India’s current account deficit that had widened in last few years primarily because of the steep increase in the deficit on the merchandise trade account, with imports growing due to the surge in gold imports, when export performance remained indifferent, have shown remarkable decline. India’s current account deficit (CAD) for the January-March period narrowed sharply to $1.2 billion (0.2 per cent of GDP) from $18.1 billion (3.6 per cent of GDP) in the same period last year, which was also lower than $4.2 billion (0.9 per cent of GDP) in the October-December quarter of 2013-14.Reduction in the trade deficit, complemented by a rise in net invisibles receipts, resulted in significant reduction in the CAD to $32.40 billion (1.7 per cent of GDP) in 2013-14 from $87.80 billion (4.7 per cent of GDP) in 2012-13.Net inflows under the capital and financial account (excluding change in foreign exchange reserves) declined to $48.80 billion in 2013-14 from $89 billion in corresponding period of 2012-13 owing to lower net FDI and portfolio flows, net repayment of loans and trade credit and advances. During the final quarter merchandise exports declined by 1.3 per cent to $ 83.7 billion, as against an increase of 5.9 per cent in the fourth quarter of 2012-13, as a result, the merchandise trade deficit contracted by about 33 per cent to $30.70 billion in the fourth quarter of 2013-14 from $45.60 billion in the corresponding quarter a year ago.

GST

The introduction of the GST considering most of the indirect taxes of the Centre and the States has already missed many implementation targets. However, there has been some ray of hopes of its implementation with states forming consensus on many issues. All the efforts of the last government could not bear fruit as the states controlled by the then opposition BJP vetoed the rollout of the much anticipated reform. Now as the BJP is in the government, the reform can be expected to become realty which will help narrow the fiscal deficit. Government on its part has intensified its efforts to get the long-pending GST plan rolling, urging state to embrace the game-changing reform to reduce the cost for industry and fast-track growth.

Implementation of GST has the potential to significantly improve the growth story, though all states reaching a consensus is still a big task with most of the states asking that employment and infrastructure should be given priority and ways to increase revenue of the states. Not only this, the Empowered Committee of State Finance Ministers plans to start work on its design and form only after Parliament passes a Constitutional Amendment for introducing the new tax regime and the States ratify it. The states have sought government’s views on the issues pertaining to the Constitution Amendment Bill and want a mechanism to compensate them for revenue losses due to the GST, to be made part of the Constitution Amendment Bill.

Outlook

The maiden budget of the new government and finance Minister Arun Jaitly is being keenly eyed, with economic growth continuing its sluggish pace amid bigger-than-projected fiscal challenges left behind by the previous government. The government had put in place a fiscal consolidation roadmap as per which the fiscal deficit has to be brought down to 3 percent of the GDP by 2016-17 with a fiscal deficit target for 2014-15 at 4.1 percent of the GDP. The things are going to get awry as in the very first two months of 2014-15, when the previous government was in charge itself, the fiscal deficit reached Rs 2.4 lakh crore or 45.6 percent of Budget Estimates for the whole financial year. Now, there is most likely a chance of revision of last government’s fiscal deficit target of 4.1% of GDP that assumed a 19% rise in tax revenue, as tax revenues rose only 3.1% in the first two months from a year ago with growth remaining sluggish. Fiscal consolidation is indeed going to be a challenge but the situation may not be as grim as it is looking in the beginning of the fiscal and the government may come up with a pro-growth budget given the credentials of the new Prime Minister Narendra Modi. While, the industry has a long wish list ranging from taking the manufacturing sector out of contraction mood, rapid clearance of infrastructure projects, lower subsidies and asset sales to early implementation of GST and DTC. On the same time, common people who have voted the government with lots of hopes will be expecting measure to curb the price rise, more spendable money in hand with tax reforms. Government will not only have to drastically cut down its wasteful expenditures, improve efficiency and productivity in all possible ways, but it will have to discontinue the schemes that amounts to extending freebies. There is big question mark on the previous government’s ambitious project “Aadhaar” with the new government likely to announce a boost to the direct benefit transfer (DBT) scheme with a few minor changes and delinking it from Aadhaar cards.

In its wish-list for budget 2014-15, AMFI, the apex body of all the registered Asset Management Companies, has demanded the government to increase the income tax slabs for individual investors and dedicate some amount for mutual fund investments.

Further, the industry body sought for capital gain benefit for selected mutual fund products and also demanded tweaking of Rajiv Gandhi Equity Savings Scheme (RGESS). AFMI also pitched for new MF-linked pension plans, which will help in channelizing retail money into capital market.

At present, average Assets under Management (AUM) of the mutual fund industry stands at around $10 billion. Over the past few years, mutual fund industry has lost its focus and there is a need to redraw attention through establishing the role and purpose of mutual funds. Around 87 percent of mutual fund AUM is concentrated in top 15 cities of India, reflecting a need to enhance mutual funds penetration in the country.

Assocham has demanded the government to introduce tax incentives in the coming budget to promote in-house R&D and create Indian brands which can reduce India’s trade deficit.

Industry Chamber also pitched for extension of tax benefits to telecom and power sectors, bringing down personal and corporate income tax rates, slashing of excise duty and service tax rates to 10 per cent from 12 per cent and creation of a conducive tax regime for attracting investments.

Further, Industry body emphasized that indirect tax is effective tool to drive economic and social growth and asked the government to replace the indirect tax structure with Goods and Services Tax (GST) to integrate India into a single economy and provide a unified tax policy for the country. For the revival of Special Economic Zones (SEZs) in the country, Assocham suggested withdrawal of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) while restoring the SEZ policy to its present form.

Following are the few other important Direct Tax propositions which ICAI has made in its Pre-Budget Memorandum

Respect the Tax Payer – The taxpayers are the ones from which the government gets the major part of revenue. However, the taxpayer has never got any respect in the bureaucratic system in Indian economy. Therefore, ICAI has suggested that a taxpayer should be treated with utmost respect, as one treats their clients. In fact there should be a system where the taxpayer paying tax, beyond a certain limit, is provided priority services. Like the taxpayer contributing tax more than Rs 25 Lakhs may be issued a Gold card, like wise taxpayers contributing more than Rs 1 crore may be issued a Platinum card.

Targets for collection of taxes-Not essential -India adopts a progressive system of taxation where the tax rate depends on the level of income earned during a financial year. Since a majority portion of direct taxes is paid to the credit of the Government through TDS and advance tax, it is suggested that no targets should be set by the Department for collection of taxes. In fact, internal mechanism is to be developed to ensure adherence of the timelines mentioned in the Citizens charter of the Department with regard to performance of services and adherence to the timelines should be made as a part of performance appraisal of the concerned.

Verification of all income-tax returns – It has been noticed that the deductions like 80C, 80 D and 24(b) claimed by individuals/HUFs are not subject to any verification. Due to this, Government is suffering a revenue loss of around Rs 466,180 crore every year.  To improve upon this, a verification system should be introduced, which shall ensure arithmetical accuracy along with admissibility of expenditure incurred, income earned or invested based on the evidence provided. Since the resources with the department are limited, this work can be outsourced to other professionals.

A single ITR form to replace all ITR forms – At present, there have been different Income Tax Return forms Vis ITR 1,2,3,4,5,6,7 for different taxpayers which make filing of ITR a cumbersome task. It is proposed to prepare a single ITR form for all taxpayers so that filing of return will be done in a simplified & effective manner.

Increase in limit of deduction u/s 80DD & 80U -The 80DD & 80U deductions are allowed in respect of medical treatment of a dependent with specified disabilities. However, the deduction limits are not good enough to cover such expenses like medical costs/travelling costs. Therefore, ICAI is suggested that the same should be increased suitably.

Meanwhile, ICAI, in its pre-budget memorandum on Indirect Taxes, has suggested that Current Service Tax Exemption Limit of Rs 10 Lakh should be increased to Rs 25 Lakh. Further, considering the increase in cost of transportation since 2004, it is suggested that the exemption limit be enhanced to Rs 4,000 for single carriage and Rs 2,000 for a single consignee.

An inverted duty structure impacts domestic manufacturing industry adversely as manufacturers have to pay a higher price for raw material in terms of duty, while the finished product lands at lower duty and lesser costs.

The inverted duty structure is making Indian manufactured goods uncompetitive against imported finished products in the domestic market. The nine manufacturing industry in the country including aluminium products, capital goods, cement, chemicals, electronics, paper, steel, textiles and tyres have reported duty inversion. Further, under free trade agreements (FTAs), India also gives concession to its partner countries, resulting into an inverted duty structure. Till now, India has implemented FTAs with many countries including Japan, South Korea and Singapore and is in discussion with several other nations.

The Commerce and Industry Ministry in its pre-Budget recommendations will ask Finance Ministry to remove this anomaly to provide impetus to Indian manufacturing sector, which has been struggling with slowdown over the past two fiscal years. The manufacturing output, which constitutes over 75% of Indian industrial index (IIP), declined by 0.7% in the FY14 as against a marginal growth of 1.1% in FY13.

On rationalisation of tax structure, it said, pending introduction of a unified Goods & Services Tax (GST), hotel accommodation and air-conditioned restaurants should be included in the negative list for service tax. The same base of room and F&B revenue is already subject to the levy of Luxury Tax and VAT by State Governments and the additional imposition of Service Tax by the Central Government amounts to double-taxation. FHRAI also said the GST should subsume, without any exceptions, all central and state-level indirect levies (including luxury tax, entry tax etc) and a composite tax rate applicable to the tourism sector under GST to be capped at 8%.

Further, Industry body also pitched for the minimum project cost mandated for inclusion of hotels in the Reserve Bank of India’s Infrastructure Lending List. That should be lowered from Rs 200 crore to a more reasonable threshold of Rs 50 crore so that a larger number of hotels across diverse market segments can benefit.  Moreover, instead of being applicable only with prospective effect, this benefit should also be available to operational and under-construction hotels too and they may be allowed to switch over their existing loans to the terms applicable for infrastructure projects.

Among other things, the body recommended the Government to revisit the provisions related to license fee/rent payable by the hotel owners, payment of service tax on services rendered by foreign travel agents and other such issues related to current structure for the imposition of service tax. FHRAI has also suggested to extend Bank loans up to Rs 10 crore (per unit/ borrower) to SMEs in the hotel and restaurant industry, should be allowed to be reckoned as ‘priority sector lending’ within the RBI guidelines.

The ICCIC President asserted that in order to accelerate business growth, corporate tax should be cut to 25 percent and basic exemption limit for non-corporates should be hiked to Rs 20 lakh. Emphasizing the need for abolishing the DDT levied on companies, ICCIC President  has stated that tax rate on dividends in excess of Rs 25 lakh received by the shareholders should be reduced. Further, the benefit of exemption from Minimum Alternate Tax (MAT) given to infrastructure investment should also be extended to industries supporting infrastructure to boost overall economic growth. Industry chamber also urged the government to implement the Goods and Service Tax (GST) and Direct Taxes Code (DTC) in the current year.

Further, the ICCIC also proposed for extension of the Technology Upgradation Fund Scheme (TUFS), which now covers only the textile industry, to engineering industry as well. Other ICCIC’s suggestions including raising the Service Tax exemption limit to Rs 25 lakh from the current limit of Rs 10 lakh, treating corporate social responsibility (CSR) expenses deductible with a weighted deduction similar to Sec 35 AC of the Income Tax Act and allowing cenvat credit at 100 percent, on capital goods bought in the year of purchase, instead of 50 percent.

Accountability on the part of the Income-tax Department — Government has certain expectations from taxpayers. However, no efforts are made to encourage, motivate & assist taxpayers to enable them to meet these expectations. When a tax-payer has some difficulty to understand the tax-provisions or when unjust treatment is given to him or he is facing the ‘corrupt’ official, no higher authority is available to approach in the matter. The BCAS believes that large number of tax-payers is honest and law abiding, more can be brought in that category if the department becomes more accountable. In order to make the system and the income-tax department accountable, the BCAS gave some suggestions on macro level. In the Income-tax Act, 1961 [the Act] / Direct Tax Code, 2013 [DTC] provision needs to be made to create and establish independent body having wide authority to ensure accountability in the working of the department. Such body needs to be headed by a person of eminence of retired High Court / Supreme Court judge or senior respected professional. All grievances of citizens not resolved by the tax authority would be handled by this body.

Broadening of Taxpayer base — There is urgent need to broaden the taxpayers’ base in the country and spare the honest taxpayers from more and more compliance burden. In order to motivate desired behaviour among the public, the government should introduce a system for rewarding the honest taxpayers in recognition of having met national responsibility. The government should Introduce Presumptive Taxation Scheme on the lines of earlier Presumptive Taxation Scheme of Rs 1,400 with suitable modification of amount to Rs 5,000.

Removal of Domestic Transfer Pricing Provisions — Domestic Transfer Pricing provisions are more relevant and prevalent in countries like USA and Canada, where both federal and state income-taxes separately exist. In India since income-tax is a central tax, DTP provisions have no relevance as any adjustment due to domestic transfer pricing provisions should, logically have offsetting effect and should have no material revenue impact as both the assessees would be resident in India. Therefore, domestic transfer pricing provisions should be removed from the Income-tax law / statute book.

Suggestions for Specific amendments to various sections of Income-tax Act, 1961

Provisions Relating to Gift — An unintended outcome of the amendment made to Section 56 by the Taxation Laws (Amendment) Act, 2006 is that if a person receives gifts aggregating to more than Rs. 50,000 in a year from persons other than relatives then the entire amount of gifts would be taxed as income in his hands instead of only the amount in excess of Rs 50,000. It is suggested in order to avoid ambiguity and resulting disputes and litigation, the section be amended to clearly lay down a basic threshold limit for exemption of Rs. 50,000 per year.

Tax on Distributed Profits effect on Non-Resident shareholder — Tax on distributed profits is the liability of the company. Therefore, non-resident shareholders find it difficult to get credit of such tax in tax assessments in their respective countries especially when there is no direct or indirect provision for such credit either in the domestic law of their countries or in the relevant Double Tax Avoidance Agreement. In view of this, effectively, this method of collecting tax on dividend results in a benefit to the Government of the country of the non-resident rather than the non-resident investor. It is therefore, suggested that appropriate specific provisions should be made in the Act to treat such DDT as tax on dividend receipt of non-resident shareholders.

Increase in threshold limit for TDS — The threshold limits in respect of payments not subject to deduction of tax at source should be reviewed every 3 years, and should be revised upwards taking into account the impact of inflation. In particular, the limits of Rs 5,000 and Rs 10,000 under section 194A for interest have not been revised since June 2007 though limits under other sections were increased in July 2010. It is, therefore, suggested that these limits be revised upwards to Rs 15,000 and Rs 30,000 respectively.

In its wish-list for budget 2014-15, Siam has demanded to Introduce GST across all states and share the draft modalities & procedures in advance. Subsume all indirect taxes, including Road Tax, R&D Cess and Octroi, in the proposed GST to prevent cascading effect. Taxation of Used vehicles should be covered as well as taxes like road tax should be subsumed in GST. Further, the industry body seeks special incentive for automobile exports (Focus product scheme) as well as Abatement rate for Automobiles spares should be increased to 40%.

Siam has also suggested that Depreciation rate for Motor Cars, MUVs and 2 wheelers, other than those used in the business of Hire, irrespective of the period of addition should be raised to 25% from 15% (So as to make useful life as 10 years in place of present estimate of 19 years approx.). SIAM, in a letter to the Revenue Secretary had already sought further lowering of duties on large cars to 20 per cent from 24 per cent and simplification of the excise duty slabs on cars by moving to a two-tier system from a three-tier system.

Besides this, the sector is undergoing through a sea of changes, with RBI committee headed by P.J. Nayak, former Chairman and CEO of Axis Bank, in early May floating the draft recommendations on governance changes for PSU banks and revamping their ownership structure. The draft recommendations would help steer these banks through their present difficult phase marked by inferior financial parameters, accelerating stressed assets and declining market share. One of the key recommendations of the committee is to reduce government’s stake to less than 50%, which would be a beneficial trade-off between the Government and PSU banks.

These measures are all to revive the ailing health of Indian banking industry, which is plagued by issues such as deteriorating asset quality, squeezed profits margins, and tepid economic growth. Other issues that the sector is facing is raising fresh capital and maintaining prudential capital, while transitioning to Basel III norms.

However, on the positive side, the Indian banking sector has a large market still unexplored with the Indian households being one of the highest savers in the world, accounting for 69% of India’s gross national savings, of which only 47% is accessed by the banks.

Performance of the Banking Industry:

The year ‘2014’ has seen a consistent growth in investment in banking stocks by equity fund managers and their exposure has risen from 16.6% of total AUM in January this year to 21.59% in May. In absolute terms, fund infusion has grown from Rs 30,339 crore to life time high level of Rs 48,419 crore, accounting for 21.59% of their total equity assets under management (AUM) of Rs 2.24 lakh crore. Not so surprisingly, most of the banking stocks picked up momentum post May 16, when the National Democratic Alliance (NDA), led by Narendra Modi’s Bharatiya Janata Party (BJP), emerged with a decisive victory, which whetted the demand for high beta cyclicals.

At current levels, the MF industry has the highest exposure to banking sector since at least August 2009. The previous high was in December 2012, when investment in the sector had risen to Rs 43,659 crore.

Banking index, managed to carry forward its northbound journey, though with slender gains after Reserve Bank of India slashed the mandatory amount of bonds that lenders must park at the RBI–called the Statutory Liquidity Ratio (SLR)–by 50 basis points to 22.5% of deposits, a move which would release Rs 39,000 crore in the banking system. Meanwhile, in line with expectations, RBI’s governor, Raghuram Rajan left key policy repo rate unchanged at 8% in its second bi-monthly monetary policy policy 2014-15. Ever since taking over the helm of the central bank in September, Rajan has raised the repo rate by 75 basis points in a bid to tame high consumer inflation.

Notably, the central bank stroke a neutral tone with dovish bias as it underscored that further policy tightening would not be warranted, rather added that if disinflation was faster than currently anticipated, this would provide headroom for an easing of the policy stance.

RBI issues final guidelines on liquidity coverage ratio:

Early in June, Reserve Bank of India (RBI) released the final Basel III framework on liquidity standards, which includes guidelines on liquidity coverage ratio (LCR), liquidity risk monitoring tools and LCR disclosure standards. RBI unveiled that it would be introducing the Basel III liquidity coverage ratio (LCR) in a phased manner with a requirement of 60% from January 2015, which will be binding for all the banks.

Further, this requirement would be raised in equal steps to reach the minimum required level of 100% on January 1, 2019. Post to which, with effect from January 1, 2019, after the phase-in arrangements are complete, RBI plans to keep it at minimum 100% on an ongoing basis as stock of unencumbered high quality liquid assets (HQLA) is intended to serve as a defence against the potential onset of liquidity stress.

During a period of financial stress, however, banks may use their stock of HQLA, and thereby may fall below 100%. But, banks will have to report to RBI for any such use of stock of HQLA along with reasons for such usage and corrective steps initiated to rectify the situation. Moreover, banks are also expected to disclose information on their LCR in their annual financial statements starting with the financial year ending March 31, 2015 to the central bank.

The guidelines also require banks to increase LCR disclosures, including information on funding concentration by borrowers, products and currencies in annual financial statements starting with the financial year ending March 31, 2015.

The LCR promotes short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days. With this framework, the central bank has encouraged banks to adopt a ratio higher than the prescribed minimum to promote better liquidity risk management.

PJ Nayak panel report on PSU banks:

In what could be game changer for state run banks, an RBI committee headed by P.J. Nayak, former Chairman and CEO of Axis Bank, in early May floating the draft recommendations on governance changes for PSU banks and revamping their ownership structure. The draft recommendations would help steer these banks through their present difficult phase marked by inferior financial parameters, accelerating stressed assets and declining market share.

Key recommendations:

Make RBI the sole regulator with no interventions from GoI: To ensure uniform implementation of regulations, the committee recommended that RBI be made the sole regulator of banks and GoI’s intervention be stopped. It also recommended Government to stop issuing any instructions to public sector banks in pursuit of development objectives and any such instructions, if any, after consultation with RBI, be issued by that regulator and be applicable to all banks.

Three phased board appointment process: RBI’s panel proposed a transparent and three phased process for board appointment. The first phase of which would require formation of Bank Boards Bureau (BBB) comprising former senior bankers, advising on all board appointments, including those of Chairmen and Executive Directors as a predecessor to the formation of Bank Investment Company (BIC), in which the government transfers its holdings in banks. The second phase would require function to be undertaken by BIC, which would also actively strive to professionalize bank boards and lastly, BIC would move several of its powers to the bank boards. The duration of three-phase transition is expected to be between two and three years.

Govt’s stake to be reduced less than 50%: The committee recommended for banks to be free from external constrains, it is essential for the government to reduce its stake in these banks to less than 50% along with certain other executive measures. This would be a beneficial trade-off for the Government because on one hand would continue to be the dominant shareholder and, on the second this would create the conditions for its banks to compete more successfully without losing its control.

Budget Expectation/ Recommendations:

For the Union Budget to be presented by the new government in the midst of the challenging times facing the country, the Federation of Indian Chambers of Commerce and Industry (FICCI) has also submitted its recommendation for the sector

The detailed memorandum on the various recommendations is as follows:

Suitably amend the period for maintenance of special reserve under section 36(1) (viii) of the Act: The existing provisions of section 36(1) (viii) the Income Tax Act provide for a deduction to the banking company in respect of any special reserve created and maintained for providing long-term finance for industrial or agricultural development or development of infrastructure facility in India; or for development of housing in India. The deduction is hence available to special reserve “created and maintained” by the assessee. Thus, any amount withdrawn from such special reserve is subject to tax as per section 41(4A) of the Act in the year of withdrawal. Section 41(4A) of the Act seems to have had an un-intended consequence of retaining the amounts in special reserve account in perpetuity, even long after the purpose of granting the loans has been fulfilled. Hence, FICCI has recommended that that section 41(4A) of the Act should be suitably amended to specify a period, say 5 years, for retaining the transferred amounts in special reserve as such a period would be adequate to fulfil the purpose of granting long-term finance.

Increase the threshold limit for deduction on TDS Interest (other than interest on Securities) to Rs 100,000:  At present, banks are required to deduct TDS at the rate 10% in case interest payable on deposits exceeds Rs 10,000 per year. The limit of Rs. 10,000 was set in Financial Year 2007 and since then tax slabs have been substantially rationalized. Therefore, the industry wants TDS provisions be also rationalized. Hence, FICCI has recommended that the threshold limit fordeduction of TDS on interest other than interest on securities be increased from Rs 10,000 to Rs 100,000 where the payer is a banking company.

Conversion of Indian branch of a foreign bank into a subsidiary company: The Finance Act 2013 inserted section 115JG in the Income Tax Act to provide tax neutral conversion of an Indian branch of a foreign bank to a subsidiary company. However, the provisions of section 115JG of the Act does not provide any clarity on certain transitional issues such as value at which closing ‘block of assets’ are to be transferred to subsidiary, treatment of allowability of expenses to subsidiary earlier disallowed under section 43B in the hands of branch. In view of this, FICCI has sought clarity on tax treatment of these issues to achieve the intended objective of conversion of branch into subsidiary.

Restoration of deduction under section 80P to co-operative banks: Withdrawal of deduction under section 80P of the Income Tax Act has given a heavy blow to the co-operative banks which helped small and medium enterprises. Hence, FICCI has recommended restoration of deduction in respect of income of co-operative banks under section 80P of the Act be restored, on behalf of the industry.

Other suggestions:

• It is recommended that a blanket exemption from complying with the provisions of TDS be provided in respect of all payments made to Indian banks and Indian branches of foreign banks.
• It is recommended that acceptance of Form 60/61 and Form 15G/15H by banks should be made automated to reduce unnecessary paper work.
• It is recommended that section 72AA of the Act be amended to allow carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in case of all types of banking consolidation.

It is recommended that Section 163 of the Act, be amended to provide that in the following scenarios Banks should not be regarded as ‘representative assessee’ under Section 163 of the Act.

• Provision of mere custodial services, under license issued by SEB
• Provision of services as AD for facilitating the remittance of funds, in the course its ordinary banking business

Outlook:

Although the Indian banking sector is “on the cusp of revolutionary change”, the RBI has a long way to go to make this revolution happen and road to reach the final destination may not be easy as it’s appears on account of several road-bumps in between.

Although RBI committee headed by P.J. Nayak has floated the draft recommendations on governance changes for PSU banks and revamping their ownership-structure, for steering these banks through their present difficult phase, its implementation is difficult. Making these structural changes to government-owned banks requires the RBI to win the approval of parliament and, perhaps more importantly, government officials who currently have control over public sector banks may not welcome these changes.

Further, RBI final guidelines on the minimum liquidity coverage ratio (LCR), which will be introduced in a phased manner with a requirement of 60% from January 2015, although has been termed as ‘credit positive’ for Indian banks by global rating agency, Moody’s, will be difficult to be implemented by banks with weaker deposit franchises, as they are represented by smaller levels of low-cost current account and saving account deposits, and a greater reliance on short-term wholesale funding.

Besides, on issue of augmenting capital and maintaining prudential capital, government is still mulling new ways to raise capital by banks. Therefore, the outlook for the industry remains to be ‘negative’ at-least for short term. However, with this the industry is hoping that the Budget will take constructive steps to support its growth and expansion.

Installed power capacity

The demand for electricity in the country has been growing at a rapid pace on the back of growing population and increase in industrialization activities. In order to meet the increasing requirement of electricity, massive addition to the installed generating capacity in the country is required. Over the past couple of years, India’s power sector witnessed significant addition in power generating capacity. At present industry’s installed capacity stands at around 248 GW out of which coal-fired plants account for about 59% and hydro plants accounts for around 17% of India’s installed electricity capacity. During the 11th plan, power producers added record capacity of about 55,000 MW. Fuel sufficiencies as well as massive addition to the installed generation capacity in the country are required in order to fulfill the increasing requirement of electricity. Considering that power requirement is essential for the economic development, the government, during the 12th five year plan, proposed to invest 31% of the total investments in power sector, highest among all infrastructure sectors. Under 12th five year plan, around $235 billion investment is proposed to add 76,000 MW power capacities.

Power deficit

In spite of large power generation capacity addition over the past few years, the country is still facing power deficit mainly due to high demand. Further, acute fuels shortage particularly coal in the country has also become primary reason for power deficit in the country, forcing the manufactures to operate at low capacity. Sluggish domestic coal production has forced power players to import coal at high prices, which is eroding profit margins of the players. Currently, India has been witnessing peak hour power deficit at around 3-5 % with the southern India remaining the most affected region, registering a peak power deficit of 8-10%.

With the Union Budget 14-15 round the corner, the real estate industry’s hopes are building up. While the introduction of real estate investment trusts (REITs) tops their wish-list, builders are also hoping for rest of these measures from the new government in their maiden budget:

Broaden the scope of the interest rate subsidy for loans towards affordable housing: The industry wants the new government to amplify and broaden the interest rate subsidy for loans towards affordable housing.

Single Window Clearance: Presently, the approval process is very lengthy and takes around 1.5 years to 2 years. Hence, the industry wants approval processes (single window clearance) to be simplified as the cost of delay in approval, adds further to customers spending by 25% to 40%.

Introduction of real estate investment trusts (REIT): Real estate industry wants the budget document to support REIT structure, which could be game changer for industry as this is expected to attract global investments and bring transparency into the sector.

Reduce High Cost of Borrowing: Presently, interest rates charged by the banks to developers and home buyers are at an all-time peak, hence the industry has expressed the need to bring down the cost of borrowing. A reduction in the base rate (rate below which no banks can lend to the corporates or industries) is necessary to help banks lower their lending rates.

Make Provisions For Special Residential Zones: The industry wants government to seriously consider enacting provisions for Special Residential Zones (SRZs) to incentivise the growth of housing stock at targeted locations.

Increase Infrastructure Allocations: The industry seeks budget to increase infrastructure spending in urban areas with a view to unlock the value of neglected and hidden land assets in suburban and peripheral districts, which will enable more holistic growth for the real estate markets in over-burdened metros and allow the demand for housing to spread over a larger canvas. The increased demand in peripheral locations in which infrastructure has made the real estate markets there more viable will also help bring down prices in the central areas.

Provide Real Estate With Industry Status: The country’s real estate industry contributes approximately 5% to the GDP. Moreover, the real estate sector has grown significantly over the past decade, with tangible transformation in quality and business standards. However, due to lack of regulations and effective policies, the sector is experiencing many challenges on its growth path. Hence, the industry wants the government, in this budget, to consider the fact that the Indian real estate sector generates countless jobs across its various verticals. By granting it industry status, the Government would enable the sector to access debt lending at better interest rates and reduced collateral values.

Take Steps To Provide Better Clarity In Land Titles: This is another policy hurdle, which the industry wants the Government to tackle. Across the country, land needs the benefit of legally documented ownership assigned to the right persons or entities. The lack of clarity on land titles shakes the confidence of investors, and is a serious hindrance to overall growth. Hence, the industry wishes budget to make specific allocations towards regularizing and digitalizing land records.

Provide More Adequate Sources of Finance: Since the sector is not under the umbrella of any specific regulatory authority, financing has been an issue over a number of years of credit slowdown. Hence, the industry desperately seeks liberalisation of finance for the real estate sector.

Among other things:

• The industry also is seeking liberalized FDI in real estate so the smaller private equities can play a major role.
• Further, with most of corporate India pushing for the introduction of goods and services tax, real estate firms are no exception.

Outlook:

After showing a sluggish growth in last couple of years, Indian realty sector is showing signs of recovery and will be a favoured destination for global investors on expectation of a strong revival for the industry, after the formation of a stable government. Earlier in FY13, the real estate sector growth remained fragile as the industry was facing headwinds such as slow rate of approvals, regulatory changes in key micro markets such as Mumbai (pertaining to development control rules), inflation impacting cost structure, declining demand due to increasing prices, etc. However, the trend seems to have bottomed out and economy is now improving, showing signs of growth with fiscal deficit in check and on course of further fall. Increasing migration to cities and urbanization along with interest from buyers to invest in real estate market will continue to be the prime demand drivers for realty sector.
Further, budget 2014-15 will hold the key for the sector amidst expectations that the government will take steps towards providing the long awaited industry status to the real estate sector and provide boost to low cost housing in the final Union Budget 2014-15 to be unveiled on 10 July 2014. Additionally, the realty players are also looking at budget as a tool to tackle inflation issue, so that home sales can pick up. The major concern surrounding the sector is the affordability of housing for home seekers and profitability of making the house available for developers and builders. Therefore, the industry is widely pinning hopes that government would take necessary measures to reduce inflation.

Sugar Production

India’s cane production area has increased to 5.06 million hectors in 2012-13 as compared to 5.04 million hector in 2011-12 and 4.9 million hector in 2010-11. In spite of gradual increase in cane production area, sugarcane yields have been remaining stagnant over the past couple of years due to the adverse weather conditions and low investment in farming technologies. Sugarcane yields (MT/hac.) declined to 66.47 in 2012-13 as compared to average around 70 during the past three fiscal years. During the past decade, India sugar production witnessed a cyclical trend whereas consumption trend remained linear. India produced 25.14 million tonnes of sugar in the crop season ended September 30, 2013, almost 4.5% less than the previous year’s because of low rainfall in Maharashtra, Karnataka and Tamil Nadu in 2012. On the other hand, India’s sugar consumption have been growing gradually on account of rapid population growth, a rising middle class and migration to cities from rural areas, which means more demand for ice creams, soft drinks and processed food.  During 2012-13, India’s sugar consumption stood at around 22.80 MT. Though, India is self- reliant in sugar, the difference between production and consumption determine India’s exports. In 2012-13, India exports only 0.35 million tonnes of sugar as comparison to 3.4 million tonnes sugar exports in 2011-12.

Cane Arrears

Cane price arrears is one of the major reform requirement for the sector, the cane arrears which were just Rs 972 crore in the year 2005-06, have surged to around Rs 10000 crore in 2012-13. As per latest release of the Indian Sugar Mills Association (ISMA), cane arrears are set to pile up to over Rs 11,000 crore due to falling prices and uncertainty over the government’s policies for fixing the subsidy for export of raw sugar, which is almost 20% of the total cane price payable in the current season.

To improve liquidity position of beleaguered sugar industry, the government had approved Rs 6,600 crore interest-free loans in January 2014 for the cash-starved sugar mills for payment to cane growers. The government decided that interest subvention rate up to 12 percent, whichever is lower as per normal banking practice, will be provided to sugar mills through participating scheduled commercial banks, regional rural banks and cooperative banks for five years. Furthermore, the government has recently approved export subsidy of Rs 3,300 per tonne on raw sugar shipments for a period of next two years.

Industry’s demand for imports duty hike and mandatory blending of ethanol has already been fulfilled by government ahead of the budget. The government hiked import duty on sugar to 40 percent, a move which can increase the sugar prices up to Rs 60 per quintal in the country. In addition, the government has also decided to provide additional interest-free loan of Rs 4,400 crore to cash-starved sugar mills to make payments to cane farmers. The government’s latest decision is likely to provide impetus to Indian sugar industry by making imports costlier and improving the liquidity of sugar mills. Also, with the mandatory 10 percent blending, the Government can save forex outgo to the tune of $1.7 billion.

Industry has also demanded provision with State Advised Prices (SAP) and introducing a revenue sharing model where sugar mills can pay a minimum 70 percent of their average realisations from sugar and primary by-products (molasses, bagasse and press-mud). If this demand fulfilled, the cane price at current realisations will not be more than Rs 235-240/quintal.

Outlook

Sugar industry plays an important role in the development of Indian economy. However, the growth and progress in the sector is marred by demand and supply worries coupled with political interference. Despite increase in sugarcane area, there is decrease in the sugarcane and sugar production due to less rainfall in some sugarcane producing states and less investment in farming techniques. On the other hand, countries like Brazil, China, Thailand and US have managed to increase their production in last couple of years, increasing global sugar surplus which in turn eased global sugar prices and the domestic prices fell in tandem with International sugar prices. However, global sugar prices are likely to remain steady but Sugar prices on domestic front may move up slightly in coming future due to delay caused in crushing operations by mills. Further, India’s sugar consumption is likely to increase in near future on the back of gradually recovering economy and growing population.

Its various segments- film, television, advertising, prints media and music among others – have witnessed tremendous growth in the last few years. The entertainment industry continues to be dominated by the television segment, accounting for over 50 per cent of market share in terms of revenues, which is expected to grow further to 51 per cent by 2017.

Current scenario

The Indian M&E industry registered a growth of 11.8 per cent in 2013 over 2012 and touched Rs 91800 crore. The overall growth rate remained muted, with a slow GDP growth and a weak rupee. Lower GDP meant lower demand from the consumer and this impacted advertising. At the same time, the industry began to see some benefits from the digitization of media products and services, and growth of regional media. Gaming and digital advertising were the two prominent industry sub-sectors which recorded a strong growth in 2013 compared to the previous year, albeit on a smaller base.

The Indian M&E sector showed resilience and began to grapple seriously with some structural issues it has long talked about but not engaged with. These include TV and Print industry measurement, advertising volumes, inventory and rates, actions to see digitisation through and reap its benefits, working out the MSO-LCO relationship, copyright laws and operational efficiency. Many of these remain alive and will take a few years to sort through. Others, like Phase III of Radio with still pending regulatory action.

Television: The size of the Television industry in India was estimated at Rs 41,700 crore in 2013, and is expected to grow at a CAGR of 16 per cent to reach Rs 88,500 crore in 2018. Aided by digitization and the consequent increase in Average Revenue Per User (ARPU), the share of subscription revenue to the total industry revenue is expected to increase from 67 per cent in 2013 to 71 per cent in 2018.

Print Media: Calendar 2013 saw the Print industry grow by 8.5 per cent from Rs 22400 crore in 2012 to Rs 24300 crore. The growth achieved was slightly better than the estimate of 7.60 per cent last year. The long-term growth in the sector looks promising with industry players witnessing strong growth and a possible future demand in the regional market. Even though Print media has shown steady growth in the last calendar year, the macroeconomic environment continues to be challenging. Even-though, the print industry is expected to grow at a CAGR of 9 per cent for the 2014-18 period, as against estimated 8.7 per cent expected last year.

Film: Favourable demographics, widespread acceptance and expansion of multiplexes and digital distribution are likely to lead robust growth in domestic box-office collections. The Indian film industry is expected to grow robustly at about 11.50 per cent CAGR over 2012-2017, up from Rs 11240 crore in 2012 to Rs 19,330 crore in 2017. This growth will be driven primarily by domestic box office collections, expected to increase at a CAGR of about 12 per cent over 2012-2017 to reach Rs 14800 crore in 2017.

Radio: Like in 2013, the FM radio industry is expected to outpace the growth of overall advertising revenues in the coming years. With a forecast CAGR of 18.1 per cent till 2018, industry revenues are expected to double by 2018. Phase III licensing auctions is over, which is vital for the FM radio industry’s growth.

Advertising: The advertising industry faced a rough year in 2012 and there were expectations of a better performance in 2013. However, the continued economic slowdown, depreciation of the rupee and low GDP growth resulted in persistent negative sentiment leading to a muted growth rate for the industry in 2013. Advertising spends were relatively healthy in the first half of the year backed by strong spending from the FMCG sector, state assembly elections and better performance of IPL6 compared to the last two seasons. Post July, there was a sudden slowdown due to depreciation of rupee and other macro-economic factors due to which advertisers held back their money.

Budget expectation:

The media sector, in the past, made several demands for further incentivizing digitization. These demands have largely gone unheeded under the past government. In budget 2014-15, direct-to-home (DTH) industry has asked government to rationalise tax structure for the sector and reduce the licence fee. The multiple taxations faced by the DTH sector are becoming a heavy burden. Till date, Goods and Services Tax (GST) is not rolled out, the industry should get abatement in paying service tax.

The DTH industry has to pay entertainment tax to state governments and service tax to the center. No other industry pays double taxation and the industry body has asked for abatement of the service tax. The industry also asked for a reduction on the licence fee paid by DTH operators to 6 per cent from 10 per cent at present.

Further, the Industry has asked the Government to announce firm dates for Phase III and IV of digitization so that the companies related to industry can plan their investment. There is no confirmation on December 2014. That was the original announcement made, since then there have been a lot of voices and noises in the Ministry regarding extension of the digitisation deadline.

Meanwhile, CASBAA, the cable and DTH industry body, has urged government to consider a cut in customs duty on set top boxes (STBs) and its components and said that the government should lower the customs duty on STB and bring it to the earlier 5 per cent. The government had increased the customs duty on STB to 10 per cent from 5 per cent in the 2013 budget.

The Federation of Indian Chambers of Commerce and Industry (FICCI) has also submitted its recommendation for the sector to the government:

• Rationalization of rates of Entertainment Tax across various States at a uniform level should be encouraged by Central Government.
• The Cable sector needs to be given “Infrastructure” status in order to garner domestic funding.
• Eliminate the differentiation for the transactions with entities in nations having treaties and other entities.
• Export benefits to post production services under service tax legislation.
• Extension of Income tax benefits to multiplexes.
• 10 Years Tax Holiday for Animation, gaming, and Visual Effects Industry.
• Lifting of service tax on studios developing original content.
• Exemption granted to digital cinema solution providers for the services rendered in relation to delivery of digital content in movie to cinema theatres through satellite by virtue of Notification 12/2007 – ST dated 1-3- 2007 should continue.
• Removal of withholding tax paid by expats working in India for Indian mobile game development companies.
• Removal of withholding tax on revenues accruing from sales of mobile games in non India markets as well as removal of withholding tax on the development contracts given to mobile game developers outside India.

Outlook

The M&E industry grew at 12 per cent to garner Rs 92,800 crore in 2013, a development that was helped largely by digitization. Television clearly continues to be the dominant segment in the M&E industry, though animation/ VFX and Films and Music sectors too has posted strong growth in past few years. Meanwhile, radio is anticipated to see a spurt in growth post rollout of Phase 3 licensing. The benefits of Phase 1 cable digital access system (DAS) rollout, and continued Phase 2 rollout are expected to contribute significantly to strong continued growth in the TV sector revenues and its ability to invest in and monetize content.

However, rising cost of newsprint and the implementation of wage board recommendations have hit the pint industry. Unlike the West, where the print industry is on the decline, in India, it is growing with each passing year. All major newspapers are launching new editions in Tier II and Tier III cities. Hence, the industry is hoping that the Budget will take constructive steps to support its growth and expansion.

Growing investments in infrastructure

Growing economy leading to increase in the flow of goods has spurred increases in rail, road and port traffic in India, necessitating constant improvements in country’s infrastructure. With the growing economy, rising population and rapid urbanization expected in the next two decades, there is a need to provide an impetus to infrastructure investments through policy and structural reforms. The government of India realizes the importance of accelerating the investments in infrastructure and has been consistently increasing its spending on the development of infrastructure capabilities to attain sustainable economic growth. In order to increase Foreign Direct Investments (FDI) inflows, the government has been liberalizing FDI norms for a broad range of infrastructure sectors.

Current Scenario of Indian Infrastructure Sector

At present, Indian economy is struggling with slowdown and growth slowed down to decade low at 4.5% in FY13 and 4.7% in FY14. Prevailing economic downturn can be attributed partly to global factors and mainly to slow reforms and delays in implementation of projects in the country. Though, the government has made huge infrastructure investments over the past couple of years, the physical achievements have not fairly matched the aggressive investment. Only one fourth of the total number of infrastructure projects has been commissioned on their scheduled dates in India due to the various issues. The factors like slow reforms, worse land acquisition procedure and delay in environment and forest clearance have been impeding the business sentiments in the country which in turn adversely impacting investments in the sectors. Furthermore, imbalanced allocation of funds across different infrastructure sectors has also become the concern for overall infrastructure development of the country.  During the 11th five year plan, overall investment targets have only been achieved due to the strong performance of the Telecom and Oil & Gas sectors whereas the critical segments of infrastructure such as  roads, railways and ports have under-achieved their investment targets by around 22%.

Highway Ministry seeks Rs 35,000-cr Budgetary support

The Road and Highway Ministry has sought Rs 30,000-35,000 crore budgetary support from the government to execute various road projects. The demand of fund is much higher from Rs 22,890 crore that the Ministry had got as gross budgetary support (GBS) in 2013-14. Further, the ministry has demanded the government to give an assurance for enhancing the amount that will be provided in the next two years so that it can award projects this year. In the current fiscal, about 1,400 km of projects have been awarded during April and May. Other wishes include, development of low-cost airports in tier-II and tier-III cities, timely completion of dedicated freight corridors in railways, also diamond quadrilateral, as envisaged by the new government.

Outlook

India is a growing economy and need constant infrastructure development to maintain or boost the economy’s growth in future. Over the past few years, the infrastructure development in the country remained sluggish, impacting economic growth. Slow reforms, financial constraints, delay in land acquisition and environment clearance have become key concerns, hampering the business sentiments in the country which in turn adversely impacted investments in the sectors.  India’s infrastructure sector is likely to remain under pressure in the near term. However, the medium to long term outlook looks bright for the sector given the huge proposed investment target for the 12th five year plan.

Industry Performance

Strong domestic economy’s growth over the past few years has driven the industry to a double digit growth. Indian consumer durables market size increased by a CAGR of 12 percent to around $9 billion in FY14 from $5.2 billion in FY09 on the back of growing economy leading to rise in the level of peoples’ disposal income. Further, factors such as growing urbanization in the country, favorable demographics with 64% of the population in working age category, rising young population with access to disposable income and easy availability of financing schemes are the leading factors credited for growth in domestic consumer durables market. Some eminent industry side advantages like constant product upgradation with advance technology, cost-effectiveness and efficient manpower and improved distribution network of players all have provided the much needed platform to boost the industry’s growth. Further, low penetration level in most of the consumer durables products, like AC, washing machines and microwave oven offer huge market opportunities for industry players. India is still an urban centric market with around two-thirds of the total domestic demand of the consumer appliances triggered by the top 40 cities of the country. Though, over 60 percent of the country population resides in rural India, it represents only 35 percent of the total domestic sale. However, the ratio of demand is likely to change in the near future on the back of growing demand from the rural markets.

At present, consumer durables industry growth, being highly sensitive to people disposal income, is under pressure owing to the prevailing economic slowdown. Indian economy growth remained below 5 percent for the second year in a row at 4.7 percent during FY14 and the factors like high interest rates, rising inflation, low investments and slow execution of infrastructure projects have been impacting economy’s growth. Further, sector growth is also impacted by declining employment opportunities, drop in agriculture output and rising prices of products that have been subsequently leading to deferment in purchase decisions. However, domestic industry is still attracting big investment owing to the massive untapped potential in both rural and urban areas and the country’s steadily growing disposal income. There are very few houses in the country having full range of appliances therefore, industry players are of the view that even with five to six percent growth in economy, Indian consumer durables market presents a remarkable opportunity to enter and invest.

CEAMA seeks cut in duties, rapid implementation of GST in budget 2014-15

Ahead of the budget, the Consumer Electronics and Manufacturing Association (CEAMA) has asked the government to take steps such as reduction in customs and excise duties on consumer durable products and rapid implementation of Goods and Services taxes (GST).  The CEAMA is of the view that the factors like onslaught of concessional imports under free-trade agreement (FTA) and heavy taxation are adversely impacting the already depressed Indian consumer durable industry.

In its wish-list for budget 2013-14, the industry body CEAMA has demanded the government to remove inverted duty structure (driven by FTAs) on consumer electronics products and appliances which are making the Indian manufacturing sector uncompetitive. The association has also called for faster implementation of GST to decrease compliance burden for businesses as well as reduce paper work while making tax system simpler and transparent. The CEAMA also sought for reduction in excise duty on production of energy efficient products.

Further, industry association has demanded the government for reduction of customs duty on LCD/LED televisions to 0 percent to provide a level-playing field to domestic manufacturers. Further, the CEAMA has also sought for reduction of customs duty on the import of magnetron and other inputs for manufacturing of microwave ovens and reduction of customs duty on project imports to 0 percent to enhance manufacturing set-ups and invite new technologies/investments into India.

Outlook

Presently, Indian consumer durables industry is under pressure owing to the prevailing economic slowdown. Ongoing high interest rates phase and rising inflation are forcing consumers to defer their purchasing decisions. Whereas, rising raw material prices and intense competition among players has also become key concerns for the industry. The industry’s growth is likely to remain sluggish in coming future. However, the medium to long term outlook looks bright for industry given massive untapped demand in both rural and urban areas and gradually growing domestic economy.

The optimism generated in April 2013 owing to Etihad’s 24 per cent stake-buy in Jet Airways soon dissipated. It was because of  both the long delay in getting the final go which came just last month, and also due to deteriorating performance of the company. SpiceJet, which has seen a sharp increase in its debt level, has been rumoured to be scouting for a foreign investor, but has not been successful so far. Both these airlines are now saddled with massive debt and accumulated losses, which have resulted in their networth turning sharply negative. Kingfisher, meanwhile, shows no signs of revival.

Only IndiGo and GoAir have been reported to be profitable last year. Another shakeout in the sector may be on the cards, especially with the competitive intensity increasing – AirAsia has taken to the skies and Tata-SIA is waiting in the wings.

Some positives for Aviation industry

24 Airports Identified for Development as Domestic Air Cargo Terminals: Airports Authority of India (AAI), is planning to develop domestic cargo terminals throughout the country. In this regard, AAI has identified 24 airports for development of domestic cargo terminals. During the year 2013-14, all operational airports taken together, as far as freight is concerned, maintained over 2 million MT mark (1.4 million MT international and 0.8 million MT domestic); specifically freight handled was 2279.12 thousand tonnes, which indicates an increase of 4% over the previous year. At a growth rate of 5% by 2017-18, it is forecasted to touch 2796 thousand MT and at a growth rate of 8.2% beyond 2017-18, it is forecast to touch 4142 thousand MT by 2022-23.

Hike in railway fares likely to encourage some railway passengers to shift to air travel: The gap between rail and air fares will narrow further after the 14.2% rail tariff hike on June 25, an event that could encourage some railway passengers to shift to air travel. The hike comes at a time when air carriers have been indulging in massive fare wars as a shot in the arm to a stagnant air travel market. After implementation of the hike, a 2-tier AC ticket of Mumbai-Delhi Rajdhani Express in the month of August is priced at Rs 2,511. A SpiceJet flight ticket on August 19 costs Rs 3,564.

Aviation minister urges states to cut jet fuel tax: Civil Aviation Minister Ashok Gajapathi Raju had asked states to cut jet fuel tax, which makes it difficult for the country’s struggling airlines to stay profitable.

Budget expectations:

Indian aviation sector, which is facing turbulent times for the past few years on account of rising fuel costs and increasing competition, made several proposals to Prime Minster Narendra Modi to bring changes to the ministry as the BJP-led dispensation is being prepared for the general budget for 2014-15. The aviation industry has demanded the following to revamp aviation industry:

Declared Goods status to ATF: The major contributor to the high prices of ATF is the VAT levied by various State Governments ranging from 4% to 30%. The Industry expects ATF to be classified as ‘Declared Goods’ category under CST Act with a uniform application of 4% VAT all over the country. This will facilitate emergence of Indian Airports as ‘Hubs’ and stabilise ATF prices across the country which will lower tariffs for passengers.

Rationalise taxation of MROs: The industry is expecting provision for tax incentives for ‘Maintenance, Repair & Overhaul (MRO)’ in India, which reduces Airline’s operating and maintenance (O&M) costs. The MRO business in the aviation sector has huge potential to attract foreign investment. It is desirable to exempt the MRO services from imposition of service tax. Tax exemptions for MRO setting-up would be a direct step towards cost-cutting for already bleeding airline sector.

Exemption on aircraft engines from customs duty: The Industry has also sought exemption of aircraft engines from customs duty. The exemption, which was withdrawn in 2012, should be reinstated.

Infrastructure status: Association of Private Airport Operators (APAO) has also demanded infrastructure status for airport support services and sought various tax benefits in the first Union Budget. The Industry has suggested that Central Board of Excise and Customs should amend the law on allowance in bad debts in the infrastructure sector to provide relief to the service providers.

Additionally, it has demanded that the hike in withholding tax from 10 to 25 per cent should be withdrawn. APAO has suggested that private airport operators should be allowed to issue tax-free bonds for creation of aviation infrastructure as was allowed in Railways, power, housing and highways development.

Outlook

The potential of the Indian aviation industry is enormous. The market already has about 150 million travelers passing through its airports, with enough capacity to grow further. By 2020, traffic at Indian airports is projected to touch 450 million. Furthermore, India’s aviation industry supports about 0.5 per cent of the Indian GDP and close to 1.7 million high-productivity jobs. The annual value added by an employee in air transport services in the country is nearly 10 times greater than the average Indian employee. Moreover, the Indian aviation sector is likely to see investments totalling $12.1 billion during the Twelfth Five Year Plan. It aims to boost MRO business in India, which is currently worth $500 million and is estimated to grow over $1.5 billion by 2020.

However, ATF is much costlier in India than in many other countries, primarily due to higher taxes on the fuel levied variably from 5 to 30% by different States. Higher oil prices due to the latest Iraq crisis also does not bode well for the sector. If the budget grants ‘declared goods’ status to aviation turbine fuel (ATF), enabling a flat 4 per cent sales tax across the country, it will provide much-needed relief to the sector.

Emerging out of a turbulent phase, marked by legality of 3G roaming agreements, one-time spectrum cost, reframing of allotted spectrum in the 900 MHz band, Indian telecom industry definitely seems to be in better position, with competition abating and normalcy returning to market. However, there are prevailing issues, which still call for attention, vis-a vis, lack of investments, high debt, varied business, operations & monetization models, lack of visionary teams, etc.

Meanwhile, consolidation continued in the sector, with the latest development being NTT DocoMo’s decision to exit Tata Teleservices, which if materialized would further accelerate the speed of consolidation in Telecom sector. Additionally, Bharti Airtel has also entered into strategic agreement with Loop Mobile to acquire latter’s subscribers, as well as some of its assets, for about Rs 700 crore. Competition, which subsided in the telecom space after the cancellation of 122 licenses by the Supreme Court in February 2012 and brought down the number of players from 14-16 to 8-9 in a circle, has also brought down the pricing power for these firms. However, still the Indian telecom market is overcrowded as compared to global markets, which just have around 3-4 players and mobile rates in India are cheaper.

Performance of the Industry:

Continuing its gaining streak for sixth consecutive month, India’s telecom industry witnessed addition in wireless segment for March and also performed better on Q-o-Q basis. The wireless subscriber base increased from 2642.91 million in Q3FY14 to 2701.18 million in Q4FY14, registering growth of 2.20% on sequential basis. This was on the back of growth in quarterly additions from 15.71 million in previous quarter to 18.22 million in the just concluded March quarter.

Telecom Industry, which has faced turbulent headwinds for a while is badly looking for some relief from the new government, which is considered to be business and investor friendly. The industry has presented their wish-list:

A consistent, stable and transparent regulatory environment: last few years of telecom industry has been a royal mess, with sometimes the rules of the game getting changed in the middle of the game. Hence, the industry wants certain norms in areas such as foreign investment, spectrum fees, taxes, license validity and spectrum auctions, to remain the same for at least a few years. The industry wants swift and conflict free decision from various government ministries like Department of Telecommunications (DoT) and the independent agencies like the regulator, TRAI.

Batteries used in telecom infrastructure to be eligible for 65% depreciation: The batteries used in telecom infrastructure, which get clubbed in the plant and machinery category along with towers and shelters are eligible for 15% depreciation as per present rules. However in a note prepared by Federation of Indian Chambers of Commerce and Industry (FICCI), underscored since the economic life of battery is approximately three years, post to which compulsorily replacements is required, as a result of which these companies are able to claim only 38.6% depreciation (15 percent tax on written down value method for three years). Hence, the industry body has called for 65% rate of depreciation to be charged for these batteries to allow the cost of recovery.

Tax benefits under section 35AD of the Act: The industry body also called for tax benefits under section 35AD of the Act by providing investment linked incentives for tower infrastructure service providers (TISPs), which would lower the cost of services offered by TISPs and would thus help in achieving the government’s goal of providing affordable telephony.

No tax to be deducted at source for service fee payment made to TISPs: The TISPs provide 24×7 power supply, air-conditioning and access to tower sites on shared basis to multiple telecom operators in return for service income. However, the payment for such fees by the telecom operators to the telecom infrastructure service providers has not been specifically covered under the existing TDS provisions and thus creates an ambiguity on its applicability. As a result, of which tax is deducted at source by the telecom operators at a higher rate of 10% under section 194-I of the Act to avoid penal provisions under the Act in case of noncompliance of stringent provisions of TDS and resultant disallowance of expenditure. Hence, the industry wants the new government exempt tax deducted at sources for payments of service fee made by telecom operators to TISPs.

Revision of mergers & acquisitions (M&A) policy: The existing M&A guidelines formulated a few months ago need a revision. Currently, they allow two or more entities to merge as long as their combined revenue and subscriber base does not exceed 50% in any telecom circle. Now this sounds logical but there is also a dampener in these guidelines. The 50% rule is good for avoiding monopolies but any payout to the government other than mandatory taxes in an M&A deal are irrational. The industry has demand that this rule must be completely withdrawn from the M&A policy, since this acts as a major deterrent for the bigger telcos that otherwise wanted to buy out the smaller companies. Hence it is also not surprising that other than Bharti Airtel’s acquisition of Loop Mobile, no major deals have been announced in the telecom sector.Above are some of the most important points that are part of wireless telecom industry’s wish list for the new regime in India. None of these should be very difficult to achieve, although implementation timelines could vary.

Outlook

Outlook for India’s telecom industry is positive as the sector is set for a transformation in the ongoing financial year, which will see it leap from a chronic spectrum crunch to an abundance of the airwaves, which though will add to the debt burden of these mobile phone companies, but will also offer them opportunities to follow global business models and offer data services across radio frequency bands.

Additionally, improving regulatory conditions and return of pricing power are also positive for the industry. On the reform front, the industry cheered the FDI policy in the sector which allowed 100% FDI subject to FIPB approval and other national security requirements, while its long wait was over with the release of final merger and acquisition norms. Further, the industry now awaits policies on spectrum-sharing and spectrum, which would be announced post the new government takes office on May 21. Lastly, with bated breath also have its eyes set on the new minister and policy news account of dependence on regulations for its survival and growth.

Industry Performance

The textile industry is primarily concerned with the design, manufacture, trade and distribution of fabrics. Presently, Indian textile industry has become one of the most vital industries in the country in terms of output, employment generation as well as foreign exchange earnings. Indian textile growth has been mainly driven by the strong domestic consumption as well as export demand. Some eminent industry side advantages like High operational efficiency in spinning and weaving, low-cost skilled labour and easy availability of raw materials all have provided the much needed platform to boost the industry’s growth.  On the other hand, domestic textile consumption has been increasing at high rate on account of growing population. Further, the factors like changing lifestyle, rising incomes and increasing demand for quality products have also become key growth drivers for domestic textile market. The present market size of the industry stands at around $90 billion, which is expected to touch $220 billion mark by 2020.

After witnessing a sluggish growth over the past two years, Indian textile industry has shown some improvement in the FY14 on both domestic as well as exports front. Segment wise, man-made fibres production increased by 4.20 percent to around 1316 Million Kgs in FY14 from 1263 Million kgs in the FY13. India’s spun yarn production increased by 9.20 percent to 5,316 Million Kgs in FY14 from 4,868 Million Kgs in the previous fiscal. Furthermore, Indian cloth production witnessed a growth of 2.21percent to 63,319 Million Square Meters in FY14 from 61,949 Million Square Meters in the previous fiscal.

Textile industry seeks more fund allocation under TUFS from the Budget

The Confederation of Indian Textile Industry (CITI), in its pre-budget memorandum’ 2014-15, has asked the government for increasing the fund allocation under the Technology Upgradation Fund Scheme (TUFS) so that industry players can operate without any problems during the entire 12th Five Year Plan period. The government had approved the continuation of TUFS for the 12th Plan period (2012-17) with a budgetary allocation of Rs 11,900 crore.

Industry body also suggested the government that annual allocation for the scheme may be kept at the maximum possible level in order to ensure prompt disbursement of TUFS assistance to the industry.

The CITI has also asked the government for reduction in excise duty from 12 percent to 8 percent to enhance the production and consumption of man-made fibres in the country.

Presently, Indian textile industry is facing stiff competitions from countries like China, Bangladesh and Sri Lanka. Therefore, domestic industry requires constant modernisation of plants and machinery in order to remain competitive in global markets.

Outlook

Over the past one decade, industry has been witnessing a significant growth in domestic as well as global markets. Growing population, changing lifestyle, rising incomes and increasing demand for quality products have also become key growth drivers for domestic textile market. On export front, factors like increased competitiveness in key areas like technology and manufacturing have been significantly adding to exports’ expansion. After witnessing a sluggish growth over the past two years Indian textile industry has shown some improvement in FY14. In the near term, Indian textile industry is likely to surge on the back of strong growth drivers.  Further, if industry demands for Budget 2014-15 get fulfilled, these would provide further impetus to the industry in future.