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The hugely pent up expectations about the Union Budget had reached a crescendo when Finance Minister Arun Jaitley rose to present it on the 10th of July. This maiden Budget of the NDA government presented by the FM was a closely watched event, not just in India but throughout the world for its significance in terms of being a defining document of the future direction that this new government was set to embark upon.

 The FM has indeed managed to chalk out a roadmap for the future, as most of the Budget provisions define a longer term objective. Presented in the second week of July, this Budget will officially be for a period of seven months of the remaining part of the financial year. Going by the speed of implementation, there are chances that most of the provisions and allocations will be put to use as we move forward. But to think of it as a period that will bring in the keenly awaited ‘ache din’ will be an overstatement.

 The implementation of most of the provisions contained in the Budget is likely to spill over to the next year and beyond, given the wide scope of these provisions. Neither can roads and highways be expected to be built and completed, as planned, over the next six-odd months, nor can the rivers be connected during this period. These allocations essentially mean that the Budget is a long term programme document of the NDA government.

 This Budget is the fi rst step towards a stronger economy that does away with a lot of shackles so that it can power businesses and ensure growth. Look at some of the provisions that lie in the fi ne print. An online green clearance for big projects is a defi nite step in the right direction. Reportedly, it cuts out discretion and is a big change from the UPA’s ‘Jayanthi Tax’ – a term coined by PM Modi himself. Another important provision is the lifetime licences issued to ships, which is critical to commerce. To be issued by the local marine authority, it will save a lot of time and energy in terms of seeking renewals from Delhi. Breaking away from the licence raj is the provision that makes industrial licenses valid for three years wiTha simpler process laid down for a two-year renewal.

 A very signifi cant provision in the Budget that should save a lot of trouble for the common man is the doing away of the requirement of notaries. You are now allowed to self-attest your identity documents, address proofs and other documents. States have been directed to follow the same rule too. This obviously refl ects on the intent of the government to cut down the red tape. The change in the regime becomes even clearer when you look at some of the policies that the NDA is pushing for. Just a simple example of this is the doing away of the diff erence between the price of premium fuels and bringing them very close to the normal fuels.

 These are some of the striking highlights of the Budget. Many of these have also been touched upon in our editorial (Pg 6). The impact will soon be felt on Corporate India which has been reeling under various pressures. What does this Budget mean for important sectors and where do you put your money in order to ride the upcoming boom? DSIJ presents an incisive sectoral analysis along with sound recommendations which will help you build a strong portfolio going forward.

Banking Sector

The banking sector is one of the barometers of economic performance. Therefore, as Indian economic growth rate dipped to a decade low of less than fi ve per cent, the repercussions were clearly visible in the performance of the banks, especially their asset quality. All banks, without any exception, saw their asset quality deteriorating in the last two years. This is refl ected in the rising non-performance assets (NPAs) of the banks. In his maiden Budget, Finance Minister Arun Jaitley has tried to address this issue by setting up six new benches of Debt Recovery Tribunals (DRT). Although the DRT process needs to be streamlined to allow faster resolution of stressed assets issues, nevertheless setting up of new DRT branches is a welcome step and will help banks in addressing asset quality to a certain extent.

 Besides addressing the NPA issue in this Budget, the FM also indicated that adequate allowances would be given to banks so that they can provide long-term loans to the infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and priority sector lending. Following this, RBI on July 15, 2014 issued

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guidelines covering incentives for issuance of long-term bonds by banks for the financing of infrastructure and affordable housing and flexible loan structuring. The guidelines pave the way for banks to raise long-term resources to finance their long-term loans to infrastructure and affordable housing through minimum regulatory pre-emption (exemption on CRR, SLR & priority sector lending). These incentives increase the capacity of banks to manage their asset liability management in a better way and may have a positive impact on their competitive position against other financial institutions providing such loans.

Moreover, these regulatory exemptions are expected to reduce the effective cost of funds for banks anywhere between 1-1.5 per cent.

 In addition to the above provisions that will have immediate impact on the sector, there were some other provisions that will have long-term impact on the sector, especially the public sector banks (PSBs). First, the government in principle has agreed to consolidation of the PSBs. This will involve merging smaller banks with bigger banks and the SBI associates with State Bank of India. This will help banks in managing their capital requirement, especially under the Basel-III norms. According to some estimates, the PSBs will require Rs 2.4 lakh crore as equity by 2018. Also, to meet this huge capital requirement, PSBs will sell shares to retail investors. Moreover, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year. The RBI will also create a framework for licensing small and differentiated banks.

 The announcement in the Budget and RBI guidelines post-budget will help the entire banking sector, boThin the short term as well as in the long run.

Infrastructure

One important factor that would help Indian economy get back on its track is the focus on infrastructure. The reason behind this is that a single rupee invested in infrastructure generates opportunities worth Rs 10. In a nutshell, the sector has a better gearing than any other sector to provide a boost to the economy. Appreciating the need to revive the infrastructure sector, the BJP government has tried to provide some impetus to this sector as well as to the realty sector. Let’s take a closer look at how the Budget makes an impact on these sectors.

 If we analyse the budget in detail, it can be clearly seen that the infrastructure and manufacturing sectors have been given paramount importance in this Budget, since these are job-creating verticals. To help the financially ailing infrastructure sector, banks will now be encouraged to extend long-term loans for infrastructure projects without any regulatory pre-emptions such as CRR, SLR and priority sector lending norms. Further,the Finance Minister has stated that the vision of the government was to provide 500 urban habitations with support for renewal of infrastructure and services in the next 10 years through PPPs. We are of the opinion that the PPP has been a successful model in the past and we expect it to work going ahead also. We feel the government is looking at an overall infrastructure development in roads and ports. The development of 16 new ports has been proposed at an outlay of `11,000 crore. Additionally, an allocation of `11,600 crore has been made for the development of outer harbour port projects. The combined effect of these provisions will be manifested in the form of an increase in demand for commercial office space from the manufacturing sector in India’s major port cities.

 Apart from this, the BJP government, which had provided focus on road development during the Vajpayee regime, is continuing its strategy this time also. The Finance Minister has stated that the road sector needs huge amount of investment, along with debottlenecking from the maze of clearances. Hence, investment of an amount of `37,880 crore in NHAI and state roads is proposed. Apart from this, work on select expressways parallel to the industrial corridors will be initiated.

 We feel that while the Budget may not spell out immediate benefi ts for the sector, there are factors that would lead to a gradual and long term recovery. Most importantly, the liquidity issues have been addressed.

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Realty

Realty was one sector which was reeling under the burden of debt and also slower sales volume growth. In fact, the combination of both these factors resulted in cash crunch for many of the players. In such a situation, it was high time that the sector got some support from government and as expected the government has provided a new lease of life by making some positive announcements in Budget. First, the requirement of the built up area and capital conditions for FDI would be reduced from 50,000 square metres to 20,000 square metres and from USD 10 million to USD 5 million respectively for development of smart cities. This would attract more FDI into the sector, providing the much-needed liquidity. Further in line for developing new cities, a sum of Rs7,060 crore is provided in the current fiscal for developing 100 Smart Cities.

In addition, the Finance Minister has provided incentives for Real Estate Investment Trusts (REITs) in terms of complete pass through for the purpose of taxation. Further, amodified REITs type structure for infrastructure projects as the Infrastructure Investment Trusts (INVITS) has also been mooted. These two instruments will attract long term finance from foreign and domestic sources, including the NRIs. We are of the opinion that specifi c measures relating to reduction in built up area for FDI and REITs will increase liquidity in the sector and therefore reduce the dependence on the banking system. With the current incentives in the Budget, affordable housing will become even more attractive from a developer’s perspective. In addition, realty sector has also received support in the form of direct tax benefi ts, wiThadditional tax incentive  of increase in the deduction limit on interest paid on housing loan to `2 lakh from the earlier `1.50 lakh. Further, some of the realtors in Tier-I cities would stand to benefit as slum development would be included in the list of corporate social responsibility (CSR) activity.

Power

If you have to choose one sector that needs a complete overhaul and revamp on an urgent basis then it would certainly be the power sector as the country is going through a power crisis, especially due to scarcity of coal. The situation is so grave that the country’s biggest power generator NTPC has been left with few days of coal in many of its plant and, as a result, around 17,000 MW capacity is under threat. The situation is the same with other power generators as well. The good thing is that the government clearly knows the importance of the power sector and seems to be quite proactive about this. In the Budget also, the Finance Minister remained quite focused on the power sector and if everything goes according to his announcements and with the seriousness in which Ministry of Power is moving, then there should be “achche din” for the power sector in the next one year.

 In the Budget, the main focus was on new and renewable energy, with the FM providing `500 crore for Ultra Mega Solar Power Projects (UMSPP) in Rajasthan, Gujarat, Tamil Nadu, Andhra Pradesh and Ladakh and providing another `400 crore for a scheme for solar power driven agricultural pump sets and water pumping stations. This will be helpful for companies

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such as BHEL, Suzlon, Moser Baer, Indosolar, Jain Irrigation, Indowind and others that are into solar panel manufacturing. In fact, BHEL has started work on setting up 4,000 MW UMSPP in Sambhar, Rajasthan, along with various companies. A Green Energy Corridor Project is also being implemented to facilitate evacuation of renewable energy across the country.

 The main focus of the government is clearly on augmenting the coal supply to the power plants. The FM has ensured provision of adequate quantity of coal to power plants which are already commissioned or would be commissioned by March 2015. For this, comprehensive measures for enhancing coal production are being put into place, including more washeries for improving quality of delivered coal. Also, the FM has given concrete indication that coal linkages will be rationalized to optimize transport of coal and reduce cost of power, for which an exercise is already underway. Piyush Goyal, Minister of State (I/C), Power and Coal, has also announced various measures to improve the power situation. In fact, he has made it clear that reforms and restructuring of coal sector cannot be perceived as the privatization or disintegration of Coal India. Already a process of transparent auctioning of coal mines involving a competitive mechanism has been started. Another scheme announced in the Budget regarding “Ultra-Modern Super Critical Coal Based Thermal Power Technology” would be quite helpful for the power generators for which `100 crore has been allocated in the first instance. This will be quite helpful for companies like NTPC, BHEL, Tata Power, Torrent Power, etc. which are making efforts to put new technology in place for power generation. Another beneficial announcement in the Budget was the extension of tax holiday under section 80IA till FY17. This will greatly benefit power companies such as NTPC, NHPC, Reliance Power, Power Grid, etc. whose plants will become operational in the next 2-3 years.

Education

In the Union Budget 2014-15, Finance Minister Arun Jaitley has given a thrust to higher education. The FM has laid down the ‘neev’ for a better tomorrow wiTha slew of measures taken to educate the youths of India. The measures announced in the Budget are as follows:

·         Jai Prakash Narayan National Centre for Excellence in Humanities to be set up in MP.

·         RS 500 crore provided for setting up fi ve more IITs in Jammu, Chhattisgarh, Goa, Andhra Pradesh and Kerala.

·         Setting up five more IIMs in the states of HP, Punjab, Bihar, Odisha and Rajasthan

·         Simplifi cation of norms to facilitate education loans for higher studies.

 This is a clear mandate that the government has given due to the rising need of specialised educational institutions that will enrich the talent pool of the country. This is surely a step due to which the people of India will be able to reap the benefi ts from a long term perspective.

Healthcare

The healthcare sector has been the one that needed special attention. This may sound ironical, but it is true. The healthcare infrastructure of the country has reached its bottom. To address this issue, the FM announced the vision of the Modi Government, which is to achieve “Health For All”. Apart from this, the FM has also proposed for Free Drug Service

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and Free Diagnosis Service. The other initiatives announced during the speech were as follows:

·         Two National Institutes of Ageing to be set up at AIIMS, New Delhi, and Madras Medical College, Chennai.

·         A national level research and referral institute to be set up for higher dental studies.

·         AIIMS-like institutions to be set up in the states of Andhra Pradesh, West Bengal, Vidarbha in Maharashtra and Poorvanchal in UP. A provision of `500 crore was made.

·         12 new government medical colleges to be set up.

·         States’ Drug Regulatory and Food Regulatory Systems to be strengthened by creating new drug testing laboratories and strengthening 31 existing state laboratories.


·         15 Model Rural Health Research Centres to be set up for research on local healThissues concerning rural population.

·         A national programme in mission mode to be put in place within six months to halt the deteriorating malnutrition situation in India.


Petroleum & Natural Gas

 

For the petroleum and natural gas sector, the Budget didnot have any power-packed announcements but Finance Minister Arun Jaitley has certainly administereda booster dose with some finesse. The main focus of the FM was on natural gas and implementation of infrastructure network for transportation of gas. For this, the government will focus on laying pipeline network via PPP model across the country.


 The FM has set a target of laying 15000 kms of gas pipeline for developing a gas grid in the country on a priority basis. This would be of great benefit for the companies that are involved in gas production and transportation and are technology providers. Particularly for GAIL, this would be quite encouraging as in the past the company has put on hold its expansion plans and pipe laying activity due to non-availability of gas.


GAIL is the largest transporter of gas in the country and if its pipeline network is expanded and supply of gas is improved as expected in the Budget,the company would be the biggest beneficiary. Engineers India limited (EIL) will also be benefitted by this as it is the main consultant and EPC player in laying gas pipelines in the country. Other private players will also be benefitted as the sector will be open to private companies once the PPP model comes into being.


Sticking with the deregulation plan of diesel is also a big positive for the sector, though industry is expecting more in terms of deregulation of kerosene and LPG. A big respite was that the FM has stuck to the fuel subsidy target of `63,427 crore planned for FY15 and if the targetis adhered to by the government,it would be benefi cial for the economy on the one hand and fi nancial health of oil PSUs on the other.


 In terms of clear vision,the FM has given some direction to oil exploration companies wherein announcement regarding use of modern technology to revive old or closed wells has been made. It is important to note that domestic oil production of ONGC and Oil India has been stagnated in the last few years and companies are pressing hard to ramp up the production from their ageing fields.


 The Budget announcement would be beneficial as these companies need to incur huge investment in such activity. It was announced in the Budget that the PSUs will do a capex of 2.47 lakh crore during FY15 and this amount would majorly go in oil and power PSUs as they require huge sum for capital expansion. The technology companies will also be benefitted due to focus on unconventional energy source like CBM as the government has given clear indication towards accelerating production and exploitation of Coal Bed Methane reserves.


 However, despite these announcements, a clear direction was missing for oil and gas sector in the Budget but experts are not very amused by it. “Apart from talking about production enhancement from marginal/declining fields using modern technology, no direction has been provided (in budget) for indigenous exploration activities. Reduced reliance on imports and vulnerability due to external conditions can only be achieved by domestic exploration activities. Overall impact negative on the already stressed oil and gas sector,” states a KPMG report.

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