THE UNION BUDGET

2011-2012
REPUBLIC OF INDIA

March 10, 2011

EXECUTIVE SUMMARY

No Budget exercise can please the Indian intelligentsia, politicians, economic pundits and the
corporate world alike. The Union Budget 2011-2012 has been no exception.

This year, the focus on social infrastructure development – a hallmark of the United Progressive
Alliance government in its second term in power – changes trajectory. Efforts are being made to
ensure that the pro-poor subsidies reach the beneficiaries in an efficient fashion. Social
Spending is also up 17 percent to USD 35 billion.

On the taxation front, there is good news. Both the unified Goods and Services Tax (GST) and
the Direct Tax Code (DTC) are back on the agenda. These tax reforms, which will take more
than 12 months to be implemented, will have a significant impact on how India does business.

Also there is good news for the private insurance sector as there are plans to raise the FDI cap
to 49 percent. This will help Indian promoters dilute their stake in these companies and fund
new projects.

On the other hand, there is genuine concern that fresh levies of indirect taxes may fuel inflation
in the year to come. Disconcertingly, there seems to be no specific strategy to curb rampant
inflation, particularly in light of the political situation in the Middle East, which has led to crude oil
prices in excess of USD 110 per barrel.

There were no big-bang reforms proposals on the 20th anniversary of India’s economic reforms
– particularly a ringing endorsement of further FDI liberalisation in the multi-brand retail and
defence sectors. However, the stock markets, after a more tepid response on budget day,
reacted far more buoyantly a day later – with the two key stock market indices – the Bombay
Stock Exchange’s Sensex and the National Stock Exchange’s Nifty rising by 623 points and 189
points respectively – probably signaling that the Budget was a step in the right direction.

© 2011 APCO Worldwide Inc. All rights reserved.

BUDGET 2011: AT A GLANCE
ECONOMIC INDICATORS
 The Gross Domestic Product grew at 8.6 percent in 2010-2011 in real terms and is
expected to grow at 9 percent with an outside band of +/- 0.25 percent in 2011-2012
 In 2010-2011, agriculture is estimated to have grown at 5.4 percent, industry at 8.1
percent and services at 9.6 percent
 Foreign Exchange reserves are estimated at USD 297.3 bn
 The savings rate has increased to 33.7 percent, while the investment rate is up at 36.5
percent of GDP

COMMERCE AND TRADE

 Exports have grown at 29.4 percent to reach USD 184.6 billion
 Imports are at USD 273.6 billion, having recorded a growth of 17.6 percent during April-
January 2010-2011
 The current account deficit is around the 2009-2010 levels and poses some concerns
because of the composition of its financing
 Proposal to introduce a scheme to refund taxes paid on services used for export of
goods
 Mega cluster scheme to be extended for leather products. Seven mega leather clusters
to be set up during 2011-2012

INFRASTRUCTURE
 USD 47 billion allocated for infrastructure sector in 2011-12, up 23.3 percent over 2010-
2011
 Tax-free bonds of USD 6.6 billion proposed to be issued by government undertakings
during 2011-2012
 Government to evolve national public-private partnership (PPP) policy
 Additional deduction of USD 4.4 billion for investment in long-term infrastructure bonds
proposed to be extended for one more year
 Foreign Institutional Investors (FIIs) limit in corporate bonds in infrastructure sector
increased to USD 25 billion

TAXATION

Tax Reforms

 Direct Taxes Code (DTC) to be finalised for enactment during 2011-2012. DTC
proposed to be effective from April 1, 2012
 Areas of divergence with States on proposed Goods and Services Tax (GST) have been
narrowed. As a step toward roll-out of the Goods and Services Tax (GST), Constitution
Amendment Bill proposed to be introduced in this session of Parliament
 Significant progress in establishing GST Network (GSTN), which will serve as the IT
infrastructure for introduction of GST

1
Direct Taxes
 Personal income tax exemption limit has been raised to approx. USD 4,000
 Given the good growth in corporate tax collection during the year, base corporate tax
maintained at 30 percent
 Surcharge on domestic companies reduced to 5 percent from 7.5 percent
 Rate of Minimum Alternative Tax proposed to be increased from 18 percent to 18.5
percent of book profits
 Tax incentives extended to attract foreign funds for financing of infrastructure
 Individual investments in long-term infrastructure bonds to continue enjoying additional
deduction of USD 444 for one more year
 Benefit of investment linked deduction extended to businesses engaged in the
production of fertilisers and development of affordable housing
 Weighted deduction on payments made to national laboratories, universities and
institutes of technology to be enhanced to 200 percent
 System of collection of information from foreign tax jurisdictions to be strengthened

Indirect Taxes
 To stay on course for transition to Goods and Services Tax (GST)
 Central Excise Duty to be maintained at standard rate of 10 percent
 130 items out of 370 consumer goods items currently enjoying exemption from Central
Excise duty to be brought into tax net with nominal central excise duty of 1 percent
 Lower rate of Central Excise Duty to be enhanced from 4 percent to 5 percent
 Optional levy on branded garments or made up proposed to be converted into a
mandatory levy at unified rate of 10 percent
 Peak rate of Customs Duty held at its current level

Social Focus
Expansion of existing schemes:
 Social-sector projects spending at USD 35 bn, an increase of 17 percent
 USD 12.8 bn allocation for rural infrastructure programme - Bharat Nirman (loosely
translates to “India Building”) - an increase of USD 2.2 bn from 2010-2011 levels.
Enhanced wage rated under the National Rural Employment Guarantee Act
 Remuneration of aanganwadi (community-based health centres) workers, who are the
backbone of Integrated Child welfare schemes, has been raised from USD 34 to USD 68
per month. This will be effective from April 1, 2011, and more than 2.2 million workers
will benefit from this increase
 Allocation of USD 11.5 bn for education sector, an increase of 24 percent
 Out of overall education outlay, USD 4.7 bn has been allocated for the Sarva Shiksha
Abhiyan (universal education programme) – a flagship government programme
 USD 1.1 bn to be provided to the National Skill Development Council
 Allocation for primitive Tribal groups increased from USD 40 m to USD 5 m
 Scope of Rashtriya Swasthya Bima Yojana (national health insurance scheme) to be
expanded to widen the coverage

2
New schemes
 Comprehensive national policy to control the trafficking of narcotics
 The Government is close to finalising the National Food Security Bill
 National Knowledge Network by March 2012. Connectivity to all 1,500 institutions of
higher learning and research through optical fibre backbone to be provided by March
2012

THE NEWS-MAKERS
SUBSIDIES
 Subsidy bill for fuel, food and fertilisers 13 percent lower for 2011-2012 at USD 29.6 bn
compared to USD 33.8 bn in the current fiscal
 Government to bring urea under the Nutrient Based Subsidy (NBS) net
 Government to move toward the direct transfer of cash subsidy to people living below
the poverty line in a phased manner for better delivery of kerosene, liquefied petroleum
gas (LPG) and fertilisers. Task force to work out modalities for proposed system to be
headed by Mr Nandan Nilekani with interim report expected by June 2011. The system
will be in place by March 2012
 Investment in fertiliser sector is capital intensive and even considered high risk. The
government proposes to include capital investment in fertiliser production as an
infrastructure sub-sector

ENVIRONMENT-RELATED INCENTIVES
 Reduction in Excise Duty on kits used for the conversion of fossil fuel vehicles into
hybrid vehicles
 Full exemption from basic Customs Duty and a concessional rate of Central Excise Duty
extended to batteries imported by manufacturers of electrical vehicles
 Concessional Excise Duty of 10 percent to vehicles based on fuel cell technology
 Basic customs duty on solar lanterns reduced to 5 percent from 10 percent
 Full customs duty exemption for solar module cells

SECTORS
Hospitality and Aviation
 Hotel accommodation that costs in excess of USD 22 and services provided by air
conditioned restaurants that have license to serve liquor added in the Service Tax net
 Service Tax on domestic and international air travel raised

Defence
 Defence budget hiked by 11 percent, pegging the 2011-2012 allocation at USD 36
billion, to fuel the rapid modernization of the Armed Forces
 The percentage of the defence budget as a share of the GDP slumps to 1.8 percent, the
first time it is under 2 percent in more than a decade

3
APCO IN INDIA – SPECIAL FOCUS AREAS
RETAIL, FOOD AND CONSUMER PRODUCTS
Food
Announcements:
 Government to promote organic farming methods, combining modern technology with
traditional farming practices through the National Mission for Sustainable Agriculture
 Approval being given to set up 15 more Mega Food Parks during 2011-2012
 Removal of production and distribution bottlenecks for items like fruits and vegetables,
milk, meat, poultry and fish to be the focus of attention this year
 Special initiatives to improve post-harvest management of agricultural produce
 Focus on augmentation of storage capacity and cold chain through private
entrepreneurs and warehousing corporations
 Capital investment in creation of modern storage capacity will be eligible for
viability gap funding of the Finance Ministry
 Duty exemptions
 Full exemption from excise duty to air-conditioning equipment and
refrigeration panels for cold chain infrastructure
 Including conveyor belts in the full exemption from excise duty to
equipment used in cold storages, mandis (markets) and
warehouses
 Efforts to persuade the state governments to review and enforce a reformed Agriculture
Produce Marketing Act
 Allocation of USD 66.3 m for implementation of vegetable cluster initiative to provide
quality vegetable at competitive prices
 Allocation of USD 66.3 m to bring 60,000 hectares under oil palm plantations. Initiative to
yield about 3 lakh metric tonnes of palm oil annually in five years

Impact:
 In the longer run, the initiatives outlined to improve the production and distribution of
agricultural produce is expected to boost to the growth of organized retail sector. This
will also contribute to the objectives of meeting the food security obligations of the
government and to restrain rising food inflation.
 In the meantime this opens up plethora of opportunities for private investment in the
post-harvest management infrastructure backed by viability gap funding from the
government

Retail & Consumer Goods

Announcements:
 Optional levy on branded garments proposed to be converted into a mandatory levy at
unified rate of 10 percent
 130 out of 370 consumer goods items currently enjoying exemption from Central Excise
duty to be brought into tax net
 Lower rate of Central Excise Duty to be enhanced from 4 percent to 5 percent

4
Impact:
 Henceforth, the branded apparel manufacturer will have to pay compulsorilythe excise
duty of 10 percent. The cost of branded garments and made-up textiles will go up by 10-
15 percent
 Some of the items to be included in the higher excise duty regime will be coffee or tea
pre-mixes; all kinds of food mixes (including instant food mixes); ready-to-eat packaged
food; silicon in all forms; articles of jewellery manufactured or sold under a brand name;
mobile handsets; recorded CDs and DVDs; bicycles and cycles, etc. Prices of these
consumer goods will dart up proportionately as producers, who are hemmed in by rising
input costs, will have little option but to pass it on partially or fully
 The prices of consumer durables will also be maintained this year as there is no hike in
excise duties

Energy and Renewables

Announcements:
 USD 44.2 m from the National Clean Energy Fund to be allocated to start
implementation of the “Green India Mission” in 2011-2012
 USD 44.2 m proposed to be allocated for launching Environmental Remediation
programmes from the National Clean Energy Fund
 USD 44.2 m allocated for cleaning of important lakes and rivers other than the Ganga,
from the National Clean Energy Fund
 The budget allocation for the ministry of environment and forests increased only by 4
percent from USD 487 m last year to USD 509 m this year
 Provision of USD 36.5 m for schemes in the environment and forest sector in the north-
eastern states
 Plan outlay in funding for forestry and wildlife protection dropped from USD 175 m to
USD 173 m this year, while the conservation of ecology and environment saw an
increase from USD 270 m in 2010-2011 to USD 298 m this year

Impact:
 Increased budgets indicate a clear intention of the government toward a cleaner
environment by giving a boost to the implementation of the ambitious Green India
Mission
 The mission, which plans to restore around 10 million hectares of land between 2010
and 2020, is a part of the National Action Plan on Climate Change (NAPCC). This will
involve an investment of USD 10.1 bn over 10 years. India is also negotiating on the
global climate change platform for funds to maintain forest cover as well as to increase it
 Another mission under the NAPCC, the Jawaharlal Nehru National Solar Mission
(JNNSM), did not get any increased budget allocation, indicating the government’s wait-
and-see approach during the first phase of the JNNSM, which has met with criticism
lately for its slow progress
Banking and Insurance
Announcements:
 Insurance Amendment Bill, LIC (Life Insurance Corporation) Bill and Pension
Development Authority Bill to be introduced in this session
5
  The insurance legislation, if successfully passed in parliament, would increase the FDI
limit to 49 percent from the current 26 percent
 USD 6.6 bn to National Bank for Agriculture and Rural Development (NABARD) from
Union Budget 2011
 Home loan limit hiked to USD 55,000 for priority sector lending
 1 percent interest subvention on home loans up to USD 33,000
 Rural housing fund to get USD 664 m
 Indian micro-finance equity with Small Industries Development Bank of India (SIDBI) to
be formed with USD 22 m
 USD 1.2 bn for state-owned banks to maintain capital-to-risk assets ratio norms
 Banking Laws Amendment Bill, SBI (State Bank of India) Subsidiaries Bill and BIFR
(Board for Industrial and Financial Reconstruction) Bill will be introduced this year
 Capital infusion of USD 4.4 bn in state-owned banks in FY 2012
 To create USD 22 m equity fund for micro-finance companies
 The LIC bill would increase the share capital of Life Insurance Corporation (LIC) to USD
22 m from its current USD 1.1 m
 Financial Inclusion - Target of providing banking facilities to all 73,000 habitations having
a population of more than 2,000 to be completed during 2011-2012

Impact:
 The finance minister’s announcement that the Insurance Bill will be considered in this
session is a great boost to the insurance industry. It will empower the Insurance
Regulatory and Development Authority (IRDA) to introduce forward-looking regulation to
promote sustainable growth of the industry. The bill gives a lot of flexibility to IRDA in
framing such regulation
 Guidelines on fresh banking licenses still unclear
 One may expect more “new” banks to enter the banking sector after a year or so. It will
be easier for new banks to enter the wholesale banking sector while entry into the retail
banking - for new banks – will get tougher
 Home loans to become cheaper
 Insurance products to become more expensive

Health and Pharmaceuticals

 Healthcare budget hiked by 20 percent to USD 5.9 bn in FY 2012
 Extension of Rashtriya Swasthya Bima Yojana (National Health Insurance Scheme) to
cover unorganized sector workers in hazardous mining and associated industries
 1 percent hike in excise duty for vaccines and IV fluids and other medicaments
 Centralised air conditioned (AC) hospitals with more than 25 beds brought under 10
percent service tax

 Diagnostic service providers levied 10 percent service tax

 The finance minister also proposed to provide outright concession to factory-built
ambulances in place of the existing refund-based concession from excise duty

6
Impact
 Pharmaceutical sector has expressed relief over continuation of concessions on excise
duty provided during the global economic meltdown. The budget does not have much for
pharmaceutical industry as there is no major policy announcement
 Private healthcare services will become more expensive with the direct and indirect tax
proposals announced in the Union Budget 2011
 Healthcare appears to be less investment friendly as it has not been allowed any
benefits from FDI or FII, which is not a good sign for the growth of the sector like
healthcare. Rather it has been burdened with increment in excise duty and service tax
 Though the effective service tax would be 5 percent, as there is a 50 percent rebate,
experts believe that bringing the hospitals sector under services tax is a detrimental
move as the burden will be passed to the consumer
 Earlier patients under insurance coverage were under the service tax bracket, but in this
budget the government has expanded its scope of taxing by bringing even non-
insurance patients under the tax bracket

Information and Communication Technologies (ICT)

Announcements:
 Under the Bharat Nirman programme, rural broadband connectivity will be provided to all
250,000 panchayats (local administrative bodies) in the country in three years
 An optical fibre backbone through the National Knowledge Network, approved in March
2010, will link 1,500 higher education institutions by March 2012
 Since colour and unexposed jumbo rolls of cinematographic films are not manufactured
domestically and have to be imported – jumbo rolls of 400 feet and 1000 feet will now be
fully exempted from CVD (additional customs duty) and excise duty
 The government has announced a levy of 1 percent excise duty on CDs and DVDs

Impact:
 Since the government plans to take on much of the investment burden of the backbone
network without extending too far into the access network, many private-sector
companies are likely to be very pleased with it
 The government hopes that through this method of co-option, operators would be
encouraged in investing in end-user infrastructure, thus boosting the competitive
broadband market
 The Budget did not waive service tax on copyright, which was one of the film industry’s
main demands
 The government’s decision to exempt cinematographic rolls is expected to boost anti-
piracy efforts. Piracy used to take place as distributors could not make more prints
because of the high roll costs. Now, with the exemption, distributors will come out with
more prints that will help in fighting piracy
 While the exemption on the rolls may not benefit high-budget movies, since prints
constitute only 10 percent of total costs, it is a relief for low-budget filmmakers

7
POLITICAL GRAPEVINE

“The finance minister did not take any cheap populist step,
and the exercise was a reflection of an India aspiring to
become a super-power…concrete steps have been taken to
strengthen the economic fundamentals in the budget."
Abhishek Manu Singhvi, Spokesperson,
Indian National Congress
(Largest party in the ruling coalition government/Centrist)

"The Union Budget, presented by the Union finance

minister in the Lok Sabha today, is a document without a
vision. There is no big idea which has guided and
motivated the Budget presentation exercise. It is an
unimaginative budget, which has little nexus to the issues
confronting the Indian economy."
Press statement, Bharatiya Janata Party (BJP)
(Principal national opposition party/Rightist)

"The Budget reflects the abandoning of the aam admi

(populist) agenda by the government and its pursuit of an
aggressive neoliberal agenda. The Polit Bureau of the
CPI (M) calls upon the people to strengthen resistance
against these neoliberal policies."
Press statement, Communist Party of India (Marxist)
(Largest of the Communist parties/Leftist)

"It is a restrained budget. It is good to see allocation in

agricultural, education and health sectors."
Partha Chatterjee, Trinamool Congress
(Key government ally and principal opposition party in West
Bengal, which goes to the polls this year/Centre-Left)

"The Union budget is a damp squib, and the status-quo-ist

excercise will benefit only a small segment of people at the
cost of the vast majority."
J.Jayalalitha, President, AIADMK
(Principal opposition party in the state of Tamil Nadu -heading for
polls this year/Centrist)

8
INDUSTRY SPEAK

“The support for green and energy

“The finance minister has made an
initiatives, especially in the areas of
honest effort to reconcile two
automotive and solar, is worth
seemingly conflicting objectives of
noting in this year’s budget.
Reduction in duty on LEDs will help maintaining growth momentum and
containing the inflationary pressure
boost growth of this technology and
in the economy. On the whole, the
energy efficiency, since cost is one
budget is intended to keep the
of the chief inhibitors for adoption of
growth momentum going in a
new energy efficient products.”
difficult environment.”

Ashok Chandak, Senior Director,

Sunil Bharti Mittal, CEO, Bharti
Global Sales and Marketing, NXP
Enterprises
Semiconductors India

“I think the most important thing is

that he (finance minister) has clearly
given a signal of Goods and
Services Tax coming through
soon...that is a major development
which is very welcome as it will help
us solve a lot of macro-economic
issues, including inflation, fiscal
deficit and help GDP growth.”
Adi Godrej, Chairman, Godrej
Industries
“The budget 2011-2012 is a
pragmatic budget given the present
political and economic realities. It
balances the demands of India's
growth agenda with the need of
keeping fiscal and budgetary deficits
within control.”
AK Das, Executive Director, Hinduja
Group

9
TRACKING THE MARKETS ON BUDGET DAY

BSE (SENSEX)

1,7823 (+122)

NYSE (NIFTY)

5,333 (+29)

CONTACT APCO IN INDIA

Sukanti Ghosh, managing director: +91 98330 38520
Samiran Gupta, executive director: +91 99990 19631
Asitava Sen, director corporate advisory & PA: +91 98106 05233
Tushar Panchal, director strategic communications & PA: +91 98336 87427
Steven King, associate director strategic communications & PA: +91 95822 30497

10