
Reliance Infrastructure A, B, C Roads
Reliance Infrastructure Ltd B, C Power
Reliance Power Ltd B, C Power

continued…

20 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Overall company impact

…continued

Company Impact Impact factors Industry

Samsung India A,B Household appliances
Samtel Colour Ltd A,B Household appliances
Seshasayee Paper and Boards Ltd A Paper
Shree Ashtavinayak Cine Vision Ltd B Media and Entertainment
Shree Cement Ltd A,B Cement
Shree Renuka Sugars - Sugar
SI group - Petrochemicals
Sobha Developers Ltd B Real estate - Residential
State Bank of India A, B, C, D, E Banking and finance
Steel Authority of India Ltd A, B, C, D Steel
Sterlite Industries (India) Ltd A,B,C,D Non-ferrous metals
Sun Pharmaceutical Industries Ltd A, B, C Pharmaceuticals
Sun TV Ltd - Media and Entertainment
Supreme Petrochem Ltd - Petrochemicals
Tamil Nadu Newsprint and Papers Ltd A Paper
Tamil Nadu Petroproducts Ltd - Petrochemicals
Tata Communications Ltd - Telecom services
Tata Consultancy Services Ltd A,B Information Technology
Tata Motors Ltd A,B,C,D Automobiles
Tata Power Company Ltd B, C Power
Tata Steel Ltd A, B, C, D Steel
Thirumalai Chemicals Ltd - Petrochemicals
UltraTech Cement Ltd A,B Cement
Unitech Ltd B Real estate - Residential
Vardhaman Textiles Ltd - Textiles
Welspun India Ltd B Textiles
Whirlpool of India Ltd A,B Household appliances
Zee Entertainment Enterprises Ltd - Media and Entertainment
Zenith Computers Ltd - Information Technology
Zuari Industries Ltd A,B Fertilisers

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 21

This page is intentionally left blank
 Capital markets

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 23

 Union Budget

Equity market
The market benchmark S&P CNX NIFTY (Nifty) has remained range-bound over the last 1 month. We believe the
Union Budget 2010-11 will provide a marginal boost to the market. The government’s aim to reduce fiscal deficit to 5.5
per cent and plans to raise ~Rs 400 billion through disinvestment of profit-making Public Sector Undertakings (PSUs)
in 2010-11 will act as a positive catalyst for the market.

Around 20 per cent of the Nifty stocks will have a marginally negative impact on earnings due to increase in Minimum
Alternate Tax (MAT) from 15 per cent to 18 per cent. However, reduction in surcharge from 10 per cent to 7.5 per cent
will only have a minimal impact on the overall cash outflow of the companies. Further, increase in budget allocation for
the infrastructure segment will have a positive impact on construction stocks (including Punj Lloyd, L&T etc). Some of
the PSU banks with lower capital adequacy ratios will benefit from the infusion of Rs 165 billion. Increase in the budget
allocation for renewable energy, with special thrust on wind and solar power, will benefit companies like Suzlon and
Moser Baer. Moreover, additional allocation in the education sector would benefit companies like Educomp and Edserv
Soft. We do not expect any major impact on companies like Hero Honda and Maruti due to the hike in excise duty from
8 per cent to 10 per cent as this increase would be passed on to end-customers with no major impact in demand. Further,
increase in disposal income will have a positive impact on consumption-driven sectors.

The Nifty jumped ~2.2 per cent from its previous close of 4,859 to above 4,960 before closing at 4,923 (up 1.3 per
cent).

Market reaction to the budget:

Sector Close as of Rise (%) Remarks
26-Feb-10 25-Feb-10
NIFTY 4,922.7 4,859.8 1.3% Nifty rallies on benefits announced to common man
Sectoral indices:
AUTO 7,171.0 6,846.7 4.7% Increase in disposal income to lead to higher sales
METAL 16,401.5 15,989.8 2.6% Higher spending on infrastructure projects to boost demand
BANKEX 9,828.7 9,611.6 2.3% Infusion of Rs 165 billion as tier-I capital in public sector banks to
improve capital adequacy ratios
HC 4,913.0 4,837.8 1.6% Higher deduction on R&D expenditure
REALTY 3,236.7 3,196.3 1.3% Sops for real estate, housing projects extended by a year
OIL&GAS 9,596.2 9,493.5 1.1% Subsidy reimbursement will reduce working capital stress on
OMCs
CG 13,474.9 13,333.3 1.1%
PSU 9,214.3 9,118.4 1.1%
CD 4,001.8 3,964.7 0.9%
POWER 2,961.6 2,953.9 0.3% i. Marginal increase in tariffs expected due to cess on coal.
However, the increase in costs would be passed on to
consumers.
ii. Higher budget allocation to the sector

TECk 3,179.2 3,178.2 0.0% Increase in MAT

IT 5,174.0 5,188.9 -0.3% Increase in MAT; No extension in STPI scheme
FMCG 2,662.1 2,723.9 -2.3% Increase in excise duty on cigarettes
Source: BSE, NSE

24 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Equity market
Expect modest returns in 2010
2009 started off on a low base but it was the year of economic recovery and showed improvement in risk appetite.
While we are positive on the prospects of the Indian equity markets, 2010 will not be a repeat of 2009, at least in terms
of absolute returns. Post the Union Budget today, the key areas that will be under the scanner for 2010 would include
interest rate movements due to rise in inflation, movement in fiscal deficit, the barrage of IPOs from the private sector
and disinvestments by the government. As per our estimates, the markets are expected to remain range-bound over the
next couple of quarters and could test levels of 17,000-17,500 on the Sensex and 5,100–5,250 points on the Nifty
towards end 2010, based on 2011-12 EPS estimates of Rs 1,250and Rs 375, respectively.

Nifty 1-year forward PE

25

20

15

10

0
Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

NIFTY

Source: Prowess

Impact analysis

Rise in individual income tax slabs

The Budget brought good news for individual taxpayers with increase in individual tax slabs. A deduction of an
additional amount of Rs 20,000 has been allowed, over and above the existing limit of Rs 1 lakh on tax savings, for
investment in long-term infrastructure bonds as notified by the Central government.

A male assessee with taxable salary income of Rs 10 lakhs will save Rs 50,000 on his annual tax outlay, thus providing
him with higher disposable income. The new income tax slabs work as below:

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 25

 Union Budget

Equity Market
As per new slab As per old slab
% tax % tax
Upto Rs 1.6 lakh Nil Upto Rs 1.6 lakh Nil
Rs 1.6-5 lakh 10 Rs 1.6-3 lakh 10
Rs 5-8 lakh 20 Rs 3-5 lakh 20
Rs 8 lakh and above 30 Rs 5 lakh and above 30

Example for individuals with taxable income of Rs 10 lakhs

Tax computation
Upto Rs 1.6 lakh 0 Upto Rs 1.6 lakh 0
Rs 1.6-5 lakh 34,000 Rs 1.6-3 lakh 14,000
Rs 5-8 lakh 60,000 Rs 3-5 lakh 40,000
Rs 8 lakh and above 60,000 Rs 5 lakh and above 150,000
Total tax 154,000 204,000
Effective tax rate 15.4% 20.4%

Net savings in tax 50,000

Source: CRISIL Equities

Change in MAT and surcharge

The Budget introduced an increase in MAT rate from of the current 15 per cent to 18 per cent on book profits. Also,
surcharge applicable on domestic companies was reduced to 7.5 per cent from the 10 per cent applicable earlier.

Other key reforms

• Introduction of Companies Bill, 2009, to replace the existing Companies Act, 1956, which will address issues
related to regulation in the corporate sector in the context of the changing business environment
• Plans to implement Direct Tax Code (DTC) from April 1, 2011 and introduce Goods and Services Tax (GST) by
April 2011
• Divestment process in progress for National Mineral Development Corporation and Satluj Jal Vidyut Nigam
• Limit for turnover over which accounts need to be audited, increased to Rs 60 lakh for businesses and to Rs 15 lakh
for professions. Also, limit of turnover for the purpose of presumptive taxation of small businesses enhanced to Rs
60 lakh.

26 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Mutual funds
Mutual fund industry assets touch all-time high, but growth trajectory to be under pressure
• The Indian mutual fund industry’s average assets under management (AAUM), which touched a record high of Rs
8.09 trillion (including fund of funds) in November 2009, fell marginally to Rs 7.63 trillion in January 2010.
AAUM grew by 65 per cent till January 2010 compared with the same month last year, largely on the back of
inflows into debt funds as well as mark-to-market gains in equity funds following the close to 80 per cent rise in the
benchmark indices. High systemic liquidity too helped fund houses increase their corpus. The industry recorded net
inflows of Rs 1,742 billion, out of which Rs 1,727 billion were in debt-oriented funds (mainly ultra short term debt
schemes). Going forward, systemic liquidity is expected to be lower than the levels seen in the last several months
on account of factors such as bank credit growth picking up and the inflation control measures of the government.
Consequently, increasing the assets under management (AUM) would be a challenge for the mutual fund industry.

• Banks were key contributors to mutual fund assets, occupying around a fifth of the AUM till December 2009.
However, the sector’s contribution dropped in the last 2 months (December 2009 and January 2010) after the RBI
expressed concerns on the rising mutual fund investments of banks. Banks’ investments in mutual funds stood at Rs
1.07 trillion on January 29, 2010 compared to Rs 1.69 trillion in early December 2009.

• Debt-oriented funds continued to garner a major share of the mutual fund assets (70 per cent share as of January
2010). This was, however, marginally lower than the 72 per cent share in the corresponding period of the previous
year. Equity-oriented funds accounted for the remaining share.

Mutual fund industry – AAUM and net inflows

1,500
8

1,000
(net inflows - Rs billion)

7
(AAUM - Rs trillion)

500

6 0

-500
5
-1,000

4 -1,500
Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Net inflows (Rs billion) Industry average AUM (Rs trillion)

Source: Association of Mutual Funds in India (AMFI)

• The industry continued to be top heavy, with the top five mutual funds accounting for a 56 per cent share while the
top 10 funds had an 80 per cent share of the January 2010 assets. The bottom 10 fund houses continued to have
around 1 per cent of the industry assets. Reliance Mutual Fund dominated the assets chart throughout the year, and
became the first fund house to cross the Rs 1 trillion AAUM mark in May 2009 (Rs 1.17 trillion as of January
2010). HDFC Mutual Fund was the second fund house to cross the Rs 1 trillion-mark in November 2009.

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 27

 Union Budget

Mutual funds
• The year 2009 saw a key regulatory change for the benefit of retail investors with SEBI’s decision to waive-off
entry loads for investing in mutual fund schemes from August 1, 2009. SEBI further proposed that distributors
must move to an advisory model, whereby they can charge fees for investment advice as against the distribution
commissions that they received earlier. The immediate impact of this regulation was the reduction in the equity
schemes’ monthly sales from over Rs 90 billion in July 2009 to Rs 40-50 billion levels from August 2009 till
December 2009 on account of lower distributor interest in selling schemes following the SEBI ban on entry loads.
The launch of new fund offers (NFOs) too dropped as a result.

• SEBI also targeted improving retail investor penetration by allowing investors to buy and sell mutual fund schemes
on stock exchanges. Both the BSE and NSE have subsequently launched mutual fund trading platforms though
volumes have yet to pick up.

• CRISIL FundServices is of the view that investor education is key to improving penetration, as investors must
inculcate the habit of regular investing through options like systematic investing via mutual funds. CRISIL
FundServices also expects pressure on mutual fund assets growth going forward, as the withdrawal of the fiscal
stimulus (liquidity) is likely to gain momentum. Banks too are likely to reduce their mutual fund exposure post the
full implementation of the 0.75 per cent cash reserve ratio (CRR) hike announced in the latest monetary policy
review as well as due to the pick up in credit demand.

Snapshot of mutual fund performance

CRISIL Index Returns in Tracks 1-month returns 3-month returns 6-month returns 1-year returns
per cent till Feb 24, 2010 till Feb 24, 2010 till Feb 24, 2010 till Feb 24, 2010

CRISIL Fund~eX Equity funds -1.50 0.79 14.02 88.30

CRISIL Fund~bX Balanced funds -1.59 0.58 14.47 76.67
CRISIL MIPEX Benchmark for monthly -0.58 -0.25 3.26 13.20
income plans
CRISIL MF~Gilt Index Gilt funds -0.57 -0.28 1.18 0.88
CRISIL Fund~dX Long-term bond funds 0.06 0.46 2.24 5.20
CRISIL STBEX Benchmark for short- 0.11 0.75 2.38 5.46
term bond funds
CRISIL~LX Liquid funds 0.24 0.86 1.88 4.47
Source: CRISIL Mutual Fund Database

Budgetary measures and their impact

1. Financial inclusion and financial literacy

• Government proposes to set up an apex-level Financial Stability and Development Council, which would monitor
macro prudential supervision of the economy, including the functioning of large financial conglomerates, and
address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion.
• The government proposes to provide appropriate banking facilities to regions having a population in excess of
2,000 by March 2012. The government has also proposed to extend insurance and other services to these targeted
beneficiaries.

28 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

 Union Budget

Mutual funds
• To encourage financial inclusion, the government proposes to augment NABARD’s Financial Inclusion Fund and
Financial Inclusion Technology Fund by Rs 1 billion. These funds enable to expand the reach of banking services
to unbanked areas.

Impact
Increase in financial inclusion and financial literacy would benefit mutual fund penetration, which is currently at less
than 5 per cent of the total population.

2. Infrastructure spending
• The government has provided Rs 1,735 billion (over 46 per cent of the total plan allocations) for infrastructure
development.
• The government has provided Rs 661 billion for rural development in 2010-11.
• The allocation for Bharat Nirman (upgradation of rural infrastructure through its various programmes) would be Rs
480 billion.
• There would be an allowance for the deduction of an additional amount of Rs 20,000 for investment in long-term
infrastructure bonds as notified by the Central Government, above the existing limit of Rs 0.1 million on tax
savings under Section 80C.

Impact
• The continued thrust on infrastructure funding is expected to result in an increasing appetite for infrastructure-
oriented funds.
• The focus on infrastructure projects is likely to result in an increasing number of corporate bond and equity
issuances for fund raising by infrastructure companies and institutions. This would provide an expanding avenue
for mutual funds to invest in.

3. Government’s contribution to NPS (New Pension System)

• Government will contribute Rs 1,000 per year to each NPS account opened in 2010-11. An allocation of Rs 1
billion has been made for the year, which will benefit up to 1 million NPS subscribers of the unorganised sector.

Impact
• This incentive is likely to improve subscriptions towards NPS as well as add to the assets of pension fund managers
under the NPS.

CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010 29

 Union Budget

Mutual funds
4. Broadening of tax slabs

Income tax rate 2009-10 (Existing) 2010-11 (Proposed)

Nil Upto Rs 1.60 lakhs Upto Rs 1.60 lakhs
10% Above Rs 1.60 lakhs upto Rs 3 lakhs Above Rs 1.60 lakhs upto Rs 5 lakhs
20% Above Rs 3 lakhs upto Rs 5 lakhs Above Rs 5 lakhs upto Rs 8 lakhs
30% Above Rs 5 lakhs Above Rs 8 lakhs
(10 lakhs = 1 million)

Impact
This will result in higher disposable incomes, which could see additional inflows towards mutual fund schemes,
amongst other investment avenues.

5. Concessions for clean energy technology

The government has announced various concessions for clean energy technology such as solar energy and other renewal
energy sources.

Impact
Mutual funds may look at clean energy as a theme going forward, taking into account the evolving consensus on global
warming.

30 CRISIL RESEARCH ANALYSIS, FEBRUARY 26, 2010

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