Overall, we view the governments FY11 Budget proposals in positive light. Key positives are: i) the distinct message on policies and reforms; ii) a clear roadmap towards fiscal consolidation; iii) the continued move towards a simplified tax structure and removal of exemptions; iv) treatment of the earlier stimuli offered, in terms of lower excise duties, was calibrated and just about right (excise duties were raised 2%). Market expectations were low in the run-up to the Budget and fears on issues such as capital gain tax increases or a complete rollback of stimulus did not materialise. Global market volatility will likely impact India; except this, the Budget boosts our comfort with broader markets for 10 and we continue not to expect any significant downside from current levels. We believe that the banking sector, which has been one of our preferred investment ideas, has emerged even more attractive post the Budget announcement.

A distinct message on policies and reforms...We view the Budget as high on policy, with the finance minister sounding confident on implementation of the Direct Tax Code and the Good & Services Tax by April 11, and having taken steps to simplify the corporate tax structure and reduce exemptions (Minimum Alternate Tax-MAT was increased to 18% from 15%; exemptions for software export units were not extended; and surcharge was reduced to 7.5% from 10%); also, there were statements on the direction on petroleum product pricing. Personal tax was reduced somewhat, with the broadening of tax slabs. Earlier excise duty reductions were rolled back 2% (to 10% from 8%), exactly in line with market expectations.

and a clear roadmap towards fiscal consolidation. The government targets fiscal deficit of 5.5%, 4.8% and 4.1% for FY11, FY12 and FY13 respectively (this includes off-balance sheet items such as oil subsidies). We believe that the 5.5% target for FY11 was in-line or better-than market expectations. If the aforementioned targets are met, the fiscal deficit (as a percentage of GDP) would have effectively halved in four years (from 7.8% in FY09). Revised FY10 deficit estimate is 6.9% versus the budgeted estimate of 6.8%.

Key surprises. Overall, the fiscal deficit expectations soothed the markets, in our view. The increase in MAT was a negative surprise, though the impact on corporate earnings is not very large and was fairly offset by a reduction of surcharge. A steep increase in excise rates on cigarettes was a negative surprise. The fine-print on items included within the ambit of service tax has also negatively surprised real estate and rail freight are examples. We think that the Budget is positive for the financials as the expected government borrowing has not been a negative surprise and concerns of an impact on credit growth were belied. ITC will be hurt by our estimated 17% effective excise hike. Real estate, particularly commercial, will be hit by the inclusion of lease rentals, construction activity and land rent under service tax. MAT and increase in MS & HSD excise duty will hurt RIL.