CARE Ratings Budget Expectations for FY19

Transcription

1 CARE Ratings Budget Expectations for FY19 Contact: Madan Sabnavis Chief Economist Economics team: Kavita Chacko, Senior Economist Rucha Ranadive Associate Economist Manisha Sachdeva Associate Economist Shivam Kaushik Associate Economist Industry research team: Saurabh Bhalerao Associate Director (Paper, Gems & Jewellery) Darshini Kansara Research Analyst (Automobiles, tyres, Textiles, Hotels & tourism, retail) Bhagyashree Bhati Research Analyst (Telecom, Steel, sugar, edible oil, Drugs & Pharmaceuticals) Ashish K. Nainan Research Analyst (Infrastructure, Power & Real Estate) Urvisha Jagasheth Research Analyst (Aluminium, Fertilizers, Copper Oil & Gas) Mradul Mishra (Media Contact) Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/ inferences/ views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report. January 23, 2018 I Economics This publication provides CARE Rating s Budget expectations for FY19. It is divided into 2 sections. The first section includes Budget expectations from the macro-economic standpoint while the second provides expectations of various industries. The following is the structure of the Report. I. Budget Expectations for the Broader Economy A. Summary of FY18 Budget B. Performance of the Budget so far C. FY19 Budget Expectations II. Industry Wise Expectations from Budget FY19 A. Industry-wise expectations on taxes/duties, expenditure allocations and specific sector measures in the Budget : 1. Infrastructure (Roads & Highways, Ports, Cement) 2. Power 3. Real Estate 4. Automobiles 5. Tyres 6. Textiles: cotton yarn, manmade fibres and readymade garments 7. Hotels & Tourism 8. Retail 7. Telecom 9. Steel 10. Drugs & Pharmaceuticals 11. Sugar 12. Edible oils 13. Aluminium 14. Copper 15. Fertilizers 16. Oil & Gas 17. Paper B. Industry-wise GST Expectations (A general discussion which may not be part of the Budget and could be deliberated in the GST Council meeting)

2 I. Budget Expectations for the Broader Economy The Union Budget for FY19, to be presented on 1 February, 2018, is the last full budget of the current government before the general elections of 2019 and comes in the backdrop of weaker domestic economic growth (GDP growth expected to be 6.5% compared with 7.1% in FY17), lower revenue collections and rising global commodity prices which can potentially impact inflationary expectations. It is also the first assessment of the impact of the GST reform on the overall finances of the government. Starting 2017, the government has followed the practice of presenting the Union Budget on 1 February, a month earlier than that in the preceding years. The advancement of the Budget presentation by a month is being done so as to make available authorized funds for spending from the beginning of the financial year itself, as opposed to the authorized funds being available (following passage of budget in Parliament) 2-3 months into the financial year. The delay in fund authorization for spending earlier led to inactivity in various ministries at the start of the financial year. The earlier passage of the budget is also intended to make available to the government the benefits of the new tax measures i.e. higher revenues from the onset of the fiscal year. The fiscal performance and progress of the government in the first 8 months (Apr-Nov) of the current financial year has been examined in conjunction with the budget provisions and estimates that were made for FY18. This serves as the base on which we have based our expectations for the FY19 budget. Summary of FY18 Budget (A) Key Highlights and Announcements of the FY18 Budget The Railway Budget was merged with the Union Budget. The plan and non-plan expenditure classification was done away with. The 25 year old Foreign Investment Promotion Board (FIPB) was abolished with the aim to boost FDI inflows. Income tax for MSME with turnover less than Rs.50 crs was reduced to 25% from 30%. Infrastructure status awarded to affordable housing. The taxation rate for individuals having an income between Rs 2.5 lakhs to Rs 5 lakhs was reduced from 10% to 5%. Government imposed a restriction on cash transactions above Rs 3 lakh with an aim to promote digital economy. The holding period for computing long term capital gains from transfer of immovable property was reduced from 3 years to 2 years. In addition to this, a shift in base year for indexation from 1981 to 2001 was proposed. MAT credit allowed to be carried forward up to a period of 15 years instead of 10 years. The profit (linked deduction) exemption available to the start-ups was changed to 3 years out of 7 years from the earlier 3 years out of 5 years. Concessional withholding rate of 5% charged on interest earned by foreign entities in external commercial borrowings or in bonds (including Rupee denominated bonds) and Government securities is extended to Allowable provision for Non-Performing Asset of Banks was increased from 7.5% to 8.5%. Interest taxable on actual receipts instead of accrual basis in respect of NPA accounts of all non-scheduled cooperative banks also to be treated at par with scheduled banks. 2

3 (ii) Size of Budget FY18: Total Expenditure and Total Revenues Table 1: Budgeted Revenue Expenditure and Revenue Receipts in FY18 Rs Crore FY17(RE) FY18(BE) (i) Revenue Expenditure 17,34,560 18,36,934 Interest payments 4,83,069 5,23,078 Subsidies 2,60,485 2,72,276 Pensions 1,28,166 1,31,201 Salaries 4,07,000 4,38,000 (ii) Capital Expenditure 2,79,847 3,09,801 Total Expenditure (i) + (ii) 20,14,407 21,46,735 RE: Revised estimates and BE: Budget estimates Rs Crore FY17(RE) FY18(BE) (i) Revenue Receipts 14,23,562 15,15,771 Tax Revenue 10,88,792 12,27,014 Non tax revenue 3,34,770 2,88,757 (ii) Capital Receipts 5,90,845 6,30,964 Recovery of loans 11,071 11,932 Disinvestments of equity in PSEs 45,500 72,500 Internal Debt(Market borrowings) 3,47,218 3,48,226 Total Receipts (i) + (ii) 20,14,407 21,46,735 The Budget announcements of FY18 were seen as the government s attempt to provide the necessary impetus to stimulate growth while continuing on the path of fiscal consolidation. The focus was on increasing productive expenditure and curtailing non-development spending along with boosting consumption by offering tax relief and not having significant changes on the indirect tax front. The increase in both the budgeted expenditure and revenue collections for FY18 was lower than the average annual increase of the previous years. For FY18, total expenditure of the government was budgeted to be 6.6% higher than in FY17 (RE), which was lower than the average 9.3% annual increase during FY Revenue Expenditure for FY18, which accounts for 86% of total expenditure, was budgeted to increase by 5.9% from that in FY17 (RE), lower than the average annual increase of 8.7% in FY The budgeted capital expenditure for FY18 was the highest ever at Rs.3.09 lakh crore. The annual increase in the same at 10.7% in FY18 was lower than the 14.1% average growth of the previous 4 years. The main focus area of this expenditure in FY18 was towards creating transport infrastructure rail and road. The revenue receipts for FY18 were budgeted to grow by 6.5% over FY17 (RE), notably lower than the average annual growth of 13% during the preceding 4 years. The government had estimated lower non-tax revenues in its FY18 budget (13.7% less than in FY17). Tax revenue in FY18 was budgeted to grow by 12.7%, lower than the 15.4% growth of FY17. Capital receipts were budgeted to grow by a high of 15.8% in FY18 (y-o-y), aided in large part by the rise in disinvestment receipts. 3

4 B. Performance of the Budget so far Table 2: Central Governments Fiscal Position (Apr-Nov) Budget Estimate Actuals upto Nov 17 % of actuals to Budget Estimate Rs. Crore Rs. Crore Revenue Receipts 15,15,771 8,04,861 53% Tax Revenue (Net) 12,27,014 6,99,392 57% Non-Tax Revenue 2,88,757 1,05,469 37% Non-Debt Capital Receipts 84,432 61,849 73% Recovery of Loans 11,932 9,471 79% Other Receipts (Disinvestment) 72,500 52,378 72% Total Receipts 16,00,203 8,66,710 54% Revenue Expenditure 18,37,505 12,94,700 71% Interest Payments 5,23,078 3,09,799 59% Capital Expenditure 3,09,230 1,84,115 60% Loans disbursed 39,993 22,042 55% Total Expenditure 21,46,735 14,78,815 69% Fiscal Deficit 5,46,532 6,12, % Revenue Deficit 3,21,734 4,89, % *Source: Ministry of Finance Lower revenue collection and decline in non-tax revenue Despite, the government budgeting for a lower than average growth in revenues for FY18, the revenue collections in the first 8 months of FY18, as a percentage of budget estimates, has been 5% lower than that in the comparable period last year. The lower revenue collections in FY18 are mainly on account of the decline in non-tax revenues. Only 37% of the budgeted non-tax revenues have been collected during Apr-Nov 17, notably lower than the 54% of budget estimates that was collected in the corresponding period last fiscal. The decline in non-tax revenue collections this year can primarily be attributed to the lower receipts of dividends from the RBI, which at Rs. 30,659 crs was half of what was transferred last year. The lower returns on the RBI s foreign investments and the higher cost incurred by the central bank in managing liquidity and the printing of new currency note in the aftermath of demonetization has lowered the RBI s surplus and thereby its dividend payout to the government. Higher direct taxes and dis-investment proceeds The tax revenue collection at 57% of budget estimate for the 8 month period Apr-Nov 17, is marginally lower than the 59% of last year. Higher direct tax revenues, which account for 51% of the total budgeted tax revenues 1, have been contributing to the overall tax revenues this fiscal. Net Direct tax collections have increased by 18.7% (to Rs lakh cr) for the period Apr 17-mid Jan 18, from the corresponding period last year and amounted to 70% of the total budget estimate for the fiscal year. The increase in direct tax collection in the ongoing fiscal, despite slower economic growth, can be largely attributed to the increased tax payers base and better compliance following demonetization and GST implementation. The Direct tax collections for the current fiscal are expected to exceed the budget estimate. Indirect tax collection of Rs.7.35 lakh crs, for the period Apr-Nov 17, which includes GST (central, state, integrated, UT and compensation cess) along with customs duty, union excise duty and service tax prior to the implementation of GST, 1 Before deducting the state s share in central taxes and transfers to national disaster response fund. 4

5 amounted to 80% of budget estimate. The collection under GST has been declining since Oct 17 on account of the reduction in tax rates of various items and the constraints associated with compliance. The GST collection in Dec 17 (Rs. 80,808 crs) is 14% lower than the collection of Aug 17. Also, with the government cutting the excise duty on petroleum products (petrol & diesel by Rs.2/lt in Oct 17), a revenue loss of Rs.13,000 crs on this account is expected for the remainder of the current fiscal year. The non-debt capital receipts of the government in the current fiscal year have seen a favorable increase. During Apr- Nov 17, the government garnered nearly 75% of the budget estimate of non-debt capital receipts, significantly higher than the 49% of the corresponding period of last year. The higher receipts here are primarily on account of the higher proceeds from disinvestment. Total disinvestment proceeds, as of 11 Jan 18 for the current financial year amounted to Rs. 54,337 crore, the highest in over 7 years and 75% of the target for current fiscal year. The government is likely to cross the disinvestment target for the year by around Rs. 19,000 crs as the sale of government s stake in HPCL has been finalized at Rs. 36,915 crs. The increase in direct tax collections and higher receipts from disinvestment, likely to be an additional Rs.40,000 crs above target, is expected to partly make up for the lower non-tax revenue and indirect tax collections (customs duty and GST). Marginal increase in Revenue and Capital Expenditure Revenue Expenditure accounted for 88% of the total expenditure of the government during the first 8 months of the ongoing fiscal year. 71% of the budgeted revenue expenditure has been incurred during this period, 4% higher than the spending undertaken during the corresponding period of the previous year. Likewise, capital expenditure during the period was 60% of the budget estimate, 2% higher than that in the corresponding period last year. The proportion of expenditure incurred has been only marginally higher despite the government advancing the budget presentation. The revenue expenditure has mainly been towards interest payments, subsidies and pensions. Together, they account for a little over 50% of the government s revenue expenditure. Around 60% of the budgeted interest payments (which accounts for 29% of revenue expenditure in FY18) were during Apr-Nov 17, around 5% more than that during the same period last year. Subsidies payments amounting to 86% of the target have been made during Apr-Nov 17. Food subsidies account for nearly 54% of the total subsidies, while fertilizers account for around 25% of the total. Both food and fertilizer subsidy increased by 10% during Apr-Nov 17, compared with that in the corresponding period a year ago. Table 3: Subsidies BE Actuals Apr- Nov 17 Actuals Apr-Nov 16 Rs. crs Rs.crs Rs. crs Food Subsidy 1,45, ,35, ,23,100.1 Nutrient Based Fertilizers Subsidy 20, , ,991.2 Urea Subsidy 49, , ,800.9 Petroleum 25, , ,898.9 Total Major Subsidies 2,40, ,06, ,97,791.1 *Source: Ministry of Finance 5

6 Capital Expenditure is mainly incurred towards defence, finance (central sector schemes & projects and grants and loans transfers to states), roads, railways, urban development and home affairs. In case of defence and roads, capital expenditure of over 70% of target has been incurred. Likewise, in case of railways, urban development and home affairs, 55%-60% of the target expenditure have been incurred up to Nov 17. *Source: Ministry of Finance Table 4: Capex of Key Ministries Ministry BE : Rs. Crs Actuals upto Nov 17 : Rs. Crs % share of actual to total % of Actual to BE Defence 91, , Finance 74, , Road Transport and Highways 54, , Railways 55, , Urban Development 19, , Home Affairs 13, , Fiscal deficit target exceeded Receipts have been able to meet 58% of the government s expenditure for the first 8 months of the current fiscal. As of Nov 17, the government s fiscal deficit target was breached. At Rs.6.12 lakh crs it was 112% of the full year target. This has raised concerns about the government s ability to keep the fiscal deficit within the target 3.2% of GDP for FY18. This has also raised concerns about possible cuts in expenditure in the remainder of the fiscal to attain the fiscal deficit target. This would in turn be detrimental for investment activity. The central government announced additional borrowings of Rs. 20,000 crs (which was scaled down from the earlier announcement of Rs.50,000 crs) for the ongoing fiscal year, which is likely to impact the fiscal deficit. However, the trimming of the additional borrowing can be seen as being indicative of the government s ability to maintain the fiscal deficit target for the year. The government could ask PSUs to pay higher dividends to the government to enable it to maintain its fiscal deficit target. Pains points for the remainder of FY18 Lower GST collections in the last quarter of the ongoing fiscal. Rise in crude oil prices and further cut in excise duty. Contraction in capital expenditure in the remainder of the fiscal. Possibility of higher fiscal deficit ratio 6

7 C. FY19 Budget Expectations Tax Proposals Indirect tax reforms in the form of GST are already in place. The Direct Tax Code which was discussed earlier has yet to be adopted and is in the process of further discussion. The following measures are expected this time within the existing framework. The income tax exemption limit to be raised from the current Rs.2.5 lakhs to Rs. 3 lakhs. There could be a revision in personal income tax slabs and lowering of slab rates with an aim to boost demand. Raise exemption limit under section 80C from Rs.1.5 lakhs to Rs.2 lakhs. Increase in limit on deduction of interest paid on housing loan from the current Rs. 2 lakhs to Rs.2.5 lakhs or Rs. 3 lakhs. A rise in global crude oil prices and the resultant increase in domestic prices could prompt the government to cut excise duty on petroleum products (petrol & diesel) and/or increase petroleum subsidy, the benefit of both would be felt by consumers. During Jun 14 Dec 16, the government raised excise duty for branded petrol from Rs.15.5/litre to Rs. 22.7/litre (a 46% increase) and excise duty on branded diesel was raised increased from Rs. 5.8/litre to Rs. 19.7/litre (240% increase) with the aim to increase its revenues when global crude oil prices were benign. As the government has raised excise duty on petrol & diesel considerably in recent years, a surge in global crude oil prices could see them reducing excise duty on these fuels. However, the scope for cut in excise duty could be limited as the government would be constrained to increase revenue collections from other sources. Corporate tax rates likely to be lowered to from the prevailing 30% to 27.5% as the first step towards moving to 25%. Expectation has been growing that long term capital gains (LTCG) on equity gains will either be taxed or the period for availing the benefit will be raised (from the current 1 year). Any change in the LTCG would however have negative implications for the stock markets. The government s disinvestment program hinges on the vibrancy and positive investor sentiments in the domestic stock markets. Given the success of the disinvestment program in FY18 and its contributions to the revenues, the government is unlikely to make any changes to LTCG. The government is unlikely to do away with the STT (securities transaction tax). Bank re-capitalization and policy reforms The Budget is expected to include details of the government s proposed Rs.2.11 lakh crs bank recapitalization (recapitalization bonds of Rs 1.35 lakh crore, Rs 58,000 crore to be raised from the market by diluting government stake and Rs.18,139 crs by way of budgetary allocation under the 2015 Indradhanush plan). The basis and timing for infusing the funds to banks likely to be announced. Further measures to promote digitization. Capital Expenditure Continued higher capex towards infrastructure building. Roads and railways to see higher outlays. Higher outlays towards urban development. Increased allocations towards agriculture viz. for irrigation, agri- marketing and supply chains. Overall Capex to increase by 6-7% in FY19, lower than the 11% increase of FY18. Against the backdrop of an ensuing Election year, certain revenue expenditure would need be enhanced which could limit the fund allocations for capital expenditure. The shortfalls in Capex would however be compensated by extra budgetary resources (EBR)/ institutional financing. 7

8 Subsidies Overall subsidies of the government are expected to increase by 6-7% in FY19. The government s food subsidy is likely to increase in FY19, by 8-10% with the rise in MSP (minimum support price) of rice and wheat. Fertilizer subsidy is likely to be constant or at best see a marginal increase of 2-3%. Petroleum subsidy is likely to increase by around Rs.10,000 crs to Rs.35,000 crs in FY19. The rise in petroleum subsidy would help cushion the price rise of global crude oil prices for domestic consumers. We expect the government to assume a price of $ 60-65/barrel for the Budget calculations. Fiscal consolidation and Gross Borrowings of the Government The government is likely to follow the fiscal consolidation roadmap (of fiscal deficit at 3% of GDP) If at all it is likely to marginally relax its fiscal consolidation target for FY19. The target of Gross Fiscal Deficit as a percentage of GDP for FY19 could be raised to 3.2% (from the current target of 3% for the fiscal year). The governments gross borrowings would increase from Rs. 6,05,000 crs in FY18 to (i) Rs.6,20,000 crs if Gross Fiscal deficit is 3% of GDP (ii) Rs. 6,30,000 crs if Gross Fiscal deficit is 3.2% of GDP Other measures Measures to boost investments and exports (sops for export oriented companies) Schemes for employment generation. Allocation towards Mahatma Gandhi National Rural Employment Guarantee Programme (MNREGA) expected to increase to Rs.50,000 crs in FY19 from Rs.48,000 crs in FY18. 8

9 II. Industry-Wise Expectations from Budget FY19 After the Goods and Services Tax (GST) implementation on July 1, 2017, the Indian economy has witnessed macro changes. With the GST Council in place, half of its work indirect taxes, is outside the purview of the Budget. The Budget now is mostly about allocations, direct taxes and customs duties and levies. The government has over the period launched various schemes to boost consumption. The Government is expected to increase its outlay on schemes that are expected to increase benefits available to the rural populace and revitalize growth by reviving the capex cycle. Also, industries have their hopes pinned on the upcoming budget especially with governments focus on improving ease of doing business. A. Industry-wise expectations on duties and allocations in Budget FY19 1. Infrastructure (Roads & Highways, Ports, Cement) Duties Treating InVITs as long term capital assets if held for over 12 months and reducing investment limit from Rs. 10,00,000 to Rs. 2,00,000 for higher participation from retail investors. This would ensure, completed income generating infrastructure projects can be listed by their promoters as InVITs for raising more funds to invest into new projects Infrastructure is expected to be one of the key areas of focus of Budget We expect ~10% increase in budgetary allocation to various ministries in infrastructure sector. This includes railways, roads, ports, rural development and shipping Need for a single-greenfield authority for project approvals is a long-standing demand from the Government. A dedicated funding institution for funding stuck and stressed infrastructure projects Other schemes like AMRUT and Smart Cities are unlikely to witness a major allocation being made this year Ministry Allocation ( 17-18) Remarks Railway Rs. 55,000 crore Safety and Signalling, Network strengthening and rake addition Urban Development Rs. 34,211 crore Metro projects Roads Rs. 64,900 crore Bharatmala Project and Border roads-asean Connectivity Shipping Rs. 1,773 crore Sagarmala Projects 2. Power The Government is expected to give higher subsidy for power users in the rural segment especially irrigation. Additional allocation towards last mile rural electrification and Power for all scheme is expected to be made. This is expected to drive demand for electricity which would lead to better capacity utilization for power generators. The 9

10 overall allocation to power sector may witness sizeable increase. Allocation towards renewable energy is expected to remain unchanged. Ministry Allocation ( 17-18) Forecasted ( 18-19) Power Rs. 13,881 crore Rural household electrification New and Renewable Rs. 5,472 crore Grid Connectivity and evacuation Three flagship schemes of the government for the power sector UJWAL for discoms, Power for all and SHAKTI scheme for coal allocation to power gencos would require sizeable investment in the sector and supporting sectors like railways and coal, for a meaningful improvement and efficient implementation of these schemes. 3. Real Estate Duties For homebuyers, the Government should increase the loan deduction for housing loans from income of individuals. Currently, most of the incentive is concentrated towards affordable housing and its buyers in the form of subsidies. Higher allocation for Housing ministry, primarily towards subsidy for Housing for all scheme under Pradhan Mantri Awas Yojana (PMAY) is expected during the budget This increase in interest subsidy for affordable housing holds significance due to subdued demand for residential properties, and the twin-policy blows of demonetization and RERA implementation further dampening the demand. Ministry Allocation ( ) Forecasted ( ) Housing and Urban Poverty Rs. 6,406 crore PMAY to be focus, expect doubling allocation for the PMAY(U) scheme 4. Automobiles Duties Industry expects: The industry urges the government to subsidize the battery and lithium imports or incentivise companies to set up this business in India. The support infrastructure charging infra and robust smart electricity grid to take the additional load also needs to be in place. The programme on Faster Adoption of Manufacturing of Hybrid and Electric Vehicles (FAME) to promote clean fuel technology cars, is expected to get further push with the auto industry gearing itself first for the transition to BS-VI (Bharat Stage VI) emission norms by 2020, skipping the BS-V norms completely, post which the industry would be gearing for transformation of moving completely towards Electric vehicles (EVs) by 2030 The government to encourage R&D spends by companies in India move that will auger well for the industry that will shift to BS-VI emission norms in 2020 and to electric vehicles by 2030 Along with these, government s focus on rural development (positive for tractors and two-wheelers segment), infrastructure and affordable housing (positive for commercial vehicles segment), lowering of direct taxes on income 10

11 (higher disposable income positive for passenger vehicles and two-wheelers), allocation of funds to skill development centres (technical skills for auto industry) should benefit the automobile industry going forward. Also, if fund allocation to MNERGA increases, the volatility in the rural income will reduce leading to higher demand from Tier 3 towns and rural India for entry level motorcycles and passenger vehicles. 5. Tyres - Industry seeks duty free imports of natural rubber equivalent to deficit in the domestic production or reduction in customs duty on natural rubber from the existing 20% or alternatively, the industry expects an increase in the customs duty on tyres from the existing 10% to 20% to make the domestic industry competitive 6. Textiles Industry has sought sufficient provision for the Technology Upgradation Fund Scheme (TUFS) in the union budget The textile ministry is expecting the finance ministry to green signal Rs 1.7 billion special package for knitwear sector at the earliest which is expected to give a make the domestic manufacturers competitive The industry has urged for income security for farmers in a pre-budget meeting. They also proposed to have buffer stocks for commodities whose prices are trading below the MSP i.e. minimum support price. Currently the MSPs of Medium Staple of cotton is Rs 4,020 per quintal and Long Staple of is Rs 4,320 per quintal. 7. Hotels & Tourism Industry has asked the government for Infrastructure & Industry status for the Hospitality Industry for projects worth Rs 25 crores and more The industry needs more resources to create new infrastructure and develop tourist packages along with publicity on the huge potential the country has by developing areas that are not usual tourist destinations. Also, developing tourism, particularly in the remote north-eastern states, is one of the top priorities of the country. Industry wants the government to announce measures in the budget to promote investment in the tourism sector We expect the allocation to tourism ministry to be higher in the budget vis-à-vis last year. 8. Retail Industry is looking for relaxed FDI regime for multi-brand retail trade (MBRT) as also incentives to be provided for setting up warehousing and cold-chain storage facilities Industry also wants the government to grant industry status to the retail industry for easier access to finance and attract more investments 9. Telecom We expect that the government will lay focus in reducing the urban rural digital divide in the upcoming Union Budget It is expected that the government will continue to allocate budget for augmentation of internet connectivity in the country. 11

12 10. Steel Duties We expect the import duty on ferro-nickel (one of the key raw materials used in manufacturing of stainless steel) to be removed. The import duty on ferro-nickel currently stands at 2.5%. The withdrawal of import duty will encourage production of stainless steel in the country. The government s thrust on infrastructure and construction is expected to continue. This, in turn, is likely to increase budget allocation for these sectors which will augur well for the steel industry. The budget allocation for steel industry is expected to give significance to domestic production of high end value added steel like automotive steel for high end applications, electrical steel (CRGO), special steel and alloys for power equipment, aerospace, defence and nuclear applications 11. Drugs & Pharmaceuticals We expect the government will proceed with its focus on use of generics drugs in the domestic market. Rising inspections, quality and compliance issues with the major export destination may prompt the government to make some allocations or provide some incentives towards the research & development facilities in the industry that would aid the companies to improve the quality standards of the generic drugs and enhance their investments in speciality drugs. A likely higher budget allocation to the healthcare sector would provide benefit to the pharma companies as it will enhance opportunities for the Indian pharma industry 12. Sugar Duties With rising sugar production and declining sugar prices, the government may reduce the export duty on sugar or incentivise sugar exports to provide support to sugar prices. The export duty on sugar stands at 20%. We expect the government would encourage ethanol production through budget allocation for the same. It is expected that the government would continue to allocate budget for Sugar Development Fund, loans for rehabilitation/modernisation of sugar mills among others. 13. Edible oils The government is expected to increase allocations towards the development of vegetable oils and oilseeds industry that would aim at improving the conditions of stagnant oilseed production in the country. 12

13 14. Aluminium Duties The aluminium industry expects the Government: To increase import duty on aluminium scrap from 2.5% to 10% To increase import duty on primary aluminium from 7.5% to 10% To increase the export duty on bauxite from 15% to 20% The industry also expects for reduction on import duty of key raw materials used for the manufacturing of aluminium. Reduction is expected from the following items: Alumina from 5% to nil Coal tar pitch from 5% to 2.5% Caustic soda lye from 7.5% to 2.5% Aluminium fluoride from 7.5% to 2.5% Anodes from 7.5% to 2.5% 15. Copper Expectations are that the government would: Increase import duty on copper scrap Reduce import duty on copper concentrate Lower export duty on refined copper Higher infra spending by the government would be a major boost for this sector as a large part of demand emanates from this segment. 16. Fertilizers The government has been focused on providing incentives towards the agricultural sector, as the focus of the government is to improve the agricultural sphere of the nation which will in turn help in providing additional rural employment and boost income. In order to double the farmers income by 2022, the production of fertilizers will have to be increased as it would help in the productivity of land and farm produce. According to the New Urea Policy, manufacturers are incentivized to produce more than the reassessed capacity of the plant. The government will give more trust towards the fertilizer sector which means the subsidy allocation will be increased in the coming financial year i.e. subsidy will be more than 70,000 crore. Within the fertilizer subsidy allocation towards the Nutrient based policy will be increased, to encourage production of decontrolled fertilizers. Direct Benefit Transfer to be rolled out on a nation-wise basis, which will aid the Government to abide in the timelines in reimbursement of the subsidies to the fertilizer manufacturing companies and aid the companies to avoid adverse impact on working capital needs. 13

14 17. Oil & Gas Duties Industry Expects: India is on the move towards a gas based economy, and government wants to encourage the increased use of natural gas as it is a cleaner fuel 18. Paper This year due to the rise in prices of crude oil, which forms a key determinant in factoring the Petroleum Subsidy, the subsidy towards the petroleum sector will be increased. The Budget may assume crude oil price within the $60-65/bbl range given that OPEC and Non OPEC are actually abiding by the production cuts undertaken by them. The Government will also have to increase the petroleum subsidy as they aim to provide LPG connections in rural India under the PMUY and subsidy on LPG is extracted from natural gas which is based on the prices of crude oil. The government needs to announce additional incentives for the exploration and production of natural gas and crude oil, as the government aims to reduce oil and gas imports by 10% by Duties Impose anti-dumping safeguards on certain categories of paper e.g. uncoated paper Keep paper and paperboard in the negative list in all FTAs, and agreements Increase in applicable customs duties on newsprint 14

15 B. Industry-wise GST Expectations Listed below are certain considerations on the GST front which the industry wants the government to review ahead of the upcoming budget or during the course of time: a. Infrastructure (Roads & Highways, Ports, Cement) EPC projects to be taxed 12% instead of the existing 18% under GST for roads sector b. Power Reduction of GST incidence on Renewable EPC projects from 18% to 12% would be a key reform for the renewable industry. It is also expected that the Government might introduce measures to gradually bring Electricity and the various duties and levies under the ambit of GST c. Real Estate Inclusion of real estate sector under the ambit of GST instead of existing stamp duty levied by states is one of the key reforms, which the sector would expect from the government. d. Automobiles Tax rationalisation for the passenger vehicles - to be put under just two tax rates under the GST vis-à-vis the multiple rates levied currently Exemption seater ambulances from levy of compensation cess that currently attract 28% GST plus 15% cess To fix the tax on used cars at 5% on the differential value between sale and purchase price e. Textiles Garment exporters have sought that the duty compensation to them should be retained at the pre-gst (Goods and Services Tax) drawback rate of about 7.5% to remain competitive in the global markets, amid declining exports. The drawback rates are 2-2.5% at present Garment dealers are also hopeful of reduction in goods and services tax (GST) rates on textiles industry. The industry seeks exemption of 5% GST on raw cotton, reduction of 18% on man-made fibres (MMF) and recycled polyester staple fibre to (PSF) to 12% and 5% respectively. Also, the industry expects the government to bring the petroleum products in the GST purview so as to reduce the production cost by allowing seamless flow of input tax credit (ITC) f. Hotels & Tourism Industry wants the government to keep the GST rates uniform at 12% on all hotel categories Also, the industry has urged the government to reinstate the Input Tax Credit (ITC) which was withdrawn while rationalizing the GST to 5% g. Retail The industry wants the government to simplify the GST system where invoices issued to BTC (bank transfer compliant) consumers must be streamlined and the need for manual signature and multiple copies to get GST refund must be removed. 15

16 h. Aluminium The aluminium industry expects the Government to exempt the aluminium industry from a 400 a tonne GST compensation cess on coal to support power intensive industries. i. Fertilizers The government needs to reduce the GST rate of 18% and bring it down to 12%, for the raw materials used to manufacture fertilizers. This move will help bringing down the cost of manufacturing for fertilizer producers. j. Oil & Gas Natural Gas, Petrol, Diesel, Jet Fuel and crude oil to be included under the GST regime. Presently only LPG, kerosene and naphtha are subject to a GST rate Bringing fuel products under the ambit of GST has been deliberated for long. The state and centre however have not been able to build a consensus on revenue sharing k. Gems & Jewellery A scheme with minimal tax for business-to-business (B2B) transactions between import and export of diamonds under the GST regime. Such as scheme would reduce funding costs and enable international competitiveness. Currently each supply from manufacturers to traders to jewellers generates tax liability which in turn generates input tax credits and blocks working capital. CORPORATE OFFICE: CARE RATINGS LIMITED (Formerly known as CREDIT ANALYSIS & RESEARCH LIMITED) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai Tel: I Fax: care@careratings.com I Website: Follow us on /company/care Ratings /company/care Ratings 16