Post Budget Analysis: Commodity Market : Highlights Finance Minister, Mr. Arun Jaitley, presented his third Union Budget. With an eye on supporting the small tax-payers and small investors, the Minister announced a slew of schemes and income-tax exemptions. He has rolled out a budget that is pro-poor and should usher growth and employment. It is encouraging to see that fiscal discipline has been given priority in the budget. Focus on rural / social sector spending and roads/highways is along expected lines and a positive. But less-than-expected support for banks' recapitalisation has disappointed somewhat. Though the FM has kept the income-tax slabs unchanged, but he has brought some cheer to the common man by proposing to increase limit of deduction in respect of rent paid from Rs.24,000 per year to Rs.60,000 per year. Also, no tinkering with the capital gains tax is a big relief for the markets. The FM has tried to keep the house in order, instead of pleasing everyone. The intent of the Finance Minister, purpose and direction seems right and the general public will have to digest the fact that there will always be a tradeoff between short-term pain for long-term gain. For more details, we present below a crisp budget analysis and how it affects the metals and energy sector. Following are some of the key takeaways Fiscal deficit seen at 3.9 percent of GDP in 2015/16 and at 3.5 percent of GDP in 2016/17. Planned expenditure seen at 5.5 trillion rupees in 2016/17. No increase in Service Tax. Proposed to set up panel to review the Fiscal Responsibility & Budget Management (FRBM) Act. Bankruptcy code for financial firms to be introduced in Parliament in 2016/17. RBI Act to be amended for implementing monetary policy framework. Committed to implementing GAAR from Apr 1, 2017. More reforms to come in foreign direct investment policy in insurance, pension, asset reconstruction companies. SEBI to launch new derivative products in commodities to benefit commodities exchanges. NBFCs allowed to claim tax benefit on 5% of income in lieu of NPA provision. STT on equity options increased to 0.05%. Government will pay employers' share of 8.33 percent in the Employee Provident Fund (EPF) for all new employees for first three years. Disclaimer: http://www.religareonline.com/research/disclaimer/disclaimer_rcl.html 2
Post Budget Analysis: Commodity Market (Metals & Energy) Budget 2016-2017 Outcome Financial Market New derivative products will be developed by SEBI in the Commodity Derivatives market. A comprehensive Code on Resolution of Financial Firms to be introduced. Proposed to amend the RBI Act for setting up of a Monetary Policy Committee (MPC) which will fix the benchmark interest rate of the central bank and set inflation targets. A Financial Data Management Centre to be set up. RBI to facilitate retail participation in Government securities. General Insurance Companies owned by the Government to be listed in the stock exchanges. Taxes No change in Income Tax slabs Reduction of Rs. 60,000 per annum for those who don t own house and pay rent, as against the previous Rs. 24,000. Only the interest that accrues on contributions to employee provident fund made after April 1 will be taxed while principal will continue to be tax exempt. Tax rebate for those earning less than Rs. 5 lacs per annum. First time home buyer Rs. 50,000 deduction for upto Rs. 35 lakh loan provided house cost not more than Rs. 50 lakhs. Impact This will boost the growth of commodity markets in long run in India with new products expected to attract more participants towards the sector. This was a long standing demand of the industry and the govt. has taken first step in that direction. A committee-based approach will add lot of value and transparency to monetary policy decisions. This will facilitate integrated data aggregation and analysis in the financial sector. The market was expecting a change in tax slab, wherein it was anticipated that the slab will be raised to Rs 3 lacs. However the Finance Minister chose to maintain a status quo. However, he has brought in some cheer by increasing limit of deduction in respect of rent paid from Rs. 24 000 per year to Rs. 60 000 per year. Individuals with income up to Rs. 5 lakh will get a relief of Rs 3,000 in their tax liability. This will provide a boost to housing sector. Disclaimer: http://www.religareonline.com/research/disclaimer/disclaimer_rcl.html 3
Post Budget Analysis: Commodity Market (Metals & Energy) Taxes CMP Lower (`) : 201.30 corporate tax for small companies at 29% surcharge + Target cess. (`) : To implement general anti-avoidance tax rule (GAAR) from April 1, 2017. Security transaction tax on options raised to 0.05 percent. Proposes to levy infrastructure cess of 1-4 percent on certain models of cars. Levy of STT in Options will be a dampener for domestic equity markets. Bullion Import duty on gold and silver kept unchanged at 10%. Import duty on semi-pure gold doré bars raised to 8.75 percent from 8.0 percent. Proposed to increase the basic customs duty on imported imitation jewellery from 10 to 15 per cent. Interest earned on Deposit Certificates issued under Gold Monetisation Scheme, 2015 and capital gains arising from them would be exempt from tax.. Base Metals Total investment in the road sector, including PMGSY allocation, would be Rs 97,000 crore during 2016-17. Allocation for roads and highways development at Rs. 55,000 cr. Industry was widely anticipating a duty cut of around 2-4%. Had it been the case, it would have boosted long term demand of bullion in the country, even as a duty cut would have resulted in short-term weakness in prices at MCX. Exemption from capital gains tax on redemption and interest earned from sovereign gold bonds, is expected to increase monetisation of gold in the country. Positive for base metals as more infrastructure projects will require more metals into the country. More focus on Make in India will also increase the demand of metals in India. Disclaimer: http://www.religareonline.com/research/disclaimer/disclaimer_rcl.html 4
Post Budget Analysis: Commodity Market (Metals & Energy) Base Metals Capital expenditure on roads and rail development at Rs. 2.18 lakh crore. Proposed to remove the export duty on low grade iron ore. Basic Customs Duty increased for primary aluminium from 5 percent to 7.5 percent and that on aluminium products from 7.5 percent to 10 percent. This will boost the export of iron ore. This will make import of aluminium in the country expensive. Energy Incentivize gas production from deep-water, ultra deepwater and high pressure-high temperature areas. Oil Industries Development Cess on locally produced crude oil from Rs. 4,500 per tonne to a higher-than-expected 20 percent of the value of the commodity. Proposed hike in excise duty on aviation turbine fuel to 14 percent from 8 percent. This will help India move towards self-sufficiency. As of now, such opportunities remain unexploited on account of higher cost and higher risks. Some of the misses remain No announcement regarding the reduction in the import duty of gold despite a significant decrease in the CAD because of the decrease in the gold imports. No announcement over allowing FIIs and MFs to participate in the Indian commodity markets, even though the FM announced that FDI and FPI investors would be treated as same. No relief in the Commodity Transaction Tax (CTT). Disclaimer: http://www.religareonline.com/research/disclaimer/disclaimer_rcl.html 5
Post Budget Analysis: Commodity Market (Agri) Impact on Agri Sector Farmer Development Implications Agri and farmers' welfare: Need to think beyond food security to income security. To double income of farmers by 2022. Rs 35,984 crore allocation for farmer welfare Govt implementing a unified market for agri produce, e-platform to be launched after states amend APMC Act. E-platform to be dedicated on Babasaheb Ambedkar's birth anniversary. Online procurement systems under FCI to ensure that farmers get a fair price for their produces Govt is launching a new initiative to provide cooking gas to BPL families with state support. Farmers have, many a times, been deprived of getting fair remuneration for their produce. This is because of the inefficiencies existing in the system. Government has initiated some steps to remove that inefficiency by its decision to launch e-platform for a unified market for agri produce. This would go a long way in ensuring farmers get the correct price. Proposal to double their incomes by 2022 would help in solving their problems. Nominal premium and highest ever compensation in case of crop loss under the PM Fasal Bima Yojana Disclaimer: www.religareonline.com
Post Budget Analysis: Commodity Market (Agri) Farmer Development Implications Urgent need to focus on areas of drought and rural distress. Self-help groups to be set up. Cluster formations under MNREGA 2.87 lakh crore grants to gram panchayats and municipalities - a quantum jump of 228% MNREGA to get Rs 38,500 crore Govt to spend Rs 850 crore in a few years on animal husbandry, cattle and livestock breeding Rs 15,000 crore set aside for loan subvention for agricultural loans taken by Allocating more for MNREGA, reducing the premium for crop insurance. Reducing premium to 2% for kharif crops and 1.5% for rabi crops as against the average premium of 5.5% for foodgrains under existing schemes and direct transfer of subsidies would have a long term beneficial impact on farmers. farmers. Direct benefit transfer scheme will be implemented for disbursal of fertilizer subsidy on a pilot basis. Disclaimer: www.religareonline.com
Post Budget Analysis: Commodity Market (Agri) Infrastructure Implications Rs 27,000 crore to be spent on roads network Rs 55,000 crore for roads and highways 50,000 km of state highways projected 10,000km of National Highways to be added in FY 2017 Total allocation to road sector including PMGSY: Rs. 97,000 crores Total outlay for infrastructure Rs. 2,21,246 crores in 2016/17 Rs 9000 crore allocated for Swachh Bharat Abhiyaan Rs 19,000 crore for Pradhanmatri Gram Sadak Yojna 65 eligible habitats to be connected via 2.23 lakh kms of road. Current construction pace is 100 kms per day Infrastructure bottlenecks continue to remain critical for the farm sector. Higher investment proposals in this sector should be beneficial for the economy as a whole. Increased investments in roads, power and other infrastructure areas would be critical in solving agricultural transportation issues and reduce costs of transport. Funds for Pradhanmatri Gram Sadak Yojna and Swachh Bharat Abhiyaan would have a long term positive impact for this segment. Disclaimer: www.religareonline.com
Post Budget Analysis: Commodity Market (Agri) Farm Productivity & Production Implications All-time high, Rs 9 lakh crore for agricultural loans Provision of Rs 15,000 crore to ease burden on loan repayment in form on interest subvention for farmers A dedicated irrigation fund worth Rs 20,000 crore to be set up under NABARD 5 lakh acres to be brought under organic farming over a three year period Pradhanmantri Krishi Sinchaai Yojna strengthened and implemented in Mission Mode There is no doubt that the highest impetus has been on the Agricultural sector. Whether it be raising the amount of loans, or easing burden of loan repayment, providing funds for irrigation, roads and electricity - all steps from the Government point towards a lot higher focus on the Agricultural sector. Allocation to PM Fasal Bima Yojana for 2016/17 is Rs 5500 crores Arrangements made for pulses procurement. Rs 500 crore allocated to pulses production Soil health card scheme to be implemented with greater vigor, all 14,000 crore Farms to be included under it by 2017. Working to Increase crop yield in rain fed areas Disclaimer: www.religareonline.com
Post Budget Analysis: Commodity Market (Agri) Farm Productivity & Production Implications 5,542 villages electrified. 100% village electrification to be achieved by May 1, 2018 Rs 8500 crore for rural electrification Only 46% of cultivated land is fed with irrigation. Rs 17000 cr next years and Rs 86500 cr in the next five years to increase area of irrigation Rs 60000 cr to harness ground water 87,765 crore allocated for rural development. Long-term irrigation fund of Rs 20,000 cr to be created With area under cultivation remaining stagnant, it becomes imperative that the productivity should improve through Irrigation. The Fund set aside for this purpose should be properly utilized to ensure more production and higher incomes for farmers. This could have a long term impact in solving the food problems we are facing to some extent. 5 lakh acres to be brought under organic farming over a 3-yr period Buffer stock of pulses will be created; 900 crore rupees for Market Stabilization Fund for Pulses Disclaimer: www.religareonline.com