Вы находитесь на странице: 1из 29

KBuzz

Sector insights
February 2011

kpmg.com/in
As the Indian Finance Minister Pranab Mukherjee unveiled the Union Budget 2011 on
February 28, 2011, our Nation was hoping for a continued focus on the reform agenda and
sustenance of growth while balancing out challenges such as the high Current Account
Deficit and high inflation levels.

In line with the trend of fiscal consolidation and inclusive growth, the Budget provisions
allowed for moderate growth in government expenditure, left the central excise duty
untouched, permitted foreign money in Indian mutual funds, increased the long term
infrastructure bonds limit for Financial Institution Investors , and reduced corporate surcharge
in an attempt to move towards the Direct Tax Code framework. Further, although no specific
provisions were laid down to tackle inflation, there was an emphasis on eliminating flaws in
agricultural marketing and distribution systems and supply linkages, which have played their
part in contributing to increasing inflation .

I hope you find this edition of KBuzz interesting and useful.

Regards,

Vikram
Head – Markets and Private Equity Advisory
KPMG in India

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IT-ITeS

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IT-ITeS

KPMG View – Implications of Budget 2011-12

Chasm between theory and practice


Amidst rising inflation, increased fiscal deficit in 2009-10 and few instances of
governance failures, run up to Budget 2011 was filled with high expectations.
While major structural and policy reforms were expected, experts were
envisaging a populist budget without compromising on industrial and agricultural
growth. IT/ITeS sector, which is one of the key focus sectors and acts as an
imperative for modernization and growth of other sectors was also expected to
get a boost. However, without getting blown by the flurry of expectations,
Pradeep Udhas Finance Minister released a pragmatic budget which brought with it a mixed bag
Head, of implications for the IT/ITeS sector.
IT-ITeS
pudhas@kpmg.com The Good
The Government is betting big on the role of Information & Technology (IT) to
boost new initiatives and improve governance. With a plan outlay of INR 3,619.07
crore, Department of Information & Technology (DIT) would focus on
Infrastructure Development (which includes eGovernance), R&D Programmes
(which includes Micro Electronics and Centre for Development of Advanced
Computing) and Human Resource Development Programmes (for capacity
building, specifically in the areas of Nano Technology, Power & Communication,
Computer Science, Bio-Technology, Infrastructure, Energy, Mechatronics, and
Manufacturing).1 The thrust areas of the government would be e-Governance
which would encompass key government projects and initiatives such as Unique
Identification of Authority of India (UIDAI), Tax information network (TIN), National
Pension Scheme (NPS), Goods and Service Tax (GST), National Treasury
Management Agency (NTMA), e-Stamping for property registration, and e-Tax
Filings through Central Processing Centers. The government has also proposed
to set up a National Knowledge Network (NKN) which aims to link 1500
institutions across states which act as stakeholders in Science, Technology,
Higher Education, Research & Development and Governance, by 2012. The
government would also focus on Electronics/IT Hardware Manufacturing Industry
Programme for promotion of Electronics/IT Hardware industry, and would take
steps to improve the state of nation’s cyber security strategy. These steps would
make the government a major client for the IT/ITeS sector and would catapult the
growth of this sector.
In terms of specific taxation measures, the Finance Minister reduced the tax on
Foreign Dividends to 15 percent from current 30 percent, which would increase
the the fund repatriation to the Parent companies in India. This is specifically
advantageous to the IT/ITeS sector as most companies in this segment now
operate on Global Delivery Model.

1. Budget 2011

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IT-ITeS

KPMG View – Implications of Budget 2011-12

The Not So Good


The Finance Minister spoke favorably about the role IT can play in country’s
development and governance, however, it did very little to bolster the growth of “The Union Budget lays
this sector. While the total revised outlay for Department of Information & specific emphasis on
Technology in 2010-11 was INR 3,875.01 crore, the budgeted outlay for 2011-12
controlling fiscal deficit
has been kept at 3,619.07 crore.2 Despite strong statements on the need to
improve governance and drive new IT-based initiatives for inclusive growth, the and accounts for
budgeted outlay may not be suffice the requirements of planned activities. adequate intervention
Taking a closer view, there is more to the budget than it meets the eye. While from the RBI to curb
the industry was expecting a decrease in Minimum Alternate Tax (MAT) on the issues of rising inflation.
basis of the argument that globally MAT is not more than one-third of Corporate Sectors such as
Tax (which is nearly 34 percent in India) and hence it should not be more than 10- Agriculture,
11 percent. Paradoxically, the government announced a hike in Minimum
Infrastructure have been
Alternate Tax (MAT) to 18.5 percent from 18 percent and has proposed to also
bring Special Economic Zone (SEZ) units/ developers under the purview of MAT. appropriately addressed
While the surcharge has been reduced from 7.5 percent to 5 percent for in the budget but there
domestic companies, keeping the effective MAT rate at the same level, yet it isn’t as much focus on
was unable to please the IT industry which was expecting a more positive the Information
outcome.3 Additionally, the available exemption on levy of Dividend Distribution
Technology industry.”4
Tax (DDT) on SEZ developers is also proposed to be withdrawn. Putting spotlight
on indirect taxes, new services have been included in Service Tax regime which - Jeya Kumar,
would increase the output cost, moreover no clarification was given on double CEO, Patni
taxation of licensed software (through VAT as well as Service tax) which
disappointed the industry vendors.
On the transfer pricing front, the industry has been severely impacted by transfer
pricing additions at the behest of the tax department and while the safe harbor
provisions announced in last year’s budget were awaited to be notified, this
year’s budget proposes wider powers to be conferred on the transfer pricing
officer to conduct survey and to examine all international transactions which
come to his notice at the time of the transfer pricing proceedings initiated for a
particular transaction(s).
The government also did not extend the tax holiday for Software Technology
Parks of India (STPI) units under section 10A and 10B which could have been an
incentive for IT players, especially for small and medium businesses (SMBs) as a
larger proportion of their revenues accrue from STPI units in comparison to tier-I
players. The industry leaders have found a niche for them and showcased smart
recovery from economic downturn, however, SMBs are still struggling and are
walking the tightrope of maintaining margins. In a situation like this, this year’s
budget may set the SMB segment of IT/ITeS sector on detract mode.
While the overall vision of this budget is commendable, which targets at inclusive
and long-term growth through policy changes and structural reforms, there is little
incentive and reassurance for IT/ITeS players in short term. Budget 2011 may not
affect the tier-I players to a great extent, however, it would not be wrong to say
that expectations of small and medium businesses in IT/ITeS sector—an
expanding cluster—have not been met.

2. Budget 2011
3. KPMG Analysis
4 . Money Control.com

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IT-ITeS

KPMG View – Implications of Budget 2011-12

Key deals in February 2011


Sr. Target Acquirer/ Acquirer Deal Size Percent
Target Deal Type
No. Country Investor Country (USD Mn) Sought

Amtek Auto - Amtek Auto Ltd ;


Joint
1 Enertec India Enertec India NA NA
Venture
Management JV Management Ltd

Tata
2 BitGravity The US Acquisition India NA NA
Communications

Micro
Block Trade
3 Technologies India HT Media Ltd India 4.4 100%
(Investment)
India Ltd

Computaris R Systems
4 The UK Acquisition India 14.27 NA
International Ltd International Ltd

IndoUS Venture
Jasper Infotech Acquisition Partners (IUVP) ;
5 India India 12 NA
Pvt Ltd (Funding) Nexus Venture
Partners

Note: Deals covered till from 21 January 2011 to 21 February, 2011


Source: ISI Emerging Markets

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
PHARMACEUTICALS

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Pharmaceuticals

KPMG View – Implications of Budget 2011-12


Introduction
The Indian pharma industry estimated at USD 22.9 billion in FY20101 is one of the
fastest-growing pharmaceutical markets in the world and is poised to achieve
considerable growth in the coming years as well. In this setting, the budget and
the policies adopted by the government play a major role in keeping the
momentum of growth in the industry. Overall, the budget was considered to be
neutral with both positive and negative impact for the pharma industry.

Positive Implications
Gaurav Khungar
Head, Weighted deduction on payments for research enhanced: The weighted
deduction on payments made to National Laboratories, Universities and Indian
Pharmaceuticals
Institute of Technology for approved scientific research programme will be
gkhungar@kpmg.com enhanced from 175 percent to 200 percent in order encourage innovation in the
country. This is expected to boost the research and development scenario in the
pharma sector to some extent.

Plan allocations for health stepped-up by 20 percent: India's health allocation


was increased by 20 percent to INR 26,760 crore for the sector with special
focus on research, insurance cover for marginal workers and medical education.
The scope of Rashtriya Swasthya Bima Yojana is planned to be expanded to
widen the coverage. This move is positive considering that access to quality
healthcare is lacking in the country and needs to be addressed.

Reduction in basic customs duty on lactose: The reduction in the basic


customs duty on lactose for the manufacture of homeopathic medicines from 25
percent to 10 percent is expected to make homeopathic medicines cheaper.

Reducing tax on dividends from 30 percent to 15 percent: The lower rate of


15 percent tax on gross dividends received by an Indian company during the
Assessment Year 2012-13 from its foreign subsidiary will help in the inflow of
funds to India.

Other positives: Other few positives include the reduction in surcharge from 7.5
percent to 5 percent for domestic companies and from 2.5 percent to 2 percent
for foreign companies.
One of the proposals is to reduce the import duties on specified raw material for
the manufacture of syringes and needles to 5 percent basic and 4 percent
countervailing duty (CVD). Basic customs duty on import of endovascular stents
is exempted. The customs duty on four specified life saving drugs and their bulk
drugs is reduced to 5 percent with nil CVD (by way of excise duty exemption).
Moreover, the importance given to the cold chains and its recognition as an
infrastructure sub-sector could indirectly benefit the pharma industry. Cold chain
management is important for medicines as they require temperature controlled
equipment and facilities throughout the supply chain.

1. Crisil Research

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Pharmaceuticals

KPMG View – Implications of Budget 2011-12


The government is also keen to come up with a comprehensive policy that can
be used by the Centre and the State Governments in further developing public-
private partnerships which could benefit the healthcare sector.

Negative Implications

Hike in Central Excise Duty from 4 percent to 5 percent on medicaments:


The increase in the excise duty is expected to be passed on to the customers
and therefore, the prices of drugs and medical equipments are expected to
increase. Vaccines are now under 1 percent excise levy without Cenvat credit
facility. Therefore, companies such as Serum Institute of India, Sanofi and
Panacea Biotech might hike the prices of the vaccines in the range of 1-1.5
percent, excluding those under the National Immunization Programme.2
With Ayurvedic, Unani, Siddha and Homeopathic (AYUSH) drugs also under the 1
percent excise levy, these drugs are also expected to cost more. Companies
such as Dabur, Baidyanath, Himalaya Drug Company, Dr Batra's and Baksons
Homeopathy are expected to be impacted.2

Minimum Alternate Tax (MAT) of 18.5 percent on book profits: The increase
of MAT from 18 percent to 18.5 percent is expected to hit the profitability of the
pharma companies marginally.
MAT on developers of Special Economic Zones (SEZs) as well as units operating
in SEZs is expected to adversely affect the pharma companies that have made
huge investments / operate in the SEZs. Further, Dividend Distribution Tax is now
payable by SEZ developers for dividends declared, distributed or paid on or after
June1,2011. Many pharma companies or their promoters operate or have their
own SEZs including Cipla, Wockhardt, Zydus Cadila, Serum Institute and JB
Chemicals, etc. to avail of the tax-exemption policy of the government.3 The tax-
exemption policy of the Government for SEZs helped companies to invest for the
long-term in manufacturing and in research. This step is expected to result in a
higher tax for several large export-oriented companies in the country which
operate out of SEZs.

Other negatives: Moreover, as no extension of sops to the Export Oriented


Units was announced was a bit of a dampener for the industry which expected
the Government to do so.
The tax levied on all services including diagnostic services provided by hospitals
with more than 25 beds that have the facility of air-conditioning is a step against
making healthcare affordable in the country for the average consumer.
Also, there was no clarity whether the weighted deduction given to companies
on their research spend at 200 percent will be extended beyond 2012. The
pharma industry’s expectation of the restoration of tax holiday for standalone
Research & Development companies was left unfulfilled.
Overall, we hope that the government promotes a stable and encouraging
environment for growth of this sector by keeping stable policies and ensuring a
fair and accountable administration.

2. Economic Times_Pharmaceuticals - Budget 2011: Most drug prices likely to go up_March 3, 2011
3. Business Line_Minimum Alternate Tax On Sez Will Stunt Growth, Say Drug Firms_March 2, 2011

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Pharmaceuticals

KPMG View – Implications of Budget 2011-12

Key deals in January and February 2011


Deal Size
Target Acquirer
S.No Target Deal Type and Details Acquirer/Investor (USD
Country Country
million)

Acquisitions

WCI Consulting
1 UK Acquisition TAKE Solutions India NA
Group

Aizant Drug
Zephyr Peacock India
2 Research Solutions India PE India 5
Fund
Pvt. Ltd.

Bonaire Exports Private


Limited; Deeparadhana
Ramdev Chemical Investment and Finance
3 India Acquisition (50% stake) India 7
Private Limited Private Limited;
Bridgestone Investment
and Finance Limited

Hill Top Research BA Research India


4 US Acquisition India NA
Corporation Limited

Dental Corporation
5 Australia Majority stake acquisition Fortis Global India NA
Holdings

Collaborations

Drug discovery
Dr. Reddy’s
1 Argenta Discovery UK collaboration in the area of India NA
Laboratories Ltd.
pain and inflammation

Form a Joint Venture


Amrutanjan Austin Chemical
2 India named Amrutanjan US NA
Healthcare Limited Company Inc.
Pharmaessense Ltd.

Joint venture to enter the


Agila Specialties Instituto BioChimico
hospital-based anesthetics
3 (subsidiary of India Indústria Farmacêutica Brazil NA
and high-end injections
Strides Arcolab Ltd.) Limitada
segment

To set up Joint Venture


4 Zydus Cadila India Company Bayer Zydus Bayer Healthcare Germany NA
Pharma

Deal to supply recombinant


5 Wockhardt Ltd India insulin in cell culture Sheffield Bio-Science US NA
markets, across the world

Source: Company Press Releases, ISI Emerging Markets, Merger Market

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
TRANSPORTATION &
LOGISTICS

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Transportation & Logistics

KPMG View – Implications of Budget 2011-12


Overview
The Union Budget 2011 packed little nuggets for the transportation and logistics
sector but, once again, required more provisions if momentous reforms are to “The infrastructure
be undertaken that can catalyze a much needed supply side transformation in
the industry. So while the positive signals on Goods and Service Tax (GST) and a status and other sops to
few more sops to the cold chain sector are encouraging, nothing on FDI in multi- cold chain infrastructure
brand retail has been disappointing. is expected to boost
supply side capacity by
Budget announcement Expected impact
Manish Saigal catalyzing private
• Driving operational efficiency, GST will gradually catalyze
Head, (1) fewer, larger warehouses reducing per unit storage investments. However,
Transportation & and handling cost, (2) longer primary distances positively there is a whole lot more
Logistics affecting rail, inland and coastal shipping, (3) greater
outsourcing by customers to logistics service providers, that needs to be done
msaigal@kpmg.com Positive signals for GST
(4) increased consolidation in the logistics services
rollout by April 1, 2012 for other segments
sector.
• As a pre-requisite to GST implementation, all simultaneously instead
transportation and logistics stakeholders would need to of sequentially.”
gear up towards network re-design, contracts, IT set ups,
etc.
- Manish Saigal
• Private sector participation will be driven by (1) National Industry Head,
infrastructure status to cold chain and post-harvest
Benefits to the cold storage, (2) full exemption from excise duty on cold Transportation &
chain storage sector chain-related capital goods such as refrigeration panels, Logistics, KPMG in India
(3) availability of viability gap funding for cold chain and
agri-storage-related projects.

• Traders may be allowed to assess the duty on their


Provision for self
goods by themselves while customs will only verify that
assessment in the
the same is correct. Thus, reduced checks and
context of customs
inspections would improve operational efficiency.

• Exemption from paying excise duty on repair parts and


capital goods, so far only available to ship repair units, is
now extended to ship owners making ship repair and
Positive measures for
spare parts cheaper.
coastal/inland shipping
• An abatement of 25 percent from the taxable value for
sector
the purpose of calculation of service tax on transportation
of goods through coastal/inland shipping will boost
private investment and overall sector growth.

• Allocation of INR 100 Billion for NHAI and INR 50 Billion


Issuance of tax-free
for ports will provide some additional cash for
infrastructure bonds
transportation infrastructure projects but is insignificant
worth INR 300 Billion
when compared with what is required.

18.5percent Minimum • This unexpected levy will cause disappointment amongst


Alternate Tax levy on SEZ developers as their tax-holiday driven business cases
SEZs get disturbed.

The Cold Chain sector in India


The cold storage and distribution sector has now seen major benefits
announced for it in two consecutive budgets with the aim to encourage capacity
creation in this sector in turn driving food, retail and perishables export.

In 2011, the cold chain market is expected to be worth INR 101 Billion, growing
at ~ 12 percent CAGR to reach INR 157 Billion by 2015. Though the growth is
rapid,

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Transportation & Logistics

KPMG View – Implications of Budget 2011-12


Size of the Cold Chain Industry
CAGR (2010-15)
Actual Projected 157 12%
160
141
24 21%
127
21
120 113
101 18
89 15
84
INR Bn

76 12
80 9 9 11%
8 133
109 120
89 98
40
68 75 80

2008 2009 2010 2011 2012 2013 2014 2015


Storage Transportation
Source: KPMG analysis, Crisil, US trade and development agency

driven by multiple factors such as changing lifestyles and food habits, expanding consumer
markets, the advent of the retail sector, the sector faces critical challenges such as
fragmentation, quality supply deficit, poor farm and last mile connectivity, erratic power supply
and high price sensitivity of users.
There are multiple business models viz. standalone (transportation-only/storage only) or
integrated (transportation-cum-storage), chilled or frozen focused, palletized or unpalletized,
segment-focused or segment-agnostic. KPMG believes that players with a sharp focus on 1-2
segments, both standalone and integrated, shall enjoy higher client stickiness, claim price for
quality and develop a sharper service focus. Supply side differentiation shall be pivoted around
innovative management of seasonality, operational and cost leadership, control over quality
assets, ability to mix cargo types including frozen, chilled and dry, effective utilization of assets,
technology and brand.
Not surprisingly, investor interest, both strategic and financial, in the organized segment of this
sector is high owing to the strong fundamentals of this market and severe capacity deficit
buoyed further by policy sops. These investments are going into the build up of a modern
network of storage assets and distribution capabilities across key nodes in India.

Conclusion
Undeniably, the budget did not offer path breaking announcements for the transportation and
logistics industry. Even so, the industry, especially on the infrastructure creation side, has long
realized that announcements without strong execution tend to mean little. But while there is
disappointment, announcements around self-assessment of customs duty and benefits around
use of coastal shipping are indicators of the fact that the industry has started to make itself
heard.

Key deals in January 2011


Acquirer/ Acquirer/ Percent
Target Deal value
Target investor Deal type acquired/
country investor (INR Mn)
country invested

Mesco USA TVS Logistics India Acquisition 135 100

Fourcee Infrastructure India Equity PE


India US 450 NA
Equipments Partners investment

Note: Deal value converted into INR at the rate 1 USD = INR 45; NA – Not available;
Source: Key deals – Venture Intelligence

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
REAL ESTATE AND
CONSTRUCTION

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Real Estate and Construction

KPMG View – Implications of Budget 2011-12

Talking affordable, results debatable…


“The current budget
Key Highlights Potential Impact lays emphasis on
 Extension of 1 percent • Expected to benefit expanding housing
subvention scheme for housing population in LIG category
coverage for the
loans up to INR 1.5 million (for especially in Tier II and Tier
houses costing less than INR + III cities and bring more affordable category –
Amit Mookim 2.5 million) from INR 1.0 million houses under financing however, significant
Director earlier (for houses costing less ambit areas relating to FDI,
than INR 2.0 million)
Real Estate & tax benefits etc remain
Construction
 Higher allocation to Rural  Higher access to rural unaddressed”
amookim@kpmg.com
Housing Fund from INR 20 + population seeking - Amit Mookim
billion to INR 30 billion institutional finance
Director,
 HUDCO allowed to issue tax  Move would allow HUDCO Real Estate &
+
free bonds up to INR 50 billion to extend loans at
Construction,
competitive rates for core
urban infrastructure and KPMG in India
housing needs

 Developers to avail investment  Expected to reduce tax


linked deduction for affordable + incidence for developers and
housing projects create more supply of
affordable housing stock
 Levy of 18.5 percent MAT
(Minimum Alternate Tax) on -
 Demand dampener for SEZ
developers of SEZ (Special developers
Economic Zones)

The Finance Minister attempted to address the need for incentivising affordable
housing category by declaring certain policy incentives like liberalization of
interest subvention scheme, raising priority sector lending limits and tax incentive
like proposing investment linked incentives in the form of accelerated
depreciation sought to benefit the home seekers as well as the entire affordable
housing ecosystem.
The inherent objective of Finance Minister to create more supply of affordable
housing stock through investment linked deduction and generating demand
through liberalization of interest subvention scheme is debatable. Firstly, the
investment linked deduction is expected to help developers improve their cash
flows in initial years rather than any actual tax savings over the life of the project.
What really needs to be seen whether the developers would pass on some
benefit to the home seekers to make the purchase affordable.
Secondly, considerable rise in capital values in last one year is unlikely to help
home seekers especially in metros. Though it may prove to be beneficial to home
seekers in Tier II and III cities. Finally, the rise in interest rates by more than 2
percent1 in the last one year has disturbed the affordability economics.
1. Union Budget 2011-12

+ Indicates positive impact


- Indicates negative impact © 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Real Estate and Construction

KPMG View – Implications of Budget 2011-12


While we debate about the incentives made available to boost affordable
housing projects, the levy of MAT (Minimum Alternate Tax) at 18.5 percent
for news SEZs discourages developers. For the purpose of records, many
SEZ developers in last fiscal have applied to BoA (Board of Approval) for
denotification citing difficult market conditions and cash flow problems.

Continuing challenges
Financing projects at reasonable rates of interest continues to pose a
challenge for developers, as repayment schedules near. Additionally, factors
like limited availability of land, leading to rise in prices and absence of
concrete steps to create additional supply (increase in FSI, creation of new
areas with infrastructure etc.) remains one of the biggest challenges for the
sector.

Conclusion
The budget has failed to address certain key expectations of real estate
industry players like relaxation in FDI norms, access to ECBs (External
Commercial Borrowings), extension of 80 IA / 80-IB (10) benefits, assigning
infrastructure status enabling bank lending at reasonable rates, reduction in
stamp duty to reduce circulation of black money and upward revision in home
loan interest deductibility of INR 0.15 million.
Although marginally positive, the question that continues to remain: Are the
budget measures announced enough to unlock the true potential of this
sector?

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
EDUCATION

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Education

KPMG View – Implications of Budget 2011-12


Education gets 24 percent increase in Budget 2011-12 1

The Union Budget 2011-12 presented by Mr. Pranab Mukherjee has allocated a “Greater expenditure on
sum of INR 52,057 crore for the education sector in FY12, an increase of 24
education is a welcome
percent compared to the current year. The focus of the budget this year has
been on skill development, national knowledge network, research and measure. It will help to
innovation. facilitate RTE
The existing operational norms of Sarva Shiksha Abhiyan (SSA) have been implementation, skill
revised to facilitate the implementation of Right to Education Act. The Budget development and boost
increased the allocation for SSA by 40 percent, pegging it at INR 21000 crore.
Narayanan research and innovation.
Besides the ‘Vocationalisation of Secondary Education’, a centrally sponsored
Ramaswamy But more concrete
scheme has been announced to improve the employability of youth.
National Head,
policy incentives were
Education A pre-matric scholarship scheme has been proposed for Scheduled Castes and
Scheduled Tribes students studying in classes IXth and Xth. This is expected to expected to accelerate
narayananr@kpmg.com
benefit about 40 lakh students. private investments, to
This year, the thrust of funding has been on existing institutions. Special grants strengthen vocational
of about INR 700 crore have been announced to recognize excellence in education and to push
universities and academic institutions. Various institutes like IIT Kharagpur, IIM
capacity building and
Kolkata, Kerala Veterinary and Animal Sciences University, The Centre for
Development Economics, Ratan Tata Library, Delhi School of Economics, Delhi, research in higher
and Madras School of Economics have received these grants with specific education”
objectives.
Narayanan
The Budget also mentions that the National Knowledge Network (NKN),
approved last year in March, would link 1,500 institutes of higher learning and Ramaswamy
research through an optical fibre backbone by 2012. About 190 institutes are
proposed to be connected to the NKN in this current year. National Head,
Education
To promote research and innovation, the weighted deduction on payments
made to National Laboratories, universities and Institutes of technology, for KPMG in India
scientific research has been enhanced from 175 percent to 200 percent.
We believe that there have been several encouraging announcements for the
sector in the budget. However our main concern is lack of specific allocation of
funds for teacher training & development and lack of push for capacity creation
in Higher Education, given that quality in education needs to be improved and
that country would need ~1000 more universities in next 10 years2. No
concrete incentives have been announced to attract private investments in
vocational education or in academic research. Also concerns over education
loan have not received any consideration in the budget.

1 India Budget Nic.in, Budget Speech, Press Articles


2 Rediffnews, In 10 years, India will need 1,000 more universities: Sibal, January 2011

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Education

KPMG View – Implications of Budget 2011-12


Key highlights of the Budget 2011-12 3

• Plan allocation increase by 24 percent from INR 31,036 crore in 2010-11 to “The grant will help us
INR 52,057 crore in 2011-12
upgrade various
• Sarva Shiksha Abhiyan have been allocated INR 21,000 crore for 2011-12 , 40 laboratories. We need
percent higher than INR15,000 crore allocated in the Budget for 2010-11
modern technology in
• A revised Centrally sponsored Scheme, “Vocationalisation of Secondary nano sciences. It will
Education”, will be implemented from 2011-12 to improve the employability
of youth also help us in different
segments of high-end
• Approved in March 2010, the National Knowledge Network (NKN) will link
1500 Institutes of Higher Learning and Research through an optical fibre researches,“ 4

backbone. During the current year, 190 Institutes will be connected to NKN.
Since the core will be ready by March 2011, the connectivity to all 1500 -A.K. Majumdar
institutions will be provided by March 2012.
Deputy Director, IIT-
• Special grants announced include: Kharagpur

– INR 50 crore each to upcoming centers of Aligarh Muslim University at


Murshidabad in West Bengal and Malappuram in Kerala
– INR 100 crore as one-time grant to the Kerala Veterinary and Animal
Sciences University at Pookode, Kerala
“The money will help us
– INR 10 crore each for setting up Kolkata and Allahabad Centers of
make our financial
Mahatma Gandhi Antarrashtriya Hindi Vishwavidyalaya, Wardha
research and trading
– INR 200 crore as one time grant to IIT, Kharagpur
laboratory world-class.
– INR 20 crore for Rajiv Gandhi National Institute of Youth Development, The fund will also help
Tamil Nadu
students for further
– INR 20 crore for IIM, Kolkata, to set up its Financial Research and
research in global
Trading Laboratory
finance markets,“5
– INR 200 crore for Maulana Azad Education Foundation
– INR 10 crore for Centre for Development Economics and Ratan Tata -Ashok Banerjee
Library, Delhi School of Economics, Delhi; and
-Professor of Finance
– INR 10 crore for Madras School of Economics and Head of the

• Additional INR 5 billion proposed to be provided for National Skill Laboratory, IIM Kolkatta
Development Fund during the next year.

3 India Budget Nic.in, Budget Speech


4 Edutech, IIT-Kharagpur to Use Budget Grant to Renovate Institute, Upgrade Labs, 01 March 2011
5 Edutech, IIM-C to Enter Global Finance Markets for Research, 01 March 2011

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
FINANCIAL SERVICES

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financial Services

KPMG View – Implication of Budget 2011-12

Too Much or Too Less?


“The Budget has set
Feb 28, 2011 was the D-day for India when Indians wait for the balance-sheet
comprising of the revenue and expenditures in the strategic sectors to be the ball rolling for
presented by our Finance Minister (FM) Pranab Mukherjee. Despite stubborn financial sector reforms
high rates of inflation and interest rates, industrial slow-down, frauds and especially in areas like
scams and delayed reforms, this year’s Budget helps India potentially move
banking and insurance
towards the 9 percent growth orbit. The FM should be lauded for his
prudence on not taking actions to curb the growth rate and on trying to through the
Abizer Diwanji manage the fiscal consolidation. Through various reforms measures, Pranab Amendment Bill, which
Mukherjee has promised to bring down the fiscal deficit to 4.6percent in
Head, will hopefully facilitate
2012, 4.1percent in 2013 and 3.6 percent in 2014.
Financial Services some of the measures
adiwanji@kpmg.com This year’s Budget has given an impetus to the financial sector’s growth by
relating to cap on
reiterating government’s commitment to Direct Taxes Code which will be
implemented from April 1, 2012, and to introduce GST and other financial voting rights and ceiling
sector reforms bill in the current parliament session along with investment in in foreign investment in
mutual funds by foreign investors.
private sector banks
To initiate the financial sector reforms, a new commission “Financial Sector and insurance’
Legislative Reforms Commission” is being set up. This commission will
rewrite and streamline the financial sector laws, rules and regulations and will - Abizer Diwanji
complete its work in 24 months. Various legislations are to be proposed like Head,
Insurance amendment bill which talks about enhancing the FDI limit from 26
Financial Services,
percent to 49 percent, LIC Bill that proposes to increase the share capital of
Life Insurance Corporation (LIC) to INR 1 billion from its current INR 50 KPMG in India
million, Banking law amendment bill, pension fund bill, and SBI amendment
bill.
Few measures introduced in the Budget pertaining to the banking sector
were — allocation of INR 60 billion to PSUs for the FY 2011-12 in addition to
INR 232 billion given in the last three years. This ensures that PSU banks will
be able to maintain Tier-I capital at 8 percent and thus can pursue their loan
growth more aggressively as the target for agricultural credit, and credit to
minority communities has been increased.
Expect more competition in the banking sector as the Budget talks about
formulating guidelines for issuing new banking licenses before the end of this
financial year. This is a big positive for various industrial houses planning to
apply for licenses. Economic survey 2011-12 also suggests a two tier
systems for additional banking licenses—for providing basic banking services
to meet financial inclusion and for full range of services based on minimum
capital requirement. Micro Finance Institutions and NBFCs are recommended
to apply for basic banking licenses. In the Budget, target has been set to
provide banking facilities to all 73,000 habitations having a population of over
2,000 during 2011-2012 using appropriate technologies. The government will
grant INR 500 million to banks in the next fiscal 2011-12 for this exercise. This
step will ensure that by 2012 every eligible person will have the access to
banking system.

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financial Services

KPMG View – Implication of Budget 2011-12


Another major reform is permitting FIIs to invest in mutual funds after fulfilling KYC
norms. Until now foreign investors were not allowed to invest in India specific Mutual
fund schemes. This move will help Indian mutual funds to have direct access to
foreign investors and widen the class of foreign investors in Indian equity market.
Although most fund houses will start preparing to draw up plans to tap foreign
money, they will need to tie up with foreign distributors to be able to push their
schemes and attract investors.
To make ‘realty’ a realty for many Indians, the government has increased priority
home loan limit to INR 2.5 million from INR 2.0 million. Also, the limit for interest
subvention of 1 percent on home loans has been increased from INR 1 million to INR
1.5 million, for house priced below INR 2.5 million. This step will also help banks in
accomplishing their targets of maintaining 20percent of its loans to this priority sector
and lower lending rates for borrowers as well. Rural housing fund has also been
increased by INR 10 billion to INR 30 billion.
Another positive move with respect to infrastructure financing is increase in FII limits
in corporate bonds issued by infrastructure sector with maturity of over five years
from USD 20 billion to USD 25 billion. Hence, total limit available to the FIIs for
investment in corporate bonds is USD 40 billion. FIIs would also be allowed to invest
in unlisted bonds with a minimum lock-in period of three years, during which they can
trade amongst themselves. This increased limit will solve the funding problem of the
infrastructure sector and will strengthen the corporate bond sector as well.
It was expected that after the Malegan committee report, Budget will have some
positive announcements for the microfinance sector. However, the only move in the
Budget was the creation of the “India Microfinance Equity Fund” of INR 1 billion with
SIDBI which intends to protect the interest of small borrowers by providing equity to
smaller MFIs for their growth and efficiency.
On the whole, the growth-oriented Budget has a positive impact on the financial
services sector with various reforms planned all the way.

Key deals in February 2011


Deal Value Stake
Target Company Buyer
(USD mn) (%)

IndusInd Bank Ltd. GA Global Investments Ltd. (US) 14.9 N/A

Infrastructure Leasing & Financial services ltd.


Reliance Industries Ltd. 1200 24
(IL&FS)

Tata Group’s innovative Foods Ltd. India Equity Partners (US) 16.5 N/A

Citigroup Venture Capital International (US) JBF Industries Ltd. 9.9 N/A

Housing Development Finance


Ratnakar Bank Ltd. 157.5 30
Corporation td. (HDFC)

Citigroup Fund Services (Canada) Larsen & Tubero InfoTech Ltd. 40 N/A

Source: Bloomberg and ISI Emerging Markets

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
AUTOMOTIVE

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Automotive

KPMG View – Implication of Budget 2011-12


A mixed bag for the Automotive Sector…
The Finance Minister, in the Budget of 2011-12, introduced policy level
changes for the Automotive Sector which could have significant impact in
the business strategy. While on one hand, he encouraged an Automotive
Green Revolution by offering concessions to hybrid 1 and hydrogen 2
vehicles. On the other hand, he discouraged dependence on imports of
critical components like pre-assembled engines by excluding them from the
definition of Completely Knocked Down thereby attracting incremental
Yezdi Nagporewalla import duty.
National Head,
Overall positive reception from the automotive sector…
Automotive
ynagporewalla@kpmg.com • One of the most positive feature of the Budget was the announcement of
the special tax rates for hybrid and electric cars and creation of 'National
Mission for Hybrid and Hydrogen Vehicles'. To encourage domestic
production and reduce import dependence, the proposal also prescribes a
reduction in excise duty on the development and production of hybrid
vehicles kits to 5 percent.3 This measure was a long waited step for the
Indian automotive market, where high import duties on vehicles have
made the Green Vehicles expensive and therefore largely inaccessible.
The concession is likely to provide impetus to the development of Hybrid
and Hydrogen vehicles. Further, it is also expected that the measure will
indirectly encourage serious research ensuring an early advent of such
technology at an affordable cost. 4
• Another positive initiative in the Budget is the increased budgetary
allocation to infrastructure and rural development schemes. Hike in
allocation for infrastructure is likely to augment the growth of the players
in the Commercial Vehicles (CV) industry. The increase in allocation under
the rural development program may be positive for automotive companies
with a rural presence.
• The increase in exemption limit of tax slab for individual payers (INR 1.6
lakh to INR 1.8 lakh) is likely to lead to increase in disposable income and
thus aid two-wheeler sales. 3
• Further, the reduction in the concessional excise duty from 22 percent to
10 percent on taxis and ambulances may turn positive for the automotive
sector. 3

1 The definition of Hybrid Motor Vehicle is amended to exclude micro-hybrid motor vehicle with start and stop technology
using battery powered electric motor only while in static condition
2 Hydrogen Vehicle has now been defined as a motor vehicle that converts the chemical energy of hydrogen to
mechanical energy by reacting hydrogen with oxygen in a fuel cell to run electric motor to power the vehicle drive trains
3 Union Budget 2011
4 KPMG Analysis

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Automotive

KPMG View – Implication of Budget 2011-12


…However, some concerns raised by the Premium segment
In order to increase the dependence on localization, the Government has
removed pre-assembled engines, gearboxes or transmission systems from
the definition of CKD. 5,6 These components would now attract a differential
duty of 35 percent from earlier 10 percent, thereby significantly increasing
manufacturing cost of Premium Vehicles. Considering the complexities in
manufacturing and testing of these components coupled with huge capital
investment in setting up manufacturing units, it is unlikely that car makers
will reduce their dependence on imports. Further, car makers who have
acquired companies outside India for importing these components will also
be significantly impacted.

The Budget also proposes changes impacting service providers providing


‘authorized service station’ services. Now, Service Tax is leviable by any
service provider irrespective of whether such person is authorized by the
manufacturer or not. This can impact the ancillary business of certain auto
manufacturers that operate service stations.

On an overall assessment, the growth-oriented budget has a neutral impact


on the automotive sector with various reforms planned all the way.

5 CKD unit is now defined as a unit having all the necessary components, parts or sub-assemblies for assembling a complete
vehicle but does include,-
- a kit containing a pre-assembled engine or gearbox or transmission mechanism; or
- a chassis or body assembly of vehicle on which any of the component or sub-assembly viz engine or gearbox or transmission
mechanism is installed.
6 CKD unit for motor cycles etc is defined as a unit having all the necessary components, parts or sub-assemblies for
assembling a complete vehicle but does include,-
- a unit containing a pre-assembled engine or gearbox or transmission mechanism; or
- a body assembly of vehicle on which any of the component or sub-assembly viz engine or gearbox or transmission
mechanism is installed

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
ENERGY AND
NATURAL
RESOURCES

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Energy and Natural Resources

KPMG View – Implication of Budget 2011-12

The Union Budget 2011-12 announcements are likely to have neutral impact on
energy sector. Though the Government did not announce any significant direct
measures for energy sector that will have an impact in short term but it did send out
a positive signal with regards to continued impetus being provided to this sector.
The Budget has the following key announcements relating to the energy sector :
1. Proposed system of direct transfer of Kerosene and LPG subsidy: The
government has announced setting up a committee to review the existing
mechanism of LPG and kerosene subsidy and replacing it with cash subsidy to
below poverty households. This is a step towards market reform and the prices
Arvind Mahajan
of these two goods will be market determined and help in reducing the
Head government subsidy burden. This system will also help in reducing subsidized
Energy and Natural kerosene usage in commercial establishments and for diesel adulteration. For
Resources companies engaged in city gas distribution, it would mean better pricing ability
arvindmahajan@kpmg.com for household segment.
2. Increase in FII investment limit in infrastructure corporate bonds: The FII
ceiling on investment in corporate bonds with residual maturity of over five
years issued by companies in the infrastructure sector has been raised by an
additional USD 20billion, taking the ceiling to USD 25billion (at present it is USD
5billion). The ceiling for corporate bonds maturing within five years is
unchanged at USD15billionn. This will help Infrastructure developers as they
can get more funds from FIIs.
3. Infrastructure status to fertilizer Industry: Budget 2011 proposes to include
capital investment in fertilizer production as an infrastructure sub-sector. That
should help fertilizer producers to access cheap financing and be eligible for tax
holiday. This is likely to put pressure on domestic gas demand.
4. MAT levied on SEZ units: The government has proposed to levy Minimum
Alternate Tax (MAT) of 18.5 percent on the book profits of Special Economic
Zone (SEZ) developers and units. Several energy and oil and gas players like
Reliance Jamnagar refinery, Adani Enterprises, GMR Infra, GVK Power, etc.
have their units in SEZ and this proposal will likely to have a negative impact on
their profitability.
5. Excise duty exemption mega/ultra-mega power projects: Domestic power
equipment manufacturers for Mega/Ultra Mega power projects have been
exempted from excise duty to bring them on an even playing field with foreign
suppliers. This will help Indian power equipment manufacturers like BHEL,
L&T, BGR Energy, etc. as they will be able to compete with foreign
manufacturers.
6. Enhanced allocation for the flagship Bharat Nirman Yojna in FY12 (to INR
580 billion, a 20 percent increase yoy): This will help EPC vendors expand
and consequently facilitate infrastructural growth.
7. Greater allocation for R-APDRP (to INR 60billion) and RGGVY (to INR
20billion): This announcement will provide further impetus to the power
reforms in the energy sector and will help transmission and distribution
vendors.
However, the government has not addressed some of the long pending demands of
industry like reduction of indirect taxes on crude oil and petroleum products, service
tax exemption for power projects and long term concessions to private distribution
companies, etc.

Source: Union Budget, KPMG analysis

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Energy and Natural Resources

KPMG View – Implication of Budget 2011-12


Key deals in January and February 2011
Acquirer/In Deal Value
Target Acquirer
Target Name vestor (USD Comments
Country Country
Name million)

BP will buy 30 percent stake in


Reliance
United Reliance Industries' 23 oil and gas
Industries Ltd India BP Plc 7200
Kingdom blocks including the producing KG-
(RIL)
D6 gas field

Stanlow United Essar Oil Essar Oil will acquire Shell's


India 350
refinery Kingdom Limited Stanlow refinery in the UK

Nelcast Nagarjuna Construction Ltd (NCC)


NCC Power
Energy through its subsidiary NCC PPL
India Projects Ltd India NA
Corporation has acquired 55 percent stake in
(NCC PPL)
Ltd. (NECL) NECL

Avantha Group has acquired a 10.5


percent stake in Solarlite, Germany
Solarlite Avantha
Germany India NA engaged in the production,
GmbH Group
marketing and operation of solar
thermal power plants

Source – ISI Analytics, Press Articles

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
This document has been compiled by the Research, Analytics, and
Knowledge (RAK) team at KPMG in India.

kpmg.com/in

The information contained herein is of a general nature and is not intended to address the circumstances
of any particular individual or entity. Although we endeavor to provide accurate and timely information,
there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of
KPMG International.

Вам также может понравиться