India Budget 2009

06 July 2009 India Budget 2009 FOR PRIVATE CIRCULATION ONLY. 06 July 2009 India Bu dget 2009 Budget 2009 Overview The Honorable finance Minister delivered the budget for 2009-2010 to the parliament today. Citing concerns on the global economic slowdown, the Honorable Minister emphasized the need for thrust in infrastructure development as the most crucial task in 2009-2010. However the only positive to the Exchange traded commodity business was the abolishment of CTT, which anyway was pending implementation since its announceme nt in 2008. Gold is synonymous with India as Indians consume most of the world’s gold production either in the form of Bars or Jewellery. Gold Bars is also the most widely traded commodity on the exchange platform in India. Budget 2009 has re-imposed the tax on precious metals while also increasing the customs duty on Gold and Silver. While the impact of the increase is negligible given the modest increases the timing was bad as the High prices have already dented demand and additional price increase in the form of duties would just add to the industry woes. Overall a populist budget that focuses largely on growth in the agriculture sector by raising levels of investments in the sector and providing support to the Indian farmers through cheaper availability of loans and better technology. One such positive is the continuation of interest subvention for short term crop loans. The budget has also placed thrust on the rural development by increasing allocations to various programs involved in similar activities. • Decrease over last year is primarily a result of a decrease in production of wheat pulses and coarse cereals. Wheat production decreased by 1.2% to 77.63 million tons from 2007-08 production of 78.57 million tons. Production of pulses decreased by 3.9% to 14.18 million tons in 2008-09 from 1 4.76 million tons in 2005-06. Production of oilseeds declined by 5.5% to 28.13 million tons in 2008-09 from 29.75 million tons in 2007-08. Overall there has been a considerable decline in the rate of growth of area, production and yield. • • • • Measures taken in the Budget • The target agricultural credit flow increased Rs.325000 crore from Rs.287000 crore. Interest subvention to farmers for short term crop loans to be continued at the rate of 7%. Additional interest subvention of 1% announced for those farmers who repay loans on time. The Acceleration Irrigation Benefit Programme to get additional Rs.1000 crore over interim budget allocation. To ensure balanced application of fertilizers, the Government intends to move towards a nutrient based subsidy regime instead of the current product pricing regime. Investment linked tax incentives to cover businesses of setting up and operating ‘cold chain’, ware housing facilities for storing agricultural produce. • • • Agricultural Performance 2007-08 and 2008-09 • Food grain production is expected at 230.78 million tons in 2007-08 an increase over 217.3 million tons over 2006-07. But as per the third production estimates for the year 2008-09 the food grain production is estimated at 229.85 million tons down from last year. • 06 July 2009 India Bu dget 2009 Bullion Budget 2009 has increased customs duty on gold bars by Rs.100 per 10 grams while on silver the duty has been increased by Rs.500 per kg. Hence, effective 6 July, 2009 Gold Bars would attract a customs duty of Rs.200 per 10 grams and Silver would attract a customs duty of Rs.1000 per kg. The resulting effective is an obvious increase in price of gold and silver by Rs.100 and Rs.500 respectively. In our view the increase would not have any major impact on demand for bullion. The reason being that taking gold price at Rs.14500 per 10 grams, the custom duty is just 1.40% as percentage of gold price and in the case of silver it is 4.5% as percentage of the price of silver (Rs 21000 per 1 kg) – the stress being on the fact that the price increase could be easily absorbed. Industry sources indicate that India’s gold imports in first six months of 2009 were down by almost 57% to 59.8 tons as against the same period last year. Hence, it could be argued that high prices have a tendency to dampen demand but given the modest price increases as a result of the duty levy, the impact should negligible. It seems that the government’s objective behind the duty levy was driven by revenue protection rather revenue enhancement, that is, to maintain revenues at the same level as in 2007 or earlier (when the prices were below Rs 10000 per 10 grams and the volumes were higher) a 50% decline in tonnage imports is offset by a 50% increase in the duty. While the government has increased customs duty on gold and silver bars, it has done away with the 2% excise duty on branded jewellery. This would help domestic manufacturers from not passing on the price increase to the consumer while maintaining margins. Budget Deliverables Versus Budget Expectations: Industry Pre Budget Expectations • Allow the banks and other financial institution to participate in commodity markets. Commodities Transaction Tax (CTT) could be done away. Making warehouse receipts as a negotiable instrument. No change in overall indirect tax structure. Implementation of GST may be delayed • • • • Actual • No announcements about banks and financial institutional participation in commodity markets. Commodities Transaction Tax (CTT) has been abolished. No mention of warehouse receipts. However the talks about giving investment linked tax incentives for developing warehouse facilities. No change in overall indirect tax structure. Implementation of GST is on time by April 2010. • • • • Agriculture Pre Budget Expectations • • • Additional funding for projects pertaining agriculture. Partial e-control of sugar sector. Skeptical on change in import duties for 06 July 2009 India Bu dget 2009 edible oils. Actual • • • • The target agricultural credit flow increased Y-o-Y. Interest subvention to farmers for short term crop loans to be continued. The Acceleration Irrigation Benefit Programme to get additional allocation To ensure balanced application of fertilizers, the Government intends to move towards a nutrient based subsidy regime instead of the current product pricing regime. • Re-aligning import base tariff value which have been frozen since September 2006. Edible Oil - Actual • No change in duty structure from the previous level. Sugar - Pre Budget Expectations • The government could partial de-control sugar industry by allowing market to determine prices. The government should do away with the levy quota system and ask the state governments to buy sugar at market rates from the industry and sell at cheaper rate through PDS for people below BPL. To improve efficiency, should revive sick disinvestment. the government units through • Softs and other Industry Edible Oil - Pre Budget Expectations • Hike in import duty on imports of crude edible oils from the current zero percent to 20% mainly in crude palm oil and crude soybean oil. Import duties on refined oil currently at 7.5% should be increased to 30% to help domestic refining industry. • • Power co-generation should be promoted by giving level playing field by allowing market determined prices. • Sugar - Actual • No incentives announced for the sugar sector. 06 July 2009 India Bu dget 2009 Research Amol Tilak Faiyaz Hudani Huzefa Rangwala Raghavan Sundararajan Dharmesh Bhatia Sugar, Edible Oil Complex, Pulses Spices, Energy Bullion, Base Metals Technical Analyst Technical Analyst amol.tilak@kotakcommodities.com faiyaz.hudani@kotakcommodities .com huzefa.rangwala@kotakcommodities.com raghavan.sundararajan@kotakcommodities.com dharmesh.bhatia@kotakcommodities.com +91-22- 66528845 +91-22- 66528840 +91-22- 66528848 +91-22- 66528847 +91-22- 66528846 Disclaimer This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. 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