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Budget 2006-07: Engineering Power business contributes to a large part of the engineering sector's order books. And with the government clearing the blueprint to add 100,000 MW of electricity generation capacity by 2012, the engineering sector is likely to be a major beneficiary. Also, as part of the government's APDRP program, the states will have to unbundle the generation, transmission and distribution, and invest in T&D infrastructure. This will further augment the performance of the engineering sector. Investments in core infrastructure (roads, ports, housing and airports) shall also bolster growth for companies in the sector.  Budget Measures Estimated outlay for Jawaharlal Nehru National Urban Renewal Mission to be Rs 62.5 bn during 2006-07, including a grant component of Rs 45.9 bn. Through this mission, the government intends to promote establishment of new towns, preferably focused on a specific industry (IT) or a specific theme (education or health). Budget support for National Highway Development Programme (NHDP) enhanced from Rs 93.2 bn to Rs 99.5 bn in 2006-07. Special accelerated road development programme for the North Eastern region proposed at an estimated cost of Rs 46.2 bn approved with allocation of Rs 5.5 bn in 2006-07 1,000 kms of access-controlled Expressways to be developed on the Design, Build, Finance and Operate (DBFO) model. Capital expenditure on defense proposed at Rs 375 bn. Peak rate of customs duty on non-agricultural products has been reduced from 15% to 12.5% with a few exceptions. Exemption to specified goods for making capital goods for setting up a unit with an investment of Rs 50 m or more withdrawn. Resin binders used for manufacture of rotor blades for wind operated electricity generators exempted from excise duty. Under NELP VI, 55 blocks and area of 355,000 sq kms offered. Investment of Rs 220 bn expected in the refinery sector in the next few years. Five ultra mega power projects of 4,000 MW each to be awarded before December 31, 2006  Budget Impact The urban renewal project is estimated to provide a big boost to Indian engineering companies, especially those operating in the construction sphere. Higher allocation to road development projects shall also benefit infrastructure-focused companies. DBFO model of developing expressways shall attract the much desired private sector participation in infrastructure development. Reduction in peak custom duty to benefit importers of capital goods used in engineering services. Rs 375 bn of proposed capital expenditure on defense to be beneficial for companies operating in the sphere. Investment in NELP VI to boost companies operating in the high-margin hydrocarbons engineering space. Investments in power sector are a major demand driver for engineering companies. As such, proposal for setting up five ultra mega power projects of 4,000 MW each is a positive.  Sector Outlook World-class infrastructure has emerged as one of the most important necessities for unleashing high and sustained growth and alleviation of poverty in any economy. And with poor infrastructure to support other growth initiatives, the Indian economy continues to be a laggard when compared to its developing peers. From a policy perspective, however, there has been a growing consensus that a private-public partnership (PPP) is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in, as seen from the slew of investment measures announced in this budget, especially on the road development and urban renewal areas. Apart from highway development and construction and modernisation of airports, the potential for the sector lies in the oil and gas space, where high global demand has led to increased action in exploration and production activities.  Industry Wish List Mr. Y. M. Deosthalee - Whole time Director and CFO, L&T Thrust on infrastructure must continue. The government must not only commit higher resources to the Infrastructure SPV but also show its eagerness to the infrastructure formation in the country if private parties are to participate. FBT rationalization is required. Companies should not be paying taxes on legitimate business expenditure not involving any personal element or privilege. Even if FBT has to stay, then it should be strictly confined to expenses incurred in relation to the employees like Employee Welfare Expenses, Motor Car Expenses, Scholarships, Gifts and Holiday Homes. Dividend distribution tax should be abolished. Even though exempt in the shareholders' hands, it still results in double taxation. Dividends received by an Indian company from a foreign company that is either its subsidiary or a joint venture, though received in foreign exchange, are taxable in India. In order to encourage investments by Indian companies abroad, such dividends in foreign exchange should be made tax-free. Corporate tax rate must be brought down. Reduction in corporate taxes will boost compliance and increase government revenues further.  Budget over the years Budget 2003-04 Budget 2004-05 Budget 2005-06 48 new road projects with an estimated cost of Rs 400 bn to be initiated. Renovation of two air ports at an estimated cost of around Rs 110 bn. Government's stress on infrastructure spending, in areas like power, construction, ports, and civil aviation Specified raw materials for manufacture of parts of cathode ray tubes and specified capital goods for manufacture of mobile handsets, plasma display panels exempted 10% rebate on railway freight rates for heavy machinery 2% education cess on all taxes A special purpose vehicle (SPV) to be launched to finance infrastructure projects that are financially viable. Investment limit for 2005-06 is fixed at Rs 100 bn. NHDP-III to be launched in FY06 to target selected high density highways not forming part of the GQ or the N-S E-W corridor; Rs 14 bn provided in FY06 to four-lane 4,000 kms. Excise duty on ACs has been reduced from 24% to 16%. [Read more on Budget 2004-05] [Read more on Budget 2005-06] Key Positives Power play: Since power utilities are one of the biggest consumers (generation, transmission and distribution) for engineering companies, reforms introduced in the power sector like privatisation of SEBs will help in strengthening the order book size. Huge addition in power generation capacity (planned 100,000 MW by 2012), in order to meet the demand supply gap will be a big positive for the sector. Infrastructure development: The government is focusing on development of infrastructure like housing, airports, roads and ports. This will be big positive for engineering and construction companies. Industrial 'act': Industrial divisions of engineering companies are likely to benefit from the increased focus on automation and capacity addition plans drawn by the India Inc.    Key Negatives Slow pace of reforms: Since the new government is planning to review some of the provisions of the Electricity Act, reform implementation could slowdown. To that extent, the order booking for engineering companies could grow at a slower rate. Captive competition: Duty free import of T&D equipments by captive power generation units, if allowed by government, can have some impact on margins of the T&D majors because of competition. Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.