Centre stage: India Budget FY2017

Transcription

1 In Focus: Pre-Budget report Treasury Research Group For private circulation only Centre stage: India Budget FY2017 The fiscal deficit target of 3.9% of GDP in the current fiscal is likely to be achieved through greater indirect taxes as well as rationalization of expenditure Despite the challenges, we believe the Government is likely to target a 3.5% fiscal deficit target for FY2017 and keep its commitment to medium term fiscal consolidation road map Greater capex expenditure to kick start investment cycle, revival of the agrarian economy as well as support to boost export and manufacturing sectors are likely to be key focus areas The Union Budget for FY2017 will be presented on 29th February Expectation from the Budget is running high and we expect the Budget to deliver on a.) Fiscal consolidation road map, b.) Clarity on implementation of 7th Pay Commission (7PC), One Rank One Pay (OROP) scheme, bank recapitalization etc. c.) Roadmap for implementation of the GST d.) Continued focus on productive investment and e.) Reform initiatives to revive the investment cycle. Review of the FY2016 Budget We expect the Government to meet the Budget estimate of 3.9% of the GDP in FY2016 despite lower than expected nominal growth in the economy. The shortfall in direct tax collection and non-debt capital receipts is likely to be offset by an increase in indirect taxes (especially excise duties collection). February 23, 2016 Kamalika Das kamalika.das@icicibank.com Samir Tripathi samir.tripathi@icicibank.com Niharika Tripathi niharika.tripathi@icicibank.com Please see important disclaimer at the end of this report Government likely to stick to fiscal consolidation roadmap in FY2017 The Government is expected to stick to the fiscal consolidation roadmap and announce the deficit target of 3.5% of GDP. However, we must note that achieving this target will be difficult and will require optimistic assumptions on some counts. Indirect tax collections are expected to remain robust amid continuation of higher excise duty in the next fiscal and possible increase of the services tax rate towards ~16% in line with the GST (Goods and services tax) recommendation. Change in the corporate tax structure in terms of reduction in tax rates and exemptions will be closely followed. Government is expected to look at spectrum sales as well as credible disinvestment targets which includes SUUTI sales as non-tax sources of revenue. On the expenditure side, the government would have to walk the tight rope of managing revenues expenditure with appropriate capital spending. Government capital expenditure is crucial to crowd in private investment as well as revive the investment cycle. Against this backdrop, we expect capital expenditure to grow by ~19% in FY2017. We also note that there has been some thrust towards off balance sheet funding of capital spending which is welcome. Meanwhile, while the fall in total subsidy bill amid lower fuel related subsidies is a positive development aided by global commodity prices, the implementation of direct benefit transfer for food related subsidies will be a welcome step. Net borrowing requirements expected at INR 4.4 tn in FY2017 Given the expectation of adherence to the fiscal consolidation roadmap, the net borrowing requirement is likely to be ~INR 4.4 tn in FY2017 as against INR 4.3 tn in the current fiscal. This is likely to be absorbed by the market, though state government related borrowing will be another crucial variable to watch out for. Other imperatives The backdrop for the Budget is challenging amid subdued global growth environment and uneven growth prospects domestically. The Government is likely to take this Budget as the opportunity to address challenges related to the agriculture sector, maintain the capex boost to address the infrastructure needs of the economy, and provide policy support to the export and manufacturing sector.

2 Government likely to adhere to fiscal consolidation roadmap in FY2017 In terms of budgeting for the next fiscal, we expect the Government to stick to the fiscal consolidation roadmap and announce the deficit target of 3.5% of GDP. However, we must note that achieving this target will be difficult and will require optimistic assumptions on some counts. Expectations from revenue and expenditure budgeting A. Higher revenue receipts to be budgeted in FY2017 A.1. Indirect taxes to overshoot in FY2016 thereby taking up slack from direct taxes Current trends show that direct taxes are likely to undershoot budgeted targets this fiscal on account of weakness in factor such as corporate profitability. However, the slack will be taken up by a robust collection on the indirect taxes front especially related to excise duty on petroleum products. A.2. Indirect taxes and spectrum sale to provide support in FY2017 We expect net tax revenues to be budgeted at a significantly higher growth rate. Indirect taxes: Revenue benefits from the four excise duty hikes in the current fiscal are likely to contribute significantly to tax collections in FY2017. Service tax rate hike from 14.5% currently to ~16% is likely to yield higher revenues as well. Direct taxes: While the implementation of 7PC should net some benefits for direct tax collection, the growth momentum is likely to be subdued. Non-tax revenue: Non-tax revenues are expected to receive some support from the spectrum auction. We estimate ~INR 500 bn contribution from the same. Non-debt capital receipts: Meanwhile possible SUUTI stake sale might allow for a higher disinvestment budgeting. In a similar vein we note over the medium term that while mobilizing funds to finance the deficit through stake sales is necessary but the same should not be done in a manner so as to compromise valuation considerations. B. Expenditure budgeting to require careful balancing B.1. Revenue spending to provide little headroom in FY2017 We expect subsidy expenditure to fall from 1.8% of GDP to 1.5% of GDP with subdued crude oil prices allowing for a lower budgeting in the petroleum sector. However in absolute sense the subsidy saving (on account of lower budgeting) remains thin. Normal revenue spending is a sticky component (in FY2016 budgeted amounts for interest payments, defense spending and subsidies came up to more than 50% of total expenditure). We expect the Government to budget at least a 5% growth (over previous budgeted) in revenue spending-ex-subsidies. Further, the possibility of full implementation of 7PC and OROP are likely to increase spending by INR 1100 bn in the next fiscal. B.2. Revenue and capex spending to be carefully balanced Government capital expenditure is crucial to crowd in private investment as well as revive the investment cycle. Against this backdrop, we expect capital expenditure to grow by ~19% in FY2017. The Government has shown considerable commitment to capex spending over FY2016 and we expect this trend to continue. C. Key observations and points to watch for Off balance sheet capex spending: In this context we would also like to highlight that there is also a thrust to implement capex expenditure especially in infrastructure through off-balance sheet entities such as the National Infrastructure Investment Fund (NIIF). Thus even if the budgeted growth in capital spending in FY2017 is lower than this fiscal it does not imply the focus has diminished in anyway. Clarity needed on implementation of GST: While the increase in service tax to 16-17% from 14.5% currently is a step to move in line with the proposed GST rate, further clarity on the implementation of GST will remain critical. However, we note that although the hike is being done as a convergence measure towards GST but till the time that the Amendment is passed tax credits cannot be claimed efficiently and in the short term will raise tax burden. Corporate tax rate: A significant development to look out for will be the rationalization of the corporate tax structure by reducing tax rates and exemptions. 2

3 D. Net borrowing requirements expected at INR 4.4tn in FY2017 Given the expectation of adherence to the fiscal consolidation roadmap, the net borrowing requirements is likely to be INR 4.4 tn in FY2017 as against INR 4.3 tn in the current fiscal. Meanwhile, the gross borrowing is likely to spike to ~INR 6.3 tn given the heavy debt redemption to the tune of ~INR 1.9 tn over the next fiscal. While, this is likely to be absorbed by the market, state government related borrowing is likely to be the crucial variable to watch out for. We note that SDL issuances have increased significantly over FY2016 and the trend is likely to continue next fiscal as well. Key imperatives in the Budget FY2017 A. Agriculture: Need to increase productivity India has now experienced two consecutive years of drought which has not happened since There is now tangible evidence that distress in rural areas is growing and the upcoming Budget is likely to address agricultural investment to a large extent. Background: Status of agricultural households: The recent NSSO 70 th round survey highlights some key factors about the agricultural economy in India. There are around 90 million agricultural households in India, which is ~58% of total rural households. Nearly 70% of farmers subsist on economically unviable farm holdings of less than a 2.5 hectares. Over one-fifth of farm households report salaried employment, and not farming, as the prime source of their income. Around 44% others have to seek work under the Mahatma Gandhi National Rural Employment Guarantee Scheme to supplement their income. This implies that the pressure to migrate from rural to urban areas is very strong and especially so during times of subpar output growth. Also the rural wage growth has been falling sharply lately, which has added to the woes. Green revolution: India has come a long way from the ship to mouth existence to being completely self-sufficient in grains to the extent that we export wheat and rice. For a nation that witnessed the worst food crisis recorded globally, the importance of food security cannot be over emphasized. However, even as we have made great strides in wheat and rice production, the same is not true for other crop groups such as pulses, oilseeds etc. After celebrating 50 years of the green revolution in 2015, it is probably time to usher in another holistic revamp of the entire agricultural sector. Improvement in crop productivity measures: Focus has to increase on farm mechanization and irrigation measures. However, the former is difficult to do as size of average land holding in India is fairly small and does not lend itself to mechanization. We believe there should be a strong focus on boosting irrigation facilities in the country. Prime Minister Krishi Sinchayee Yojana (PMKSY) is a welcome step as it integrates a few programs together but we believe much higher allocation to this program is merited. Replicating the cooperative model such as the Amul model in Gujarat. The model has not yet been replicated in other agri commodities like wheat, rice, pulses and sugar. Broad base FDI in agriculture FDI up to 100% is permitted under the automatic route in activities such as development of seeds, animal husbandry, pisciculture, cultivation of vegetables and mushrooms etc. under controlled conditions and services related to agro and allied sectors. Further, recently the Government has allowed 100% FDI in coffee, rubber, cardamom, palm oil and olive oil along with FDI into plantation. Besides this, FDI is not allowed in any other agricultural sector/activity. Opening up FDI would support improvement in technical expertise in the agriculture sector, improve investment in the sector and support ushering in of the much needed second Green Revolution in India. Crop insurance: It is a welcome step that the Government has proactively taken up the issue of crop insurance and the recently launched Pradhan Mantri Fasal Bima Yojana. However, effective implementation of this scheme will be key and we will watch for the same. B. External sector: Need to build buffers Attracting patient capital: FDI India presents a unique opportunity as an attractive investment destination at a time of global slowdown. Hence, government efforts to attract FDI are well timed and should be sustained. Attracting patient capital: multilateral funds Government could look towards establishing swap lines between RBI and multilateral agencies wherein RBI swaps Rupee for other emerging currencies with these agencies which can onward lend them for viable investment projects within India. Such a facility will boost quality flows into the country. 3

4 Actively work with sovereign wealth funds Continue to engage with SWFs to invest in projects in India. Additionally, tap the SWFs for fresh capital raised through alternative sources such as Rupee offshore bonds. Cogent policy for sustainable improvement in current account deficit The sharp improvement in CAD is largely attributable to a decline in global commodity prices i.e. gold and crude. Exports remain subdued given fragile global growth situation. Consequently, import substitution policies are very critical for sustained decline in CAD. C. Tax and subsidy reforms Subsidy reform: Rationalization of fuel subsidies: Further steps toward rationalization of LPG and Kerosene will help reduce the subsidy burden. The pilot programs undertaken for DBT in kerosene recently and the phenomenal success of Pahal are steps in the right direction. Reduction of fertiliser subsidy bill: The Government is yet to take steps to correct the distortion between subsidised urea prices and market-determined prices of other fertilisers. DBT for food and fertiliser subsidies: In order to enhance efficiency of subsidy allocation and for better targeting, the authorities are likely to aim towards DBT for food and fertiliser subsidies in line with LPG reform. Increasing tax base: IT infrastructure to track tax evasion It is important to deploy and use robust IT Infrastructure to consolidate and exchange information pertaining to different streams of taxes i.e., Income tax, Service tax, Sales tax, Excise duty, etc. by using common means such as PAN of an assesse. This will facilitate in tracking cases pertaining to tax evasion resulting in accumulation of black money. Expand the provisions of Tax Deduction at Source/Tax Collection at Source. Special focus could be to bring agricultural income over a certain threshold under the filing set up. D. Rationalization of the corporate tax structure A clear roadmap for reduction in corporate tax rate from 30% to 25% is expected in the forthcoming Budget as it facilitate Ease of doing business. Exemptions to be done away with: The corporate sector s current effective tax rate is 23.22%, much less than the weighted base rate of 33.2% due to exemptions. The tax liabilities are currently unevenly distributed. For instance under the current structure only 10% of the corporate taxes are generated at the rate of 33% while ~26% of the corporate taxes are generated at less than 25%. The effective tax rate for the large corporates (i.e. Profit before tax greater than INR 500 crores) is ~20.68%, which is significantly lower than 25-26% for smaller corporates. Level playing field in terms of tax incentives should be considered in the interim. E. Other miscellaneous measures: MSME sector: There is a need to support MSME sector in line with the national manufacturing policy and to keep with the objective of creating gainful employment in the economy. In this regard, income-tax rebates for small start-ups could be introduced to encourage small Start-ups and thus boost job-creation. The announcement to set up Self Employment and Talent Utilization (SETU) Fund and the Micro Units Development Refinance Agency (MUDRA) in the last Union Budget are very positive steps and more efforts in this direction needs to be taken. Skilling: The recently launched Pradhan Mantri Kaushal Vikas Yojana is a step in the right direction and indeed a holistic approach to bridge India s skill gap is required. There could also be some consideration towards providing some tax benefits towards skilling initiatives to further bolster the program. Health care sector: Compulsory Health Insurance for Employees: To promote Health insurance penetration in the country, it should be mandated that organizations insure every employee for a minimum amount of Rs.1 Lakh. The employer should be allowed tax deduction on the premium paid. Health Insurance Coverage for Senior Citizens: Medical Insurance Premium for senior citizen should be subsidized. Increase budget share to the healthcare sector with greater provision for the National Rural Health Mission and National Urban Health Mission. 4

5 APPENDIX 1. Government likely to adhere to fiscal consolidation roadmap in FY2017 INR bn FY2016 FY2016 RE FY2017E FY2016 FY2016 RE FY2017E Nominal GDP (% over previous budgeted) A. Receipts A.1. Revenue Gross Tax Direct tax (a) Corporate tax (b) Income tax Indirect taxes (a) Service tax (b) Excise duties (c) Custom duties Others State share Net tax to centre Non-tax Revenue Interest Dividents and profits Others* A.2. Non-debt capital reciepts Recovery of loans Disinvestment B. EXPENDITURE B.1 Revenue Normal Revenue expenditure (ex subsidy) Subsidy PC & OROP B.2 Capital C. Fiscal Deficit 5, , ,336.5 (% of GDP) *includes spectrum auctions FY2017 nominal GDP growth has been assumed at 11% YoY 2. Subdued crude oil prices to allow for further lowering in petroleum subsidy budgeting INR bn FY2015 FY2016 FY2017E Total subsidy bill (% of GDP) Food (% of GDP) Fertilizer (% of GDP) Petroleum (% of GDP) Others (% of GDP) Net borrowing to pick up in FY2017: Scenario analysis across various fiscal deficit levels (INR trn) Case 1 Case 2 Case 3 Fiscal deficit (% of GDP) Nominal GDP Fiscal deficit Borrowing estimate Gross borrowing FY2017 nominal GDP growth has been assumed at 11% YoY 5

6 ICICI Bank: ICICI Bank Towers, Bandra Kurla Complex, Mumbai Phone: (+91-22) Treasury Research Group Economics Research Sunandan Chaudhuri Senior Economist (+91-22) Kamalika Das Economist (+91-22) (ext 6280) Kanika Pasricha Economist (+91-22) (ext 2260) Samir Tripathi Economist (+91-22) Niharika Tripathi Economist (+91-22) (ext 6943) Sagrika Gogia Economist (+91-22) (ext 2180) Sonal Surana Economist (+91-22) (ext 2085) Radhika Wadhwa Economist (+91-22) (ext 2087) Treasury Desks Treasury Sales (+91-22) Currency Desk (+91-22) Gsec Desk (+91-22) FX Derivatives (+91-22) /43 Interest Rate Derivatives (+91-22) Commodities Desk (+91-22) Corporate Bonds (+91-22) Disclaimer Any information in this should not be construed as an offer, invitation, solicitation, solution or advice of any kind to buy or sell any financial products or services offered by ICICI Bank, unless specifically stated so. ICICI Bank is not acting as your financial adviser or in a fiduciary capacity in respect of this proposed transaction with you unless otherwise expressly agreed by us in writing. Before entering into any transaction you should take steps to ensure that you understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. You may consider asking advice from your advisers in making this assessment. No part of this report may be copied or redistributed by any recipient for any purpose without ICICI s prior written consent. Disclaimer for US/UK/Belgium residents This document is issued solely by ICICI Bank Limited ( ICICI ). The material in this document is derived from sources ICICI believes to be reliable but which have not been independently verified. In preparing this document, ICICI has relied upon and assumed, the accuracy and completeness of all information available from public sources ICICI makes no guarantee of the accuracy and completeness of factual or analytical data and is not responsible for errors of transmission or reception. The opinions contained in such material constitute the judgment of ICICI in relation to the matters which are the subject of such material as at the date of its publication, all of which are expressed without any responsibility on ICICI s part and are subject to change without notice. ICICI has no duty to update this document, the opinions, factual or analytical data contained herein. The information and opinions in such material are given by ICICI as part of its internal research activity and not as manager of or adviser in relation to any assets or investments and no consideration has been given to the particular needs of any recipient. Except for the historical information contained herein, statements in this document, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. ICICI Bank undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. Nothing contained in this publication shall constitute or be deemed to constitute an offer to sell/purchase or as an invitation or solicitation to do so for any securities or financial products of any entity. ICICI Bank and/or its Affiliates, ("ICICI Group") make no representation as to the accuracy, completeness or reliability of any information contained herein or otherwise provided and hereby disclaim any liability with regard to the same. ICICI Group or its officers, employees, personnel, directors may be associated in a commercial or personal capacity or may have a commercial interest including as proprietary traders in or with the securities and/or companies or issues or matters as contained in this publication and such commercial capacity or interest whether or not differing with or conflicting with this publication, shall not make or render ICICI Group liable in any manner whatsoever & ICICI Group or any of its officers, employees, personnel, directors shall not be liable for any loss, damage, liability whatsoever for any direct or indirect loss arising from the use or access of any information that may be displayed in this publication from time to time. This document is intended for distribution solely to customers of ICICI. No part of this report may be copied or redistributed by any recipient for any purpose without ICICI s prior written consent. If the reader of this message is not the intended recipient and has received this transmission in error, please immediately notify ICICI, Samir Tripathi, samir.tripathi@icicibank.com or by telephone at and please delete this message from your system. DISCLAIMER FOR DUBAI INTERNATIONAL FINANCIAL CENTRE ( DIFC ) CLIENTS: This marketing material is distributed by ICICI Bank Ltd., Dubai International Financial Centre (DIFC) Branch and is intended only for professional clients not retail clients. The financial products or financial services to which the marketing material relates to will only be made available to a professional client as defined in the DFSA rule book via section COB Professional clients as defined by DFSA need to have net assets of USD 500,000/- and have sufficient experience and understanding of relevant financial markets, products or transactions and any associated risks. The DIFC branch of ICICI Bank Ltd., is a duly licensed Category 1 Authorized Firm and regulated by the DFSA. DISCLOSURE FOR RESIDENTS IN THE UNITED ARAB EMIRATES ( UAE ): This document is for personal use only and shall in no way be construed as a general offer for the sale of Products to the public in the UAE, or as an attempt to conduct business, as a financial institution or otherwise, in the UAE. Investors should note that any products mentioned in this document, any offering material related thereto and any interests therein have not been approved or licensed by the UAE Central Bank or by any other relevant licensing authority in the UAE, and they do not constitute a public offer of products in the UAE in accordance with the Commercial Companies Law, Federal Law No. 8 of 1984 (as amended) or otherwise. 6