In Focus: India Budget Treasury Research Group For private circulation only India: A Budget grounded in socio-economic reality The Union Budget FY2019 was unveiled today amid considerable flux and uncertainties about the macroeconomic backdrop of the economy and the need to balance multiple objectives. The Indian economy has been slowly recovering from several structural headwinds, which had temporarily arrested growth. The second half of FY2018 is expected to see growth recover sharply, with the momentum to continue in FY2019. The Budget endorsed the recent growth in the manufacturing and services sectors, and expects export growth to clock a 15% YoY growth in FY2018. Given this backdrop, the Budget has balanced the objective of bolstering growth without abandoning the path of fiscal discipline altogether, albeit a temporary straying from that path is envisaged. The Budget has focused on the sectors of agriculture, rural infrastructure (including housing), Bharatmala Pariyojana and employment generation, as expected. The goals of livelihood generation and infrastructure development in rural India are expected to be met at a cost of ~INR 14.3 tn, which includes an off-budget support of ~INR 12 tn. The revised estimates for FY2018 show that headline fiscal deficit will slip to 3.5% of GDP as against a budgeted 3.2%, exactly as expected by us. The next fiscal is expected to see some consolidation at 3.3%, while the target of 3% has been pushed to FY2021, a year later than expected by us. In this context, the Government has accepted the key recommendations of the Fiscal Responsibility and Budget Management (FRBM) Committee to bring down Central Government s Debt to GDP ratio to 40%, and to use Fiscal Deficit target as the key operational parameter. Key takeaways from fiscal arithmetic: February 1, 2018 Samir Tripathi samir.tripathi @icicibank.com +91-22-33987233 Sumedha DasGupta sumedha.dasgupta @icicibank.com +91-22-33987243 Sparsh Chhabra sparsh.chhabra @icicibank.com +91-22-33981309 Please see important disclaimer at the end of this report In line with expectation, Government breached the fiscal deficit target by 0.3% to 3.5% of the GDP, primarily led by higher revenue expenditure. The target for the next year is set at 3.3% of the GDP slightly higher than our expectation. Despite getting 11 months of revenue under GST, the indirect tax target for FY 2018 has been met. For FY 2019, Government has budgeted a 19.2% increase in indirect tax, led by strong collection through GST. Introduction of E-way bill, 12 month of GST collection and increased buoyancy due to more compliance and new registrations is expected to pave the way for higher indirect tax. However, the budgeting for indirect taxes in FY2019, especially GST revenues, seems to be very ambitious, even accounting for more buoyancy and coverage. We believe that direct taxes growth at 14.4% is realistically budgeted with strong support from income taxes. Clampdown on black money and increased formalization of the economy will aid in achieving the target. Meanwhile, corporate taxes are expected to grow at a relatively modest rate considering the tax rate has been reduced to 25% for corporates with turnover less than INR 250 crores. The disinvestment target for FY 2018 has been easily achieved and the Government has set a target of INR 800 bn for FY 2019. Asset sales for the first time has notched ~INR 1 tn. o Three public sector general insurance companies- National Insurance Company Ltd., United India Assurance Company Limited and Oriental India Insurance Company Limited will be merged into a single insurance entity and will be subsequently listed. While the buoyant stock markets are helpful in promoting asset sales, we will have to wait and see if there is any implication of the introduction of Long term capital gains (LTCG) on the markets. We admit that the equity market has been resilient intraday to the announcement. Total expenditure is expected to grow at 10.1% in FY 2019 with equal emphasis on revenue and capital expenditure. The growth budgeting for capital expenditure is disappointing in FY2019, given the Government s focus on infrastructure. The net borrowing requirement of the Government required to fund the fiscal deficit (INR 3.9 tn) seems to be in line with expectations for FY2019. It is welcome that the Government has raised funding from cash balances. However, the significant rise in other receipts in FY2019 is a cause for concern, as a shortfall in this will lead the Government to look for other sources of financing, including market borrowing.
Budget focuses on alleviating rural distress and engendering employment Agriculture: The Budget has proposed to peg the Minimum Support Price (MSP) for crops at least at 1.5 times their cost of production (refer to Appendix IV for details). Additionally, the Budget has indicated that the NITI Ayog, in consultation with Central and State Governments, will devise a mechanism so that farmers get adequate price for their produce if market price is less than MSP. In this context, it is worth noting that the Government of Madhya Pradesh is already implementing the Bhavantar Bhugtan Yojana, under which the State Government credits the difference between the MSP for the crop and the corresponding modal rate based on average prices prevailing in mandis directly into the bank accounts of farmers. An Agri-Market Infrastructure Fund with a corpus of INR 20 bn will be set up for developing and upgrading agricultural marketing infrastructure. An Operation Greens will be launched to promote Farmer Producers Organizations, agrilogistics and processing facilities, so that horticultural crops do not suffer from lack of warehousing and connectivity. The Budget proposes to set up a Long Term Irrigation Fund (LTIF) in NABARD for funding irrigation works. Additionally, under the Prime Minister Krishi Sinchai Yojna, ground water irrigation will be taken up in 96 districts where less than 30% of the land holdings gets assured irrigation presently. Physical and social infrastructure development: Under the Prime Minister Awas Yojana, 51 lakh houses in rural areas and 37 lakh houses in urban areas will be constructed in FY2019. Government will establish an Affordable Housing Fund in National Housing Bank, funded by priority sector lending shortfall and fully serviced bonds authorized by the Government. A flagship National Health Protection Scheme to cover over 10 crore poor families will be launched to provide coverage up to INR 5 lakh per family per year for secondary and tertiary care hospitalization. Education cess has been raised to 4% from the existing 3% to fund measures to promote the education of children from BPL families. An all-time high allocation has been made to the rail and road sectors. Railways capex for FY2019 has been pegged at INR 1.48 tn, with a large part of the capex devoted to capacity creation. The Government will initiate monetizing select CPSE assets using InvITs from FY2019. It is proposed to expand the existing airport capacity by more than five times under a new NABH Nirman. Initiative. The balance sheet of Airports Authority of India shall be leveraged to raise more resources for funding this expansion. The Government also proposes to setup five lakh wi-fi hotspots which will provide broadband access to five crore rural citizens. Employment generation: A target of INR 3 tn has been set for lending under MUDRA Yojana in FY2019. Government will contribute 12% of the wages of the new employees in the EPF for all the sectors for the next three years. Also, the facility of fixed term employment will be extended to all sectors. Outlay for the textiles sector has been set at INR 71.5 bn, which is ~19% higher than the package for FY2017. Women-centric measures: Under the Prime Minister s Ujjwala Scheme, free LPG connections will be provided to 8 crore women, revised from an earlier target of 5 crore women. To incentivize employment of more women in the formal sector, women employees' contribution to EPF will be reduced to 8% for first three years of their employment against existing rate of 12% or 10%, with no change in employers' contribution. The above measures, among others, were the notable takeaways from the Budget today. (Please refer to the Appendix for further details and fiscal calculations) 2
APPENDIX (I) FISCAL CALCULATIONS ( INR bn) FY2018 BE FY2018 RE FY2019 BE Growth in FY19 (% YoY) A B C (C/A) (C/B) Revenue receipts 15,158 15,054 17,257 13.8 14.6 Gross tax revenue 19,116 19,461 22,712 18.8 16.7 Direct taxes 9,847 10,097 11,552 17.3 14.4 Corporate tax 5,387 5,637 6,210 15.3 10.2 Income tax 4,413 4,413 5,290 19.9 19.9 Other 47 47 52 10.6 10.6 Indirect taxes 9,269 9,364 11,160 20.4 19.2 Customs 2,450 1,352 1,125 - - Excise 4,069 2,770 2,596 - - Service tax 2,750 795 - - - GST - 4,446 7,439 - - Transfer to states 6,746 6,730 7,881 16.8 17.1 Net tax revenue 12,270 12,695 14,806 20.7 16.6 Non-tax revenue 2,888 2,360 2,451-15.1 3.9 Non-debt capital receipts 844 1,175 922 9.2-21.5 Recovery of loans 119 175 122 2.5-30.2 Disinvestment 725 1000 800 10.3-20.0 Total receipts 16,002 16,229 18,179 13.6 12.0 Revenue expenditure 18,369 19,443 21,418 16.6 10.2 Capital expenditure 3,098 2,734 3,004-3.0 9.9 Total expenditure 21,467 22,178 24,422 13.8 10.1 Gross fiscal deficit ( GFD) 5,465 5,948 6,243 GDP 168,475 167,847 187,223 11.1 11.5 GFD % of GDP 3.2 3.5 3.3 Source: Budget documents, ICICI Bank Research (II) SUBSIDY BILL Major Subsidies (INR bn) FY 2018 (BE) FY 2018 (RE) FY 2019 (BE) Growth in FY2019 (% YoY) A B C (C/A) (C/B) Fertilizer 700 650 701 0.1 7.8 Food 1453 1403 1693 16.5 20.7 Petroleum 250 245 249-0.4 1.6 Total 2403 2298 2643 10.0 15.0 Source: Budget documents, ICICI Bank Research 3
(III) GOVERNMENT BORROWINGS (INR bn) FY2018 (BE) FY2018 (RE) FY2019 (BE) Fiscal Deficit 5465 5948 6243 Gross Borrowing 5800 5990 6055 Repayment -1568-1396 -1435 Net Market Loans 4232 4594 4621 Net Buyback -750-570 -719 Borrowing for Switches 250 430 281 Repayment for Switches -250-430 -281 Net Switches 0 0 0 Mar ket Loans 3482 4024 3901 4. Short term borrowings 20 775 170 5. External Assistance (Net) 158 24-26 6. Securities issued against Small Savings 1002 1026 750 7. State Provident Fund (Net) 140 150 170 8. Other Receipts (Net) 535 343 847 Total 5337 6342 5812 DRAW-DOWN OF CASH BALANCE 128-394 431 Financing of Fiscal Deficit 5465 5948 6243 Source: Budget documents, ICICI Bank Research (IV) AGRICULTURAL COSTS Kharif (INR/quintal) Pr ojected cost for FY2018 MSP for MSP/ Pr ojected cost A2 A2 +FL C2 FY2018 A2 A2 +FL C2 Paddy (Common) 840 1,117 1,484 1,550 1.8 1.4 1.0 Jowar 1,214 1,556 2,089 1,700 1.4 1.1 0.8 Bajra 571 949 1,278 1,425 2.5 1.5 1.1 Maize 761 1,044 1,396 1,425 1.9 1.4 1.0 Ragi 1,384 1,861 2,351 1,900 1.4 1.0 0.8 Tur 2,463 3,318 4,612 5,450 2.2 1.6 1.2 Moong 2,809 4,286 5,700 5,575 2.0 1.3 1.0 Urad 2,393 3,265 4,517 5,400 2.3 1.7 1.2 Groundnut in shell 2,546 3,159 4,089 4,450 1.7 1.4 1.1 Soyabean (Yellow) 1,787 2,121 2,921 3,050 1.7 1.4 1.0 Sunflower 2,933 3,481 4,526 4,100 1.4 1.2 0.9 Sesamum 2,685 4,067 5,706 5,300 2.0 1.3 0.9 Nigerseed 1,788 3,912 5,108 4,050 2.3 1.0 0.8 Cotton (medium staple) 2,622 3,276 4,376 4,020 1.5 1.2 0.9 Average 1.9 1.3 1.0 Source: Commission for Agricultural Costs and Prices, ICICI Bank Research A2: Actual paid out cost A2 +FL: Actual paid out cost plus imputed value of family labour C2: Comprehensive cost including imputed rent and interest on owned land and capital Given the above table, the Government may opt for a weighted average of the three methods of computing cost in the exercise of setting MSP at 1.5 times cost of production. 4
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