If India's Finance Minister P Chidambaram has his way, India will surpass the current 8% annual GDP growth rate. The Minister gave the capital markets enough reasons to cheer when he recently tabled the 2006-07 Union Budget in the Indian parliament. Mumbai's benchmark Sensex index continues to rise - just as we predicted it would in the previous issue of the 'The Indus View: India's Industry Insider.' It now hovers at the 11,000 mark. That's 1,000 points above the historic level of 10,000 it crossed last month.

The Finance Minister emphasized the necessity of building infrastructure and growing the rural sector into to achieve higher growth rates. Industrial growth is pegged at 9% year-on-year, while the service sector is growing by almost 10%. The Union Budget has sought to lay the foundation for growth by extending the budgetary benefits across different sectors.

Infrastructure: Go Fast, Construction Work is On
The budgetary allocation towards improving the infrastructure has been increased by 11% to $127 billion (Rs. 5640 billion). The special thrust on infrastructure will not only have direct impact on a number of industries, but also contribute to the overall GDP. Even though the Finance Minister did not add to the plethora of policies and schemes already in place for the infrastructure sector, he used the opportunity for stock taking. The government has already put in place viability gap funding and infrastructure SPV (Special Purpose Vehicle) for taking care of funding mechanisms for the sector.

Agriculture Holds the Key for 10% Growth Rate
“Unless agriculture grows at 4%, whatever combination and permutation we may try, we can’t attain 10% growth rate.” said Finance Minister, P. Chidambaram before the industry leaders from the apex chambers. The Union Budget has tried to address the long-standing issues blocking the growth of rural India: lack of credit and lack of infrastructure. Banks have been asked to enhance the rural credit, and the spending on Bharat Nirman Programme aimed at improving the rural infrastructure has been hiked by 54%. The employment guarantee scheme for rural India announced in the previous Budget has already been implemented. All these measures are expected to generate additional rural demand that may prove to be a big boost to the overall Indian economy.

IT Sector: Win Some Lose Some
For the IT Services companies, the most critical factor was the rationalization of Fringe Benefit Tax (FBT), a tax on perks introduced in the previous budget. While the FBT burden was reduced on a number of items, the domestic BPOs were brought under the Service Tax net. You may find the detailed analysis of the Budget impact on the IT industry in our segment “Sector Focus”.

Union Budget: The Annual Festival of the Indian Economy
India’s Budget session is nothing less than an annual festival. Budget expectations start making the headlines of business dailies as early as 2-3 months before the actual date of announcement of the union budget i.e. February 28. This time, however, the Budget was focused on reassuring continuance of the economic reform process that was set into motion with policy measures adopted earlier.

While personal income tax and corporate income tax rates were kept unchanged, the peak custom duty was reduced from 15% to 12.5% to bring it closer to ASEAN levels. On the excise duty front, the thrust was to remove only the anomalies because of inverted duty structure by reducing excise duty on intermediaries. Service tax rate was hiked from 10% to 12% along with 15 more services being included in the tax net. A clear roadmap was outlined to move to a national level Goods and Services Tax (GST) by April 01, 2010.


Bundeep Singh Rangar
Chairman, IndusView

SECTIONS

Deal Watch
The media stocks continued to be the flavor of the month on the “Deal Street” even in the month of February. The Company Law Board (CLB) finally settled the prolonged battle over the ownership of Amar Ujala, one of the strong Hindi newspaper brands. Global Broadcast News (GBN), the owner of English news channel CNN-IBN bought a 50% stake in Channel 7, the Hindi news channel promoted by Jagran Group. On the tech front, Wipro maintained its acquisition spree by buying US-based IT consulting company cMango.
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TMT Radar
A $400 million ABN Amro outsourcing deal to TCS and Infosys, a $300 million DSG outsourcing deal to HCL, a recent $27 million GM outsourcing deal to Wipro… the list is set to become longer with almost $100 billion worth of major outsourcing contracts due for renewal internationally in the next two years.
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Policy Watch
A major policy shift in the telecom sector has led to reduction in the national long distance (NLD) and international long distance (ILD) call rates. The Telecom Regulatory Authority of India (TRAI) has announced migration to revenue sharing regime from the original per minute Access Deficit Charge (ADC) for domestic long distance calls, while reducing the ADC by up to two third for ISD calls. ADC is a special levy for compensating state-owned Bharat Sanchar Nigam Ltd (BSNL) for providing below cost telephone connections.
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Corporate Monitor
The telecom sector is ringing ‘consolidation’ loud and clear. Telekom Malaysia has announced acquiring a 49% stake in Spice Telecom, the GSM operator in the north Indian state, Punjab and the south Indian state, Karnataka. The deal concluded by the time we were giving the final touch to the current issue. On the other hand, the Tatas and the Birlas, the two oldest corporate conglomerates of India, have indulged in an open fight for control in the joint venture company Idea Cellular, the fifth largest mobile operator of India with more than 7 million subscribers.
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Sector Focus: Budget Impact on IT Industry
India might be a powerhouse in IT services, but the remarkable policy initiative in the Union Budget 2006-07 came for IT manufacturing. The government, intending to make India the manufacturing hub, announced a new policy for manufacturing of capital-intensive hardware products such as semiconductors, assembly, testing and packaging of semiconductors, LCDs, storage devices, etc. The anomalies in the duty structure on computers were removed to promote domestic manufacturing of computer hardware. The IT Services segment may feel happy over the fact that the Fringe Benefit Tax (FBT) was relaxed and the current tax exemptions to the sector were stay put.
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Company Watch: MphasiS BFL
VC Fund Baring Private is still looking for a ‘suitable’ buyer for its 34.9% stake in MphasiS BFL Ltd, while another VC fund ChrysCapital exited completely booking 400% return on its investment. The Chairman of the Board and CEO Jerry Rao also reduced his stake in the company. Are you taking any cue out of these developments?
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People Watch: Ajai Chowdhry
He co-founded Hindustan Computers Limited (HCL) that built India’s first micro-computer in 1978. Now, he is spearheading the cause of making PCs available for the masses as Chairman and CEO of HCL Infosystems Ltd.
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Market Watch
The month of February proved to be a historic month for the Indian stock market. Not only did the benchmark index of the Bombay Stock Exchange touch the 10,000 mark, but also stayed above this level throughout the month. February, the month of Union Budget in India, is always a volatile month for the stock market. This time, however, it was all different, as the Sensex moved only in one direction 12 out of 19 trading days, and that was up.
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