In Focus: Occasional Treasury Research Group For private circulation only India Budget: Capex push amid tempered consolidation February 1, 2017 Samir Tripathi samir.tripathi@icicibank.com Niharika Tripathi niharika.tripathi@icicibank.com Sumedha Dasgupta Sumedha.dasgupta@icicibank.com Please see important disclaimer at the end of this report The Budget attempts to achieve a constrained optimization by supporting the marginalized segment of the economy on the one hand and boosting public investment on the other. We welcome the Government s effort to take into account the economic reality and put in place a counter cyclical fiscal policy stance. The assumptions on the tax front are broadly realistic, underscoring the credibility of the exercise even as it achieves its desired objectives. The expenditure mix remains healthy and the Government should strive for a greater share of capital expenditure going forward. Given the slowdown in economic activity combined with low inflation, we believe that there is scope to reduce interest rate further by 25 bps. Government remains fiscally prudent despite higher capex spending The Budget was presented amid the backdrop of slowdown in the overall economy. The focus was clearly to balance the need of the marginalized sector of the economy with that of the medium term infrastructural needs of the economy. In line with our recommendation of breaching the 3% fiscal deficit target for FY 2018, the budget guided for the adoption of counter cyclical policy measures and announced a higher fiscal deficit target of 3.2% of the GDP. This considers the need for greater public expenditure amid sluggish overall investment and weak global growth prospects. The Government has also accepted the FRBM committee recommendation of 3% fiscal deficit target for the next three years. The Government has refrained from 0.5% escape clause recommended by the FRBM committee. The committee has also recommended targeting the General Government Debt to GDP ratio of 60% by 2023, consisting of 40% for Central Government and 20% for State Governments. The Government has not accepted the recommendation but has assured that it will review the same. We think that it is a good idea and will enhance the fiscal credibility of the budgetary process. Tax receipts are conservatively budgeted; disinvestment target aggressive Within the key receipt category, corporation tax is expected to account for 19% of the total receipt, income tax ~16%, union excise duties ~14%. Borrowing and other liabilities account for ~19% of the total liabilities. Gross tax has been conservatively budgeted and direct taxes are projected to grow at a faster pace as compared to indirect taxes. Within the direct taxes, income tax is expected to grow at a faster pace as compared to the corporation tax. Meanwhile, indirect tax collection has been budgeted conservatively, considering the fact that mid-year introduction of Goods and Services Tax (GST) might result in some slowdown in collections. Since direct taxes are more equitable as compared to the indirect taxes, the faster pace of direct tax growth is desirable. We would like the Government to follow this path in subsequent budgets as well. We believe that the disinvestment target for the FY2018 has been aggressively budgeted at INR 725 bn as compared to INR 455 bn for the current fiscal. We believe that the quality of fiscal consolidation will improve only if the reliance on asset sales/spectrum were to reduce. The recent demonetization exercise and the introduction of GST should help in improving the tax base and over the long term help in reducing dependence on non-tax sources.
On the income tax measures for individuals, tax rate on income between INR 2.5 5 lakhs was reduced to 5% from the previous 10%. Meanwhile individuals with income between INR 50 lakhs and INR 1 crore will have to pay a surcharge of 10%. While there was widespread expectation of a broad based corporate tax rate cut, this did not materialize. However a token cut in tax rate for small firms was administered. In an encouraging development, we had flagged the fact that corporate tax structure in our country is regressive which implies that companies with higher profits pay lower tax rates. The Finance Minister has taken cognizance of this fact in today s Budget and we expect more action on this front in subsequent years. Expenditure mix balanced In terms of key expenditure items, interest payments account for 18% of the total expenditure, subsidies at ~10%, defence at ~9%, and centrally sponsored schemes at ~ 10%. States share of taxes and duties account for ~24% of the total expenditure. The revenue capital mix of the expenditure has improved slightly as compared to the previous year. We think that this is a good intent and over the medium term, we should strive to improve the capital expenditure as share of total expenditure from the present 14%. Capital expenditure is expected to rise by ~10.7% YoY in FY2018 over RE as against the meager 3.9% budgeted growth in the current fiscal. It should also be noted that extra budgetary resources as a source of capex funding has gained traction over the last few years and the trend is expected to continue going forward as well. The Government in a break from tradition announced a net borrowing figure adjusted for buyback which would also help to reduce redemption pressures beyond FY2018. This probably signifies that the Government is attempting to smooth the liability trend going ahead and will be guarded against adverse shocks. This would in effect help in improving the debt service capability of the Government. Adjusted for the buybacks, market borrowing is expected to reduce to INR 3502 bn in FY 2018 as against INR 3658 bn in. Government announces external sector supportive measures In other measures the government has recognized the need to support external sector and has decided to introduce trade related measures. In a significant development, the government has decided to abolish Foreign Investment Promotion Board (FIPB) and will announce a roadmap for the same. This is likely to support further foreign investment. Conclusion: Scope for 25 bps rate cut remains We believe that Government has presented a realistic budget that attempts to balance the short term needs to support an economy emerging from demonetization with the imperative of reviving demand, especially investment. The focus on inclusive growth along with boosting infrastructure outlay is a welcome combination. The increasing focus on agriculture is also encouraging as a combination of all these measures would help reduce our growth vulnerabilities and reduce inflation over the medium term. With the Budget expected to provide growth impetus in the medium to long term, combined with low inflation prevalent in the economy, we believe that there still remains scope for a further 25 bps repo rate cut. (For details of the Budget please refer to the annexures I & II) 2
1. Fiscal arithmetic Annexure I Key highlights for fiscal arithmetic for FY2018 (RE) FY2018 FY2018 over (RE) INR bn A. Receipts 14,441.6 14,801.3 16,002.0 8.1 A.1. Revenue 13,770.2 14,235.6 15,157.7 6.5 Gross Tax 16,308.9 17,032.4 19,115.8 12.2 State share 5,703.4 6,080.0 6,745.7 10.9 Adjustment for NCCF 64.5 64.5 100.0 55.0 1.1 Net tax to centre 10,541.0 10,887.9 12,270.1 12.7 1.2 Non-tax Revenue 3,229.2 3,347.7 2,887.6-13.7 1.2.1 Interest 296.2 181.5 190.2 4.8 1.2.2 Dividents and profits 1,237.8 1,532.2 1,424.3-7.0 1.2.3 Others 1,695.2 1,634.0 1,273.1-22.1 A.2. Non-debt capital reciepts 671.3 565.7 844.3 49.2 2.1 Recovery of loans 106.3 110.7 119.3 7.8 2.2 Disinvestment 565.0 455.0 725.0 59.3 B. EXPENDITURE 19,780.6 20,144.1 21,467.4 6.6 B.1 Revenue 17,310.4 17,345.6 18,369.3 5.9 B.2 Capital 2,470.0 2,798.5 3,098.0 10.7 C. Fiscal Deficit 5,339.0 5,342.7 5,465.3 (% of GDP) 3.5 3.5 3.2 2. Taxation (RE) (INR bn) FY2018 FY2018 over (%YoY) Gross tax 16,308.9 17,032.4 19,115.8 12.2 Direct tax 8,471.0 8,471 9,800 15.7 of which Corporate tax 4939.2 4939 5387 9.1 Income tax 3531.7 3532 4413 24.9 Indirect tax 7,796.7 8,518.7 9,269.0 8.8 of which Custom duties 2300.0 2170 2450 12.9 Excise duties 3186.7 3874 4069 5.0 Service tax 2310.0 2475 2750 11.1 3. Subsidy Bill Subsidy (INR bn) FY2018 (RE) Fertilizer 700 700 700 Food 1348 1352 1453 Petroleum 290 275 250 Total 2338 2327 2403 3
4. Financing of fiscal deficit (INR bn) (RE) FY2018 Borrowings A. Gross borrowing 5820 5800 B. Redemption 1753 1568 C. Net borrowing (A-B) 4067 4232 D. Buyback 595 750 E. Net borrowing adjusted for buybacks (C-D) 3472 3482 Total sources of financing Market borrowings 3658 3502 of which Net borrowing adjusted for buybacks 3472 3482 Short term borrowings 186 20 Securities against small savings 904 1002 State Provident Funds 130 140 Other Receipts 99 535 External Debt 149 158 Drawdown of cash balances 402 128 Total 5343 5465 4
Annexure II The Ten themes for the Union Budget FY2018 were as follows: I. Policies related to Farmers and Agriculture: Allocation for Agriculture and Farmers welfare is INR 526.55 bn in FY2018 (~8% rise over Revised Estimates for ). Farm credit will be targeted at INR 10 tn in FY2018. Crop insurance coverage will be raised from the current 30% to 40% in FY2018, and 50% in FY2019. Long-term irrigation fund corpus will be doubled to INR 400 bn. NABARD will get INR 50 bn to set up a micro irrigation fund. NABARD will also digitize 63,000 primary agricultural co-operatives. Cost of digitizing agriculture co-operatives is seen at INR 19 bn in 3 years. A dairy processing fund will be set up with an initial corpus of INR 20 bn, and the same will be increased to INR 80 bn over three years. National agriculture markets (NAM) are to be expanded to 585 markets, and allocation of INR 7.5 mn to each APMC under e-nam is proposed. Perishables will be de-notified from the APMC Act. II. Policies related to the Rural Population: Allocation for rural development is INR 1054.47 bn in FY2018 (~10% rise over Revised Estimates for ). 50,000 Gram Panchayats will be made poverty free by 2019. Allocation for MGNREGA is raised to INR 480 bn in FY18 from the current expenditure of INR 470 bn. 500,000 ponds are to be dug up under MGNREGA in FY2018. INR 190 bn is allocated in FY2018 for the Pradhan Mantri Gram Sadak Yojana (PMGSY). The pace of construction of PMGSY roads has accelerated to 133 km roads per day in, as against an average of 73 km during the period 2011-2014. The allocation for the Pradhan Mantri Awaas Yojana Gramin has been stepped up to INR 230 bn in FY2018 (from INR 160 bn in RE). An increased allocation of INR 48.14 bn has been proposed under the Deendayal Upadhyaya Gram Jyoti Yojana in FY2018 (INR 33.50 bn in RE). III. Policies related to the Youth, Education and Skill Development: A system of measuring annual learning outcomes will be introduced in schools. A National Testing Agency will be established as an autonomous and self-sustained premier testing organization to conduct all entrance examinations for higher education institutions. Pradhan Mantri Kaushal Kendras (PMKK) will be extended to more than 600 districts across the country. 100 India International Skills Centres will be established across the country. In FY2018, the Skill Acquisition and Knowledge Awareness for Livelihood Promotion programme (SANKALP) will be launched at a cost of INR 40 bn to provide market relevant training to 3.5 crore youth. A special scheme for creating employment in the textile sector has already been launched. A similar scheme will be implemented for the leather and footwear industries. IV. Policies related to the Underprivileged, Senior Citizens and Healthcare: Affordable housing will be given infrastructure status, which will enable these projects to avail the associated benefits. The National Housing Bank will refinance individual housing loans of about INR 200 bn in FY2018. Allocation for Women and Child Development is set ~23% higher at INR 225.95 bn in FY2018. The Government has prepared an action plan to eliminate kala-azar and filariasis by 2017, leprosy by 2018 and measles by 2020. Elimination of tuberculosis by 2025 is also targeted. Two new All India Institutes of Medical Sciences will be set up in Jharkhand and Gujarat. It is proposed to amend the Drugs and Cosmetics Rules to ensure availability of drugs at reasonable prices and promote use of generic medicines. New rules for regulating medical devices will also be formulated. Legislative reforms will be undertaken to simplify, rationalise and amalgamate the existing labour laws into 4 Codes on (i) wages; (ii) industrial relations; (iii) social security and welfare; and (iv) safety and working conditions. 5
The allocation for the welfare of Scheduled Castes has been stepped up to INR 523.93 bn in FY2018. The allocation for Scheduled Tribes has been increased to INR 319.20 bn and for Minority Affairs to INR 41.95 bn. For senior citizens, Aadhar based Smart Cards containing health details will be introduced. A pilot project in 15 districts during FY2018 will be introduced for the same. The LIC will implement a scheme for senior citizens to provide assured pension, with a guaranteed return of 8% per annum for 10 years. V. Policies related to Infrastructure: The total allocation for infrastructure development in FY2018 stands at INR 3961.35 bn. For FY2018, the total capital and development expenditure of Railways has been pegged at INR 1310 bn, which includes INR 550 bn provided by the Government. The Railways will focus on four major areas, namely: (i) passenger safety; (ii) capital and development works; (iii) cleanliness; and (iv) finance and accounting reforms. For passenger safety, a Rashtriya Rail Sanraksha Kosh will be created with a corpus of INR 1 tn over a period of 5 years. Railway lines of 3,500 km will be commissioned in FY2018, as against 2,800 km in. The Budget allocation for highways has been increased to INR 649.00 bn in FY2018 from INR 579.76 bn in BE. The Government has decided to set up Strategic Crude Oil Reserves in the states of Odisha and Rajasthan, taking the strategic reserve capacity to 15.33 MMT. VI. Policies related to the Financial Sector: The FIPB will be abolished in FY2018, and a roadmap for the same will be announced in the next few months. In the meantime, further liberalisation of FDI policy is under consideration. The bill relating to resolution of financial firms will be introduced in the current Budget Session of Parliament. This will contribute to stability and resilience of the financial system. An amendment Bill for the Arbitration and Conciliation Act 1996 will be introduced for resolution of disputes in infrastructure related construction contracts, PPP and public utility contracts. The Government will put in place a revised mechanism and procedure to ensure time bound listing of identified CPSEs on stock exchanges. The disinvestment policy announced in the last budget will continue. A new ETF with diversified CPSE stocks and other Government holdings will be launched in FY2018. In line with the Indradhanush roadmap, INR 100 bn is allocated for recapitalisation of Public Sector Banks in FY2018. Additional allocation will be provided, as may be required. The lending target for Pradhan Mantri Mudra Yojana is set at INR 2.44 tn, double the target for FY2016. VII. Policies related to the Digital Economy: Promotion of a digital economy is an integral part of Government s strategy to clean the system and weed out corruption and black money. 125 lakh people have adopted the BHIM app for digital payments. The Government will launch two new schemes to promote the usage of BHIM; namely, Referral Bonus Scheme for individuals and a Cashback Scheme for merchants. A Mission will be set up with a target of 25 bn digital transactions for FY2018 through UPI, USSD, Aadhar Pay, IMPS and debit cards. Banks have targeted to introduce additional 10 lakh new PoS terminals by March 2017. They will be encouraged to introduce 20 lakh Aadhar based PoS by September 2017. It is proposed to create a Payments Regulatory Board in the RBI by replacing the existing Board for Regulation and Supervision of Payment and Settlement Systems. Necessary amendments are proposed to this effect in the Finance Bill 2017. Government is considering the option of amending the Negotiable Instruments Act to ensure that the payees of dishonoured cheques are able to realize the payments. VIII. Policies related to Public Service: A comprehensive web based interactive Pension Disbursement System for Defence Pensioners will be established. This system will receive pension proposals and make payments centrally. It is proposed to introduce a system of single registration and two tier system of examination for Government recruitment. The number of tribunals will be rationalized by merging tribunals wherever appropriate. 6
The Government is considering introduction of legislative changes, or even a new law, to confiscate the assets of big time offenders who flee the country, till they submit to the jurisdiction of the appropriate legal forum. IX. Policies related to Prudent Fiscal Management: Defence expenditure excluding pensions has been budgeted at INR 2741.14 bn, including INR 864.88 bn for Defence capital. The FRBM Committee has favoured Debt to GDP of 60% for the General Government by 2023, consisting of 40% for Central Government and 20% for State Governments. Within this framework, the Committee has derived and recommended 3% fiscal deficit for the next three years. The Committee has also provided for Escape Clauses, for deviations upto 0.5% of GDP, from the stipulated fiscal deficit target. Considering the need for higher public expenditure in the context of sluggish private sector investment and slow global growth, the fiscal deficit for FY2018 is pegged at 3.2% of GDP, and will be pared to 3.0% of GDP in FY2019. The Revenue Deficit stands at 2.1% in the RE, to be curtailed to 1.9% in FY2018 BE. X. Policies related to Taxation: Recognizing that India largely a tax non-compliant economy, the Government is committed to make tax rates reasonable and expand the tax base. The income tax rate for the INR 2,50,000-5,00,000 slab has been halved to 5% from 10%. 10% surcharge is levied on taxable income of INR 50,00,000 to 1,00,00,000, while 15% surcharge on taxable income above INR 1,00,00,000 remains. Net revenue loss on direct tax is budgeted at INR 200 bn in FY2018. Meanwhile, revenue loss from low corporate tax for MSMEs is INR 72 bn. Tax rate for companies with turnover less than INR 500 mn is cut to 25%, which is expected to benefit 96% of Indian companies. Concessional withholding tax for debt will be extended until June 2020. Carry-forward of MAT will be allowed for 15 years from the existing 10 years. Basic customs duty on LNG is reduced to 2.5% from 5%. Cash transactions above INR 300,000 has been banned, while cash donation limit for charity trusts has been cut to INR 2,000. In an effort to clean the political funding system, cash donation to political parties is limited to INR 2,000 from one source. Political parties can get funds by cheque or via the digital mode. In this context, an amendment to the RBI Act for issuance of electoral bonds has been mooted. 5% TDS on insurance agents has been removed. FPIs are exempted from categories I and II of indirect transfer norms. Levies on point-of-sale machines are to be reduced. The GST Council has finalized almost all points, and hence, not many changes in indirect tax are proposed due to the upcoming GST. Excise duty hiked on pan masala (to 9% from 6%), unmanufactured tobacco (to 8.3% from 4.2%), handmade paper-rolled bidi (to INR 28/1000), machine made paper-roll bidi (to INR 78 /1000). Additional excise duty was raised on some cigarette categories, gutkha, chewing tobacco (to 12%) Excise duty was reduced on raw material for solar-tempered glass, while 6% excise duty was levied on solar-tempered glass. Customs duty on cashew nuts was hiked to 45% from 30%, while customs duty on nickel was scrapped. 12.5% countervailing duty was levied on silver medallions and coins. Source: Budget documents, ICICI Bank Research 7
ICICI Bank: ICICI Bank Towers, Bandra Kurla Complex, Mumbai- 400 051. Phone: (+91-22) 2653-1414 Treasury Research Group Economics Research Sunandan Chaudhuri Senior Economist (+91-22) 2653-7525 sunandan.chaudhuri@icicibank.com Kamalika Das Economist (+91-22) 2653-1414 (ext. 6280) kamalika.das@icicibank.com Samir Tripathi Economist (+91-22) 2653-7233 samir.tripathi@icicibank.com Niharika Tripathi Economist (+91-22) 2653-1414 (ext. 6943) niharika.tripathi@icicibank.com Pradeep Goyal Economist (+91-22) 2653-1414 (ext. 6229) goyal.pradeep@icicibank.com Sumedha Dasgupta Economist (+91-22) 2653-1414 (ext. 7243) sumedha.dasgupta@icicibank.com Renuka Khadke Economist (+91-22) 2653-1414 (ext. 8976) renuka.khadke@icicibank.com Treasury Desks Treasury Sales (+91-22) 2653-1076-80 Currency Desk (+91-22) 2652-3228-33 Gsec Desk (+91-22) 2653-1001-05 FX Derivatives (+91-22) 2653-8941/43 Interest Rate Derivatives (+91-22) 2653-1011-15 Commodities Desk (+91-22) 2653-1037-42 Corporate Bonds (+91-22) 2653-7242 Disclaimer Any information in this email 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, E-mail: samir.tripathi@icicibank.com or by telephone at +91-22-2653-7233 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 2.3.2. 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 8
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. 9