The Union Budget threatens to be quite a task for the Finance Minister, Mr Pranab Mukherjee, given the backdrop of rising inflation, firming interest rates and a worrying deficit. Though we will know tomorrow how the FM plans to tackle the challenge at hand, here's a brief look at the sectors that seem to have the most to gain or lose from the Budget.

Building infrastructure

It promises to be a make-or-break Budget for the infrastructure sector, which has been out of market favour for well over a year now. This being the final year of the Eleventh Plan, the Government will be under pressure to spend more on the crucial infrastructure segments to meet Plan targets.

Balanced against this, though, is the concern on the deficit. This is why the Budget may focus mainly on opening up new avenues of private funding for infrastructure. It is widely expected to allow banks to float tax-free infra bonds, there is also anticipation on policy measures to give a push to the corporate debt market.

Such developments will be crucial to meet the projected investment of $1 trillion required to sustain economic growth rates during the Twelfth Plan (2012-2017). Note that the Finance Ministry has already readied a draft framework for infrastructure debt funds, on the lines of venture capital funds, to tap investment from foreign insurance and pensions funds.

Relaxation of external commercial borrowings rules for direct funding to infrastructure projects is also expected. Setting up of a long-term debt fund of Rs 50,000 crore (as suggested by a committee headed by Deepak Parekh) and formation of an agency to fast-track the clearances for infrastructure projects are among the expected raft of measures.

With the Plan period in mind, higher allocation to flagship programmes such as Bharat Nirman, JNNURM, APDRP, NHDP, and renewable energy resources, improved focus on road, bridges and urban infrastructure and increase in fund allocation for Defence are among the other expectations.

While the domestic industry expects selectively higher import barriers for capital equipment (specifically power), it seems rather unlikely, given the substantial slippages in achieving the Eleventh Plan targets for capacity addition. That said, the Budget may see a reduction in the import duty on coal, a key feedstock, given its rising price and huge deficit locally.

Among other expectations is the widening of the definition of ‘infrastructure' under Sec 80-IA to bring within its fold rural initiatives such as water harvesting, IT products and solar panels. Players also hope for extension of benefits under the Section for one more year, till FY12, and to third-party developers of infrastructure projects. Power generation and T&D companies typically get the benefit of tax exemption under this section.

Reintroduction of Section 10 (23G) of the Income-Tax Act, which provided tax exemption on interest and long-term capital gains in the hands of infrastructure capital companies, is also widely anticipated. While the industry is also wishing for an end to MAT, this seems unlikely at this juncture.

Banking on growth

It has been bad news all the way for banking ever since the RBI began to rethink its easy money policy. As always, it is the size and timing of the government's borrowing programme that may be a crucial profit-determinant for banks in the Budget. Given the absence of one-offs from 3G auctions, the Government is expected to be back to shopping in the bond markets for the bulk of its borrowings this year. A manageable borrowings plan and stable fiscal deficit in this regard would be positives for banks, though they appear to be a tall order now. The Government's fiscal target too will decide liquidity and interest rates for the year.

With infrastructure expected to be the among the main focus areas for the Budget this year, there is a strong lobby in favour of allowing banks also to float infrastructure bonds, as allowed for NBFCs such as Power Finance Corp, REC and IDFC. Such a move could lengthen the maturity profile for banks.

Infrastructure bond investments up to Rs 20,000 by individuals were made eligible for tax benefit in the last Budget and players are now clamouring for this to be raised to Rs 50,000 in this Budget. An increased outlay on re-financing and takeout financing is also among the other expectations.

Such a move would help the banks improve their asset-liability equations. Increase in the outlays for recapitalisation (for instance, rights offer for SBI and FPO of Indian Bank) of banks and further clarity on the grant of new banking licences to NBFCs and private players too are hoped for.

While the latter would open up opportunities for players such as IDFC, Religare, etc., that are looking to enter the banking space, it will also add to the competition for existing banks.

The hike in FDI limit in the insurance sector from 26 per cent to 49 per cent is also in the sector's much-coveted wish list. While banks are also wishing for a reduction in the tenor of tax-exempt deposits from five to three years, the move looks rather unlikely, as most other tax-saving options have longer lock-ins.

Oil & Gas to tackle friction

With the international crude oil price racing past the $100-a-barrel mark and domestic inflation seeing little respite, the Finance Minister may have to toe the middle line, acceding to and overlooking some of the industry's demands. Expectations are rife for a reduction in Customs duty on crude oil, petrol and diesel, to soften the burden of the recent crude price spurt on the common man.

The Customs duty on crude oil was increased from nil to 5 per cent and on petrol and diesel to 7.5 per cent from 5 per cent only in the last Budget. Given the steep inflationary pressures building up in fuel items and the rising subsidy bill, a reduction seems quite plausible, though it is sure to hurt the government's revenues.

Scrapping of the 5 per cent Customs duty on LNG and reversal of the Re 1/litre excise duty hike on petrol and diesel, effected last year, is also on the wish-list.

However, the key issue is the Government's stand on whether diesel prices are as yet ready for ‘decontrol', considering that the fuel alone makes up for over 60 per cent of the under-recoveries for oil marketing companies (OMCs).

While the industry has renewed its demands for complete auto fuel deregulation (as per the Kirit Parekh Committee recommendations) or at least a roadmap favouring it, the present time seems quite inopportune, given that inflation is on top of the government's agenda.

Restoration of the tax holiday for natural gas production, retrospectively, for all gas producing blocks and rationalisation of tax holiday for hydrocarbons are among the other demands.

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