Indian Union Budget FY18 One step at a time February 2017
Key highlights Gross Domestic Product (GDP) Nominal GDP for financial year 2017-18 projected to grow at 11.75% year-on-year (YoY), similar to financial year 2016-17 (FY17) Revenue Gross tax revenues are budgeted to grow 12% in financial year 2017-18 (FY18) vs 15% in FY17 Lower growth is expected in collections from excise duties as duties on petroleum products are expected to remain stable Taxes on income expected to grow by 25% factors in better compliance from demonetisation Divestment target increased to INR 725 billion despite undershooting targets in previous years Includes INR 110 billion from listing of government owned general insurance companies Expenditure Growth in expenditure has been contained at 6.5% in FY18 v/s 12.5% in FY17E Budgeted growth in revenue expenditure is lower at 6% as one-off expenses on pay commission and One Rank One Pension (OROP) in FY 17 are not required in the current year Capital expenditure growth maintained at 10% (YoY) in FY18 Railway budgetary expenses have not been directly consolidated into the budget. Gross budgetary support to Railways has increased from INR 450 billion to INR 550 billion The Budget mostly lays out realistic numbers and focused on curtailing expenditures 2
Key highlights Macro Finance ministry has echoed Reserve Bank of India (RBI) concerns on protectionism, commodity prices and US rates Government remains committed to achieving a rating upgrade in the near to medium term Moody s has reacted favourably to the budget on the fiscal consolidation path Reduction of debt to GDP will contribute towards the same Target outstanding liability to GDP is 41% compared to the current 47% Fiscal Consolidation Fiscal deficit target of 3.2% is on expected lines Fiscal Responsibility and Budget Management (FRBM) committee has recommended 3% fiscal deficit target for next 2 years revenue deficit target of 1.9% for FY18, 1.6% for FY19 and 1.4% for FY20 Other highlights Focus of budget has been on rural programmes such as Mahatma Gandhi National Rural Employment Guarantee (MNREGA) and rural housing programmes Potential windfall gains from demonitisation, which have not been factored into budget estimates, could be used for additional spending on infrastructure and bank recapitalisation Withholding tax regime continued for Foreign Portfolio Investors (FPI) and Masala bonds 3
Key highlights Funding the deficit Gross Market Borrowings stable at INR 5.8 trillion in FY18 v/s INR 5.82 trillion in FY17 Buybacks of INR 350 billion pending in the current financial year Lower proportion of fiscal deficit funded through market borrowings Small Savings has emerged as a significant means of funding Most States now excluded from utilisation of small savings collection Financing of fiscal deficit 4
Budget impact on markets
The equity market perspective A business as usual and a prudent budget without any negative surprises Key themes Rural and Farmer Focus: Increased funds for rural segments notably on rural employment, roads and power. Rural and social sector spending increased by 24% Improving Tax compliance: Reduction in corporate tax rates for MSMEs / reduction in personal income tax rate Digital ecosystem: Discouraging use of cash (banning of cash transactions above INR 300,000 / Aadhaar based payment infrastructure), Rural Broadband roll-out allocation at INR 100 billion Adherence to Fiscal prudence: Demonetisation and key state elections have not come in the way of maintaining fiscal prudence. Budget could be termed as Popular but not Populist Empowering Youth and the Underprivileged: Focus on skill development and job creation 6
The equity market perspective Key proposals Sticking to the Fiscal Consolidation Process: Fiscal deficit at 3.2% of GDP in FY18 versus 3.5% in FY17. Government mentioned that it would accept the recommendations of the Fiscal Responsibility and Budget Management (FRBM) committee Reduction in Personal Income and Corporate Tax Rates: For the first income slab of INR 250,000 INR 500,000, the income tax rate has been reduced to 5% from 10%. Corporate tax rate for smaller companies (turnover up to INR 500 million) reduced to 25% from 30% and set to benefit ~96% of Indian companies Sops for housing sector: Affordable housing gets infrastructure status, long term capital gains holding period of immovable assets reduced to 2 years from 3 years earlier and the base year for indexing moved to 2001 from 1980 Continued focus on infrastructure: Total spending on transport infrastructure pegged at ~1.5% of the GDP and at ~2.5% at an overall infrastructure basis. Indirect taxes: No major changes in the indirect tax structures as they would be subsumed within the proposed GST regime. Improving transparency in political funding: Limit of INR 2000 on cash donations (earlier limit of INR 20,000) received by political parties 7
Key sectorial impact Sector Measure Likely impact Increase allocation to various sectors like Road, Irrigation, Rural Electrification, Feeder separation for Power distribution Positive for power and infrastructure companies Section 80-IA sunset clause is not extended Negative for private developers Infrastructure Second phase of Solar Park development to be and Real Positive for Solar Power developers and EPC players taken up for additional 20,000 MW capacity Estate A boost to affordable housing via higher allocation to the government s low-cost housing scheme Positive for Real estate developers and by including low-cost housing in the definition of infrastructure Minor reduction in personal tax rates in the INR This would be positive for consumption spends and hence 250,000 to INR 500,000 Income Slab could lead consumer companies at the margin to higher income in the hands of people Consumer Sector Thrust on significant increase in farmer/rural income through increased allocation to irrigation, crop insurance, MGNREGA (rural employment programme) could act as a demand driver for companies focused on rural economy in the medium term Excise Duty increase of around 6% on cigarettes This would be positive for companies focused in rural areas Positive for cigarette firms as this hike is lower than market expectation and could be mitigated with a little price hike 8
Key sectorial impact Sector Measure Likely impact Capital infusion of INR 100 bn for PSU banks Lower than INR 250 bn in FY17 but will help improve capital adequacy of the PSU banks Tax deductions on provisions towards NPLs has Positive for Banks that are incurring higher credit cost and been raised from 7.5% of total income to 8.5% unable to claim full tax deduction Reduction in corporate tax rate for small Positive for cash flows of SMEs and indirectly for banks' companies (with turnover of up to INR 500 mn) by and NBFCs' asset quality 500 bps Financials Energy Materials Listing and trading of Security Receipts issued by a securitisation company or a reconstruction company under the SARFAESI Act Affordable housing given infrastructure status and increase in minimum size of units Focus on digital payments (Ban on cash transactions above INR 300,000) Proposal to create an integrated oil major Reduction of basic customs duty on LNG from 5% to 2.5% Increased allocation to infra and focus on affordable housing Import duty on silver increased (6 to 10%) as well as on CVD (0 to 12.5%) and on laterite or aluminum ore (0 to 15%) The import duty on HR coils that are meant for welded tubes and pipes manufacture has been reduced to 10% from 12.5% earlier 9 This will enhance capital flows into the securitization industry and help in dealing with bank NPAs Positive for mortgage credit demand Increased digital payments will improve fee pools for banks Though M&A related operational issues may come up in the near to medium term, in the long term this can lead to various synergies and better cost controls. Positive for LNG re-gasifiers, gas supply / distribution companies and LNG users Positive in terms of demand, prices and utlisations across building materials and metals Positive for non-ferrous companies Positive for pipe manufacturers
The debt market perspective Fiscal deficit target on expected lines at 3.2% for FY18 though higher than the FRBM committee s recommendation of 3%. Greater discipline required to meet disinvestment targets Expect government securities (G-sec) yields to remain range bound Supply of G sec incrementally limited, which may lead to increase in corporate and SDL spreads Intermediate duration funds should continue to perform well Borrowing estimates Fiscal deficit Particulars BE FY18 (INR cr) RE FY17 (INR cr) Growth GDP at current prices 16,847,455 15,075,429 11.75% Fiscal Deficit as % of GDP 3.24% 3.54% Net Borrowing 423,226 406,677 4.07% o/w Buyback 75,000 59,459 26.14% Net Borrowings excl. Buyback 348,226 347,218 0.29% Maturities* 156,774 175,291 Gross Borrowings 580,000 581,968-0.34% *Maturities of FY18 are projected to be lower on account of estimated buyback of INR 34k crores 10
To summarise Lack of negatives and focus on fiscal prudence stood out The focus areas of the budget is on Rural & Farmer welfare, Youth and Social sector, Increased tax compliance and Digital economy Fiscal prudence, adherence to FRBM targets, commitment to reforms & lack of unpleasant taxation proposals would be received well by the markets Risks Prolonged disruption due to Demonetisation and likely impact of GST on unorganised sector can derail growth leading to shortfall in tax revenues. Revenue mobilisation through non-tax measures is welcome though the targets for disinvestments appear stiff Overall, Budget 2017-18 is a continuation from the previous budget with the prudent use of means to promote rural development and social sector spending 11
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