Great expectations

Besides addressing the inflation problem, the Budget is likely to focus on infrastructure and agriculture.

It is once again that time of the year when the focus of everyone—be it the common man or the industrialist--shifts from Mumbai to Delhi, from Dalal Street to the Parliament, as the Finance Minister unveils the Budget.

But this year’s Budget is going to be tough for Finance Minister P Chidambaram. The economy is growing at a scorching pace, but inflation levels are also hitting multi-year highs.

Thus, a balance between sustaining growth and controlling inflation is going to be a Herculean task. This is also evident from the behaviour of the market last week, which tanked by 723 points or 5 per cent as there is a growing concern how the finance minister would be able to balance both.

Though there are high expectations among industry players, sectors like automobiles, cement, infrastructure, power, banking, oil and gas, agro-based, textiles, sugar and paper are expected to be in focus.

“We broadly expect the government to deploy more money in agriculture and in the development of agriculture infrastructure,” says, Raamdeo Agrawal, managing director, Motilal Oswal Securities.

“Today, 65 per cent of the population is leaving in rural areas and most of them are directly and indirectly involved in agriculture business. With rising revenues, the government can afford to focus on the agriculture sector,” adds Dinesh Thakkar, CMD, Angel Broking.

Here is a closer look at what industries and analysts expect from the Union Budget 2007-08.

Automobiles The industry demands rationalising excise duty of 16 per cent for all cars and not just small cars (at present all cars except small cars attract a duty of 24 per cent). However, this seems unlikely.

Industry players need more clarification on the definition of a small car as in the last Budget, it was defined both in terms of length (ie under 4,000 mm) and engine size (1,200 cc for petrol-1,500 cc for diesel), while the Auto Mission Plan has defined small cars only by length (under 3,800 mm).

Two- and three-wheeler players have been hankering for lowering the excise duty from the current 16 per cent to 8 per cent though analysts feel it is unlikely that the government would go the full length.

The extension of R&D tax benefits beyond March 31, 2007 is a strong possibility and will be a positive given the accelerated rate of product launch in a fiercely competitive market.

Key policy pronouncements could also be made regarding the macro environment in line with the Auto Mission Plan. The emphasis on auto parks and specially designated SEZs for automobiles reflected in the mission plan could see some fiscal sops on this front.

Concessions for exports of components, small cars and multi-utility vehicles and tractors could also be a key positive for volume growth. Some movement on the demand increase in the motor vehicle depreciation rate from 15 per cent to 25 per cent should also prove a key positive for industry.

The auto-ancillary segment too has its own wishlist of revising the abatement of parts and components at higher levels (currently 33.5 per cent) and maintaining customs duties at the present level.

A reduction in the peak customs duty on components from the current 12.5 per cent, which appears probable in the light of the government's resolve to move towards Asean rates, could mean that while OEMs could source cheaper imported components, domestic components makers would face increased competition especially from their east Asian peers.

Banking and finance In order to ensure greater availability of resources to meet the rising demand for credit, analysts feel that the lock-in period of the investment in the term deposits eligible for tax deduction under section 80C may be reduced from five to three years.

There are expectations that the earlier 80L tax exemption on interest income may be restored and that the limit for tax deducted at source may be increased to Rs 10,000 from Rs 5,000.

Kotak Securities expects that perpetual non-cumulative and redeemable cumulative preference shares in Tier I and II capital respectively should be allowed in order to improve the capital adequacy ratio ahead of Basell II norms.

Cement, construction and infrastructure With government donning its anti-inflation gear, the tight cement price situation has come under the scanner in recent times. However, little action is expected on this front as the import duty on cement was removed only last month.

The cement sector feels that it is highly taxed with excise alone equivalent to at least 32 per cent of the ex-factory price. Hence, the key industry demand is to reduce the specific excise duty of Rs 408 per tonne at present to Rs 250 per tonne. While it is unlikely that the government will meet the demand entirely, there could be some reduction given the government’s concerns over the price situation.

There is a strong likelihood of a reduction or even a phase-out of import duties of 10 per cent on pet coke-a key alternative to coal. There could also be cut in import duties on coal.

Other key expectations include a reduction of royalty on limestone, presently at Rs 45 per tonne, in line with other commodities and excise duty exemption for cement supplied to SEZs and a phase-out in the levy on captive power generation.

The strong focus on infrastructure could see some action on the customs duty front for construction equipment.

The key industry demand for increasing the proportion of Viable Gap Funding, which is a one-time or deferred grant, provided with the objective of making a project commercially viable, presently at 40 per cent could be increased, which will mean entry of more private players in infrastructure projects.

The other key demand is to extend tax benefits for infrastructure projects other than power and BOT projects (like pipelines) as also the exemption from application of minimum alternative tax applicable to infrastructure companies.

Fertilisers The fertiliser sector is expecting simplification of rules for claiming duty exemption on input such as naphtha, fuel oil and ammonia. It also expects concessional duty of 5 per cent on import of urea to manufacture complex fertilisers.

FMCG In the processed food and ready-to-eat food category, the industry is expecting the exemption of duty which is currently about 8 per cent.

The industry also demands a tax break and other incentives for setting up food processing industry in the form of 100 per cent tax deduction in first 10 years. The paints industry expects a cut of 2.5 per cent in the import duty on titanium dioxide, which is the single largest raw material.

There are expectations that cigarettes will come under the value added tax regime this year.

At present, there is a 4 per cent additional excise duty on cigarettes, which could be removed and VAT implemented. As long as the excise duty or VAT increases by up to 5 per cent, cigarette companies should be fine. But if the VAT rate is 12.5 per cent, it could affect cigarette volumes negatively.

Hospitality The hotel industry expects the Budget to give it infrastructure status as that would entail hotel projects to attract a 10-year tax holiday.

Analysts expect the current 10 per cent rate of depreciation to be raised to 20 per cent, which will result in lower taxes for hotels.

In a drive toward rationalisation of service tax, Kotak Securities expects hotels to be exempted from paying service tax on services received from foreign tour operators and travel agents, whose services are received outside India.

There are expectations that the luxury tax is made uniform across all states, and that it should be charged on the actual billed amount. Emkay expects luxury tax to be capped at 10 per cent.

Information technology Software exports from units located in SEZs are exempt from taxes for ten years in the following manner: for the first five years, 100 per cent of income from export, while for the next five years, 50 per cent of income from export is deductible from taxable income.

Software exports are also exempt from tax until FY09 under section 10A/10B, a provision, which the industry expects to be extended for another 10 years. However, analysts believe this may not come through.

The information technology (IT) industry expects the concessions given to software exports from special economic zones (SEZs) to be extended to software technology parks (STPs), as per Man Financial.

According to Sharekhan, if the tax exemption on STP units is not extended to SEZs, the effective tax rate is expected to increase to 18-24 per cent range, up from 11-17 per cent depending upon the proportion of income from exports and contribution from the domestic business. This would result in lower net margins to the extent of 150-300 basis points.

Kotak Securities expects an exemption of genuine business expenditure from the fringe benefit tax. The industry also expects a withdrawal of service tax on the maintenance or repair of software.

Media Sharekhan expects a reduction of customs duty on import of capital goods in line with the reduction in peak customs duty, which is currently up to 36 per cent. This would be beneficial to the entire media industry as it would reduce set-up costs.

According to Kotak Securities, such a move would encourage growth of segments like digital exhibition, which would in turn reduce revenues losses incurred due to piracy and boost tax collections.

Man Financial expects the print media to come under the service tax net, in order to bring parity between print and electronic media, as the latter pays service tax on advertisement revenues of 12.24 per cent per cent tax.

The industry expects a reduction in excise duty levied on equipment like set-top boxes (STBs) from a normal rate of 16 per cent to nil, which would bring the rates applicable on broadcasting equipment on par with telecommunication equipment, and encourage domestic production of STBs.

Further, Kotak Securities expects a correction of this anomaly created last year as there was a reduction in customs duty from 15 per cent to nil on STBs but there was no corresponding reduction in import duties on inputs used in the manufacture of STBs.

Metals Broking houses do not expect any significant measures for the industry as duties on many were recently reduced on January 23, 2007. Customs duty for most of the key metal products like aluminium, zinc, copper, tin and ferro-alloy stainless steel was reduced to 5 per cent from 7.5 per cent.

However, they expect reduction in the excise duty in general in order to rein in inflation. If the duty on on copper concentrate is reduced, copper manufacturers will do better.

Oil and Gas In a bid to reduce fuel prices, the oil ministry is seeking cuts in taxes and duties levied on retail petroleum products as well as energy exploration.

Gas pipelines and exploration activities are expected to be granted an infrastructure status, which would entail them to income tax benefits.

Kotak Securities also expects a concession in service tax on companies offering drilling, surveying and offshore vessels services.

Add to this, a reduction in project import duty structure for infrastructure projects in petroleum sector would help curb inflation of project costs of refineries due to taxation, given the fact that petroleum product exports are the largest commodity exports from the country.

Further, the industry expects a rationalisation of customs duty structure, which currently varies across different petroleum products. A 5 per cent customs duty is levied on crude oil, 7.5 per cent on petrol and diesel, 10 per cent on air turbine fuel and 5 per cent on naphtha, at present.

Rationalisation of excise duty on petrol and diesel is sought as well, from a structure of a percentage of cost plus fixed rate to a specific duty of Rs 15.92 a litre for petrol and Rs 6.08 a litre for diesel, according to Kotak Securities.

Man Financial expects a cut in excise duty on naphtha and fuel oil from the current level of 16 per cent. Again, there is a scope for making the sales tax structure uniform at a rate of 4 per cent, which is up to 29 per cent for diesel and up to 20 per cent for petrol in a number of states at present.

Petrochemicals and chemicals There is a possibility of a cut in import duties on purified terephthalic acid and mono ethylene glycol t o 5 per cent and that on polymer to reduce from the current 5 per cent.

Analysts also expect a cut in the excise duty on polymers (15 per cent now), fibre intermediaries (15 per cent) and polyester (currently at 8 per cent) to around 5-10 per cent.

As regards chemicals, analysts expect a review of the excise and customs duty of 16 per cent and 10 per cent respectively on caustic soda and soda ash.

Pharmaceuticals One of the key demands of the sector includes reduction of MRP based excise from 16 per cent to 12 per cent and increase in abatement to 52 per cent. The latter seems unlikely as the government recently increased the abatement from 40 per cent to 42.5 per cent.

The extension of the income tax benefits on R&D expenditure (150 per cent weighted deduction) beyond March 2007 for another five years is a strong possibility.

Others demands include a reduction in customs duty on raw materials for molecules from the current 12.5 per cent to 5 per cent and tax concessions on milestone payments received on new chemical entity out-licensing.

Service tax exemption on clinical trials and other scientific services for foreign clients is also another demand if fulfilled which would boost domestic companies wanting to take advantage of the contract research opportunity. On the customs duties front, an exemption on life-saving drugs looks a strong possibility.

Power and engineering Broking houses expect a lot from the Budget for the power sector. Emkay Shares and Stock Brokers feels that power equipment players will gain if duty on raw materials on power generation, transmission and distribution are reduced from the current 16 per cent to 14 per cent.

Kotak Securities expects duties on project imports to be reduced from 12.5 per cent to 7.5 per cent and the Accelerated Power Development and Reform Programme (APDRP) scheme to be continued.

Edelweiss Securities says that if the concessional zero customs duty structure is extended to transmission projects associated with mega power projects, power transmission players will benefit.

If the Budget provides infrastructure status to the power generation and distribution sector, power equipment players and even companies in the capital goods and engineering sectors will gain.

The engineering and capital goods industry, which was reeling under pressure of rising input costs, had benefited in the previous Budget as customs duty of major inputs like aluminium and copper had reduced.

Thus, broking houses don't expect any measures on this front except increased allocation of government spending on infrastructure, which is positive for the industry. Emkay Shares and Stock Brokers feels that excise duty on earth moving and construction equipment may be reduced from 16 per cent to 8 per cent.

Sugar Depressed by supply and compressed by margins, the Indian sugar industry is expecting this Budget to announce some sweet initiatives.

Indian Sugar Mills Association (ISMA), the apex body representing the sugar industry, has proposed to reduce the excise duty on molasses and to be levied at 8 per cent of the selling price of the molasses.

Sugar companies pay excise duty on a fixed basis of Rs 750 per tonne of molasses, compared with the final prices of molasses at about Rs 1000 in some states.

Besides expectations of a quicker implementation of ethanol blending at 10 per cent in fuel, the industry wants ethanol to get infrastructure status.

Telecommunications The telecom industry expects a rationalisation of license fee revenue sharing which varies from 6-10 per cent in different circles to a uniform rate of 6 per cent across the country. However, this is unlikely.

Analysts also expect an increase in service tax levied from telecom operators from the current level of 12 per cent. These changes however, may not impact the revenues of the operators, as they would be passed on to the consumer.

Mobile handsets attract an additional customs duty of 4 per cent at present, which the industry expects to be removed.

Textiles In order to make the Indian textile industry more competitive in the global market, Kotak expects the deadline for Technology Upgradation Fund to be extended to March 2012 from the current March 2007.

It also recommends that the excise duty on man-made fibre to be reduced from 8 per cent to 4 per cent to bring parity with cotton yarn, and that on mono ethylene glycol (key input for man-made fibre) from 12 per cent to 8 per cent to make it the same as on purified terephthalic acid.

Sharekhan Highnoon dated February 26, 2007

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Edelweiss - PCG DAILY MARKET CALL 26-FEB-2007

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PowerYourTrade Trading Calls

Ashwani Gujral
Sell Ranbaxy Labs with stop loss of Rs 375 for target of Rs 250
Sell Century Textiles with stop loss of Rs 586 for target of Rs 350.

Deepak Mohoni

Short sell IndusInd Bank above Rs 48.25 with stop loss of Rs 49.25. This is a day-trading recommendation
Buy Sesa Goa below Rs 1900 with stop loss of Rs 1860. This is a day-trading recommendation.

STRATEGY INPUTS FOR THE DAY

Not again…a Manic Monday

If we increase freight rates, the goods will move through the roads and the condition of the roads will become worse – Railway Minister Lalu Prasad Yadav.

The condition of most roads are bad enough and so are the condition of the bulls. They have been at the receiving end and are likely to remain under pressure at least in the near term owing to rising inflation and hardening interest rates. All is not lost yet though. The FIIs can resurrect the market. But, it appears they are perhaps waiting for the budget to be out of the way before taking a fresh call on India. Having seen a fall before the budget, expectations are the market need not crack post the budget. Remember, despite the fall, valuations are not cheap as yet. Unless inflation comes down sharply and there is some stability in interest rates, the undertone may continue to be weak.

As for today, we expect a cautious opening on the back of Friday's plunge. Any further weakness at start could result in margin calls and have a cascading effect. Some stability will bring about bottom fishing as the main indices were down 5% each last week. Friday's provisional FII figure of Rs3.43bn in the cash segment could prove to be the savior for the bulls. Our advice is don’t get trapped in any relief rally.

Another positive could be Reliance Industries. The company is making a Rs15bn preferential issue to Mukesh Ambani to raise funds for future expansion. This will lead to a further hike in the promoters' stake in the company when the warrants are converted into equity shares. Also, coming at a time when the stock is close to its all-time high augers well for investors and for the market.

Banking shares may also rebound after the RBI said it will pay interest on CRR for the second half of 2006 and for the period starting Feb. 17. Dena Bank and Canara Bank will be among the stocks to keep an eye on following reports of a possible merger between the two state-owned banks. The banks and the Finance Ministry have denied any such move though.

Cement stocks could continue to underperform amid fears of some unfavourable announcements from the Government for the sector. Some incentives in the railway budget may perhaps bring temporary relief to the cement counters.

Ahluwalia Contracts is likely to fall amid reports that SEBI will probe into the sharp rise in the stock on listing last week.

FIIs have been net sellers in the last couple of sessions in the cash segment. With this, their tally for the month works out to around $877mn, which is actually not bad considering the crash in the market. Mutual Funds were net buyers of just Rs7.56mn on the same day.

Foreign funds offloaded stocks worth Rs13.47bn in the F&O segment on Friday.

3M India, NEPC Textiles and Visaka Industries will announce their results today.

Shares of C&C Construction will get listed today on the bourses.

From the Research Desk - PSL

PSL Ltd. (Q3FY07): Result Update

During the quarter the company executed orders of GAIL, Reliance and some other small orders. More than half the contribution to topline during the quarter has been from GAIL and Reliance. This helped the company register a 22.2% topline growth to Rs4.9bn in Q3FY07 against Rs4.1bn in the corresponding last year. For 9MFY07 the company registered topline growth of 10.4% to Rs11.8bn against Rs10.7bn last year. There was an improvement in bottomline by 54.5% and 47.2% for Q3FY07 and 9MFY07 respectively. This translates into nine month annualized EPS of Rs20.5.

The company has a healthy order book of Rs15bn as on December 31, 2006 majority of which will be executed over the next couple of quarters. Order book consists of orders from GAIL, Reliance and L&T in addition to exports (~20% of current order book) and other smaller orders. Of this orders worth about Rs1.5bn from GAIL and Rs2.5bn from Reliance will be executed over the next quarter. The order book consists of orders from oil & gas and water sector. With continued emphasis being on developing infrastructure for oil & gas and water transportation orders for the sector are expected to keep on flowing.

Robust order book coupled with expanded capacities will facilitate strong growth going forward. With industry demand scenario appearing good for the future especially for large diameter pipes the company is well positioned to take advantage of it. We expect the company to not only gain orders from the domestic arena but also from global markets. Pipes are amongst the most economical medium of transportation for high value commodities i.e. oil and gas, as they can transport large volumes thereby reducing cost. PSL is appropriately positioned to benefit from this development as it is amongst the foremost manufacturers of HSAW pipes in India who offer large diameter pipes. To add to its competitiveness the company’s 11 mills are strategically located across India in close proximity to the ports enabling it quick deliveries and reducing transportation costs. With the scenario for the pipes industry remaining robust over the longer term, our broad calculations indicate the company to close FY07E with an earnings of Rs21.9 and FY08E with 26.2.

Market Watch

Insider Trades:
Lloyd Electric & Engineering Ltd: (i) Morgan Stanley & Co. International Ltd. a/c Morgan Stanley Dean Witter Mauritius Co. Ltd (ii) Morgan Stanley & Co. International Ltd a/c Morgan Stanley Investment Mauritius Ltd has purchased from open market 50000 equity shares of Lloyd Electric & Engineering Ltd on 19th February, 2007.

Market Volumes:
The turnover on NSE was 13% to Rs103.3bn.BSE Bank index was the major loser and lost 3.42%. BSE FMCG index (down 3.35%), BSE Technology index (down 3.22%) and BSE Pharma index (down 2.65%) were among the other major losers.

Volume Toppers:
PFC, IFCI, Firstsource, TTML, SAIL, IDBI, ITC, India Cement, Tata Steel, Hindalco, R Com, Ashok Leyland, Satyam Computer, IVRCL Infrastructure, Cinemax India, Reliance Industries and HLL.

Lower Circuit Filters:
Amara Raja, Unitech, GMR Industries, Kesoram Industries, Nelco Ltd, Classic Diamond, KRBL, Fedders Lloyd, Swan mills, Nesco, Alps Industries, Ansal housing, BSEL Infrastructure, Crew BOS and Country Club.

Long Term investment:
Valecha Engineering.

Major News Headlines:

ICICI Bank raises Deposits, Lending rates by 50 basis points

Nitco Tiles to raise funds up to Rs2.5bn by way of FCCBs/GDRs/ADRs/QIP

Pratibha Industries to raise Rs2bn by way of QIP

Atlanta withdraws record date for stock split

Sterlite Optical gets contracts worth Rs1.5bn from power Grid Corporation of India

House of Pearl acquires new warehouse in UK

HOW MARKET FARED

All eyes on Budget

The bulls again were on the receiving for fourth straight trading session. The markets corrected sharply ahead of an important event ‘The Union Budget 2007’ next week. All round selling pressure in the scrip’s across the sectors dragged the benchmark Sensex to hit an intra-day lown of 13568.08. The key indices traded in red throughout the session all the key indices closed in negative territory with BSE Bank index being the major loser losing 3.42%. Finally, the BSE 30-share Sensex plunged by 388 points to close at 13632 and NSE Nifty dropped 101 points to close at 3938. Grasim, Bharti Airtel, ACC and ICICI Bank were among the major losers. However, GAIL, Tata Steel and Reliance industries were among the major gainers outperforming both the key indices today.

ICICI Bank lost over 4% to Rs907. The company raised deposits and lending rates by 50 basis points. The scrip touched an intra-day high of Rs954 and low of Rs892 and recorded volumes of over 17,00,000 shares on NSE

Pratibha Industries declined 5% to Rs183. The company announced that they would raise Rs2bn by way of QIP. The scrip touched an intra-day high of 195Rs and low of Rs183 and has recorded volumes of over 12,000 shares on NSE.

Apollo Hospital was down 1.8% to Rs491. According to reports the company is eyeing UK-based Abbey Hospitals. The scrip touched an intra-day high of Rs505 and low of Rs490 and recorded volumes of over 87,000 shares on NSE.

Hexaware dropped over 2.5% to Rs161. The company is reportedly looking at buying an IT firm in Europe or the US. The scrip has touched an intra-day high of Rs170 and low of Rs160 and has recorded volumes of over 1,00,000 shares on NSE.

Pharma stocks stocks were in poor health today on back of profit booking. Ranbaxy dropped over 3% to Rs356, Sun Pharma slipped 3% to Rs974, Cipla dropped 2.5% to Rs241 and Dr Reddy lost 3.5% to Rs681.

Capital Good index was also on the receiving end. Punj Lloyd plunged by over 6% to Rs830, L&T fell over 2.5% to Rs1611, ABB declined 2% to Rs3708 and BHEL was down 0.8% to Rs2276.

Technology stocks ended lower, the indeed fell over 3%. Heavy weights like Wipro fell over 4% to Rs623, Infosys was down 2.2% to Rs2237 and Satyam Computer slipped 2% to Rs449. Rolta, Mastek and Polaris were the major losers among the Mid-Cap stocks.

Edelweiss Daily Market Outlook

Market Snapshot

The Sensex opened with a positive gap of 50 points at 14,071, but selling pressure forced the index into the negative zone. Unabated selling, mainly in bank, cement and pharma stocks, saw the index drift to lower levels as the day progressed. The index tumbled to a low of 13,568 before finally settling with a significant loss of 389 points at 13,633. Nifty lost 101 points to 3,939.

The NSE cash volumes were significantly lower compared to the previous day at INR 103 bn while the BSE cash volumes were better at INR 45 bn. The F&O volumes were significantly lower compared to the previous day at INR 359 bn.

Sentiment Indicators

The Implied Volatility (IV) across Nifty strikes has increased to 27-29% levels. The WPCR of Nifty Options decreased to 0.84 compared to the previous day while the 5 day average is 1.07. The February futures are now trading at 5 points discount. The Nifty Futures OI has increased by 11%.

Outlook

Nifty breached crucial trend line support of 3965 on the last trading session. The tone of the market is of abundant caution before the fiscal budget and we expect volatile movement to continue after last week’s fall. Significant OI addition was seen across strikes in the Nifty puts signaling hedging of long positions. At the same time, call IVs have decreased slightly indicating covered calls being written in the market.

Also, Rail Budget will be announced today. Any kind of positive surprises on Capex front would augur well for the market and might trigger small pull back till Union Budget is announced on Wednesday. Capital Goods and Engineering sector is expected to see lot of action today on expectations of Rail Infrastructure Capex. High metals prices at LME will strengthen metal stocks.

A close below 3965 indicates intermediate term bearishness as predicted. It completes the bearish lower top, lower bottom pattern. The immediate support of Nifty is 3880 and the next at 3880. On the upper side Nifty has a resistance at 3965, followed by 4014.

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Outlook remains weak

Fears over inflation nearing to its two years high and the Sensex losing over 1000 points in the last three weeks may keep the bias negative. The market is also worried about the Union budget, which is expected to remain populist and profit booking on any rise is also cause of concern which may keep the market volatile. Mixed Asian markets in the morning trades also likely to keep pressure on investors sentiment. Among the domestic indices, the Nifty could test 3900 and below this level may slip to 3850, while on the upside it could edge higher to 4050. The Sensex has a likely support at 13568 and may face resistance at 13780.

The Nymex light crude oil for April delivery rose 19 cents to close at $61.14. In the commodity space, the Comex gold for April series gained $3.70 to settle at $686.70 a troy ounce.

The speech Chidambaram will not make

Ten years ago I promised to reduce Indian tax rates to Asean levels, and thus become part of the Asian economic miracle. I am happy to announce that I am cutting the peak import duty to 8%, the targeted Asean level. Some people are inconveniently reminding me that I had also indicated 10 years ago that I would reduce direct taxes to the Asean level, which is now around 25%.

I cannot do this overnight for revenue reasons, but will target this rate over the next five years. For starters, I considered reducing the peak income and corporate tax rate to 30% inclusive of surcharge. But the latest Times of India poll suggests that citizens hate taxes but like cesses. So I propose to abolish income and corporate tax, and instead impose a social services cess of 30% in lieu thereof. I hope this will help us win the Uttar Pradesh election.

Our effective corporate tax rate is only 17% because of a myriad exemptions. The most unwarranted exemption is for software companies, which are not infant industries but prize athletes. I propose to levy a Minimum Alternative Cess (replacing the Minimum Alternative Tax) of 15% on all companies other than those covered by the law on Special Economic Zones. The new Minimum Alternative Cess will also apply to units in SEZs unless they export at least 85% of their output.

Our policies have yielded record GDP growth of 9.2%. I hope you agree that the entire credit for this goes to Sonia Gandhi. The economic boom has boosted tax receipts, and I am happy to announce that I have met the FRBM target of reducing the fiscal deficit to 3% two years ahead of schedule. Having said that, let me confess what serious economists have long know — that, rather like Enron, we have been hiding part of the debt in off-budget items (oil bonds, debts of the FCI).

Borrowings of the Food Corporation for political purposes like the public distribution system are logically part of the government’s own deficit, and so are subsidies to oil consumers financed by forcing oil companies to run at a loss.

Inclusive of these items, the fiscal deficit is higher by more than 1% of GDP. In the interests of transparency and accountability I propose henceforth to include these off-budget items in the official fiscal deficit, and get this consolidated figure down to 3% by 2009.

The Fringe Benefit Tax has attracted criticism because of its complexity. I know this is a bad tax, but I hate admitting that I am wrong. So I propose to give companies the choice of paying an additional 2% corporate tax in lieu of the fringe benefit Tax. Some of my Marxist colleagues want me to re-impose capital gains tax on shares.

This would be a bad idea, since prudence requires that people should churn their portfolios (constantly selling some assets and buying fresh ones), and a capital gains tax will tax such prudence. It will also place Indians at a tax disadvantage compared with foreign institutional investors.

A better way of promoting egalitarianism without affecting growth is to levy estate duty at 5% on all properties of deceased persons in excess of Rs 20 lakh. This will encourage people to save and invest in their lifetime, while ensuring that they pay their dues to society (rather than undeserving heirs) after entering the next world. It also helps that dead people do not vote.

The biggest tax anomaly is that services account for 55% of GDP but only a small fraction of taxes. I am widening the service tax net to include several categories including lawyers, so nobody can accuse me of trying to keep myself out of the service tax net.

I am also raising the level of service tax to 16%, and moving most excise duties to 16%. I hope this will lay the foundation for moving in the next four years to an all-India Goods and Services Tax levied mainly at 16%. As part of that transformation, I propose to abolish the Central Sales Tax in one go, and compensate states in full for this loss.

We spend vast sums on unproductive subsidies, of which two-thirds non-merit subsidies benefiting mainly well-off people. The fertiliser subsidy has induced farmers to use nitrogen rather than phosphorus and potassium, thus ruining the soil. Free power encourages overpumping and the drying up of drinking-water wells and shallow tubewells of small farmers. I cannot control power subsidies given by state governments. But I propose to abolish subsidies on food, fertilisers and employment programmes, and instead give a cash grant of Rs 5,000 to every family with a BPL card or Job card. That will be a more rational subsidy regime, and will also reach those most in need.

Little is known of the outcome of vast sums spent on various programmes, and I cannot trust any ministry to honestly assess its own shortcomings. So I propose to hire independent evaluators to track the actual outcome of programmes. This will give us an accurate picture of which programmes deserve to be overhauled or abandoned, and which expanded.