Will the budget focus on fiscal maths, election or inflation? The Finance Minister (FM) Arun Jaitley will present NDA s fourth budget under the current term on February 1, 2018. This year FM faces a unique dilemma of balancing growth and inflation amid rising crude oil prices and bond yield. We believe that the government is likely report a fiscal deficit target in the range of 3.4-3.5% of GDP, higher than budgeted target of 3.2%. However, the effect of the slew of tax reforms would be seen in the form of rising revenue from FY19 onwards. Overall we expect (1) push in infrastructure spending to revive capex cycle), (2) developmental schemes to push rural economy and (3) providing sops /relaxation in income tax slabs / tax rate to boost consumption. Amidst waning tailwinds, reforms likely to provide support The government has been enjoying the fortunate tailwinds like falling crude oil prices, bond yield and inflation in the last 2-3 years. As a result of these factors, fiscal deficit was coming down as % of GDP. However, with rising crude oil prices and bond yield, the government is now in a tougher spot to manage growth amid inflation. However, the array of reforms likes GST (stable GST rates likely to push collections from FY19 onwards); better tax compliance and digitization are likely to keep the government s kitty in a healthier position to fund development and growth. Also, disinvestment targets and RBI dividend may be upped in order to lower fiscal gap. Rural economy and affordable housing to remain the concurring theme The government would continue its focus on rural economy and infrastructure development with schemes like MNREGA, affordable housing, roads, irrigation, interest subvention, credit support for small businesses, etc. We expect more measures in the upcoming budget to remove distress from rural economy. However, these measures in the form of subsidies like food (expansion of MSP across categories), interest (affordable housing) and fuel (crude oil touching ~70$) are likely to put stress on the fiscal prudence. Major changes in taxation measures unlikely We believe that any major change in corporate taxation is unlikely (while various industrial bodies continue lobbying for various tax sops and rebates), as the government s focus will be to maintain fiscal discipline. In the personal taxation space, government may offer minor relief/ exemptions to boost consumption, especially from the bottom of the pyramid. Budget conviction picks With a focus on boosting rural and affordable housing space, we expect consumption sector would continue to be a direct beneficiary from this budget. We expect FMCG, consumer durables, retail and building material sectors to benefit going ahead. We prefer companies like ITC, HUL, Maruti, etc. in this space. We also expect the government s impetus on housing sector and companies like, GIC Housing and DHFL to remain our best play. Please refer to important disclosures at the end of this report (22 January 2018) 1
Exhibit 1: Budget arithmetic In ` cr FY16RE FY17RE FY18E FY19E Comments Direct Tax 7,52,021 8,25,429 8,99,718 Direct taxes to increase with widening tax base and 9,71,695 higher tax compliance Indirect Tax 7,07,590 8,83,943 10,16,534 GST implementation and digitization to boost 11,69,015 indirect taxes Total 14,59,611 17,09,372 19,16,252 21,40,710 States 5,12,103 6,08,000 6,78,353 7,57,811 In-line with historical trend Tax Revenue 9,47,508 11,01,372 12,37,899 13,82,898 Non Tax Revenue 2,58,576 2,74,584 2,90,070 3,08,483 Dividend from RBI may be upped Disinvestment Revenue 25,312 56,500 60,000 60,000 Rationalization of disinvestment target Other Capital Receipts (Exborrowings) 18,905 19,040 22,105 24,735 In-line with historical trend Total Revenue 12,50,301 14,51,496 16,10,073 17,76,116 Revenue Expenditure 15,47,673 16,92,286 18,82,941 Higher interest payment would offset effect of lower 20,65,325 subsidies Capital Expenditure 2,37,718 2,86,282 3,06,063 3,42,484 Capex to increase, in-line with economy Total Expenditure 17,85,391 19,78,568 21,89,004 24,07,809 Fiscal Deficit 5,35,090 5,37,799 5,78,931 6,31,693 % of GDP 3.9 3.5 3.4 3.3 Source: Budget Documents, Angel Research Govt. likely to miss FY18 fiscal deficit target of 3.2%, may marginally increase FY19E pre-set fiscal deficit target from 3% Key Fiscal Indicators (% of GDP) FY14 FY15RE FY16RE FY17RE FY18E FY19E Gross Tax Revenue 10.0 9.9 10.8 11.2 11.3 11.3 Devolution to State 2.8 2.7 3.8 4.0 4.0 4.0 Net Tax to Centre 7.2 7.2 7.0 7.2 7.3 7.3 Direct Tax 5.6 5.6 5.5 5.4 5.3 5.1 Indirect Tax 4.4 4.3 5.2 5.8 6.0 6.1 Capital Receipt (ex borrowing) 0.4 0.3 0.3 0.5 0.5 0.4 Plan Expenditure 4.0 3.7 3.5 3.7 3.4 3.4 Non-Plan Expenditure 9.7 9.6 9.6 9.3 9.5 9.3 Subsidies 2.2 2.1 1.9 1.7 1.6 1.5 Total Capital Expenditure 1.7 1.5 1.8 1.9 1.8 1.8 Total Expenditure 13.7 13.3 13.2 13.0 12.9 12.7 Revenue Deficit 3.1 2.9 2.5 2.1 2.1 2.0 Fiscal Deficit 4.4 4.1 3.9 3.5 3.4 3.3 Primary Deficit 1.1 0.8 0.7 0.4 0.1 0.1 Source: Budget Documents, Angel Research Please refer to important disclosures at the end of this report (22 January 2018) 2
Jan-12 Apr-12 Jul-12 Jan-13 Apr-13 Jul-13 Jan-14 Apr-14 Jul-14 Jan-15 Apr-15 Jul-15 Jan-16 Apr-16 Jul-16 Jan-17 Apr-17 Jul-17 Jan-18 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Union Budget 2018-19 Preview Exhibit 2: Bond Yields have started firming up 9.5 9 8.5 8 7.5 7 6.5 6 5.5 5 Exhibit 3: CPI inflation has increased in recent times 14 12 10 8 6 4 2 0 Source: RBI Source: Bloomberg Exhibit 4: Subsidies have been kept under check Subsidy Break-down (`cr) FY14 FY15 FY16RE FY17RE FY18E FY19E Major Subsidies 2,44,717 2,49,016 2,41,857 2,32,705 2,40,339 2,49,526 Fertilizer Subsidy 67,339 71,076 72,438 70,000 70,000 70,000 yoy growth (%) 3% 6% 1.9% -4.0% 4.0% 4.0% Food Subsidy 92,000 1,17,671 1,39,419 1,35,173 1,45,339 1,48,246 yoy growth (%) 8% 28% 18.5% 1.0% 2.0% 2.0% Petroleum Subsidy 85,378 60,269 30,000 27,532 25,000 31,280 yoy growth (%) -12% -29% -50.2% -8% -9% 25% Interest Subsidy 8,137 7,632 13,808 18865 23,204 23,204 yoy growth (%) 12% -6% 80.9% 4% 23% 23% Other Subsidy 1,778 1,610 2,136 3,128 4,066 4,066 yoy growth (%) -23% -9% 32.7% 46% 30% 30% Total Subsidy 2,54,632 2,58,258 2,57,801 2,54,698 2,67,609 2,76,796 yoy growth (%) -1% 1% -0.2% -1% 5% 3% % to GDP 2.2% 2.0% 1.8% 1.68% 1.57% 1.45% Source: Budget Documents, Angel Research Exhibit 5: GST collections have tapered but likely to pick up in FY19 1,00,000 95,000 90,000 94,063 90,669 92,150 85,000 80,000 83,384 80,808 75,000 70,000 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Source: FINMIN Please refer to important disclosures at the end of this report (22 January 2018) 3
Exhibit 6: Sectoral budget expectations Head Current Status Expected Change Potential Impact Allocation to fertilizer and other reforms like soil health card Adequate allocation of `70,000cr in last budget Agro chemicals / fertilizers Increase in allocation/ focus to marquee programs Positive for the entire agri input and fertilizer companies Commercial vehicles; Incentives on scrapping of old vehicles that are more than 10-15 years old. No Incentive Automobile Incentives to the tune of 8-10% of vehicle cost It would encourage replacement of older vehicles, thereby boosting demand for CVs. Positive for CV manufacturers like Ashok Leyland, Tata Motors, Eicher Motors, etc. GST rate on electric vehicles Current rate is 12% Expected to reduce to 5% Positive for M&M and Tata Motors Final roadmap for recapitalisation of public sector banks Budgetary allocation to the core Govt. spending has improved sectors, including metals, which metal demand and total `1.23 account for large part of the stress Lac Cr worth of cases have been and faster resolution under NCLT. referred to NCLT Affordable housing credit Last year, incentives like interest subvention were introduced Strengthening Banking Board Bureau BFSI The plan is worth `2.11 Lakh cr Details on the types of bonds or the out of which `1.35 cr will be in the interest rates on these bonds form of front-loaded recapitalisation bonds Implemented from 1 st April, 2016 & appointing industry veterans on board Increased spending on infrastructure and focus on capex revival (both Govt and Pvt) Increase in tax exemption limit for home loan Measures to bring in more accountability on PSU Banks and further guidelines on consolidation Positive for PSU banks, as it would improve credit growth Lower slippages, provision and consequent improvement in bottom-line Housing finance companies to benefit Ability of PSU banks to raise funds would increase and reduce stress Allocation towards Defence / Railways/Metro Last 2-3 years spending toward these sectors are stagnant Capital Goods Allocation is expected to increase Positive for Defence players like, BEML, BEL, etc. and railway players like BEML, Titagarh Wagons, etc. Please refer to important disclosures at the end of this report (22 January 2018) 4
Head Current Status Expected Change Potential Impact Increase in rural spending Relatively lower allocation in last budget FMCG Increase in allocation to marquee programs Increase in income tax exemption Basic exemption limit is `2.5 lakh Increase up to `3 lakh.positive for the entire FMCG sector, which has significant rural exposure Higher disposable income would boost demand for FMCG companies TDS rate Cascading effect of Dividend Distribution Tax on dividend Last year, TDS was reduced from 10% to 2% for payments made to call centres. At present, the dividend received by Indian company is taxed at 15%. There is subsequent dual levy of dividend distribution tax on this, when distributed to its shareholders of parent company in India IT To be reduced to 2% for all software transactions Will improve the margins of the small IT companies Tax already paid on the dividend is expected to be allowed to be set off against Will benefit MNC companies tax liability from dividend distribution tax of the parent company in India. Infrastructure Increased allocation for infrastructure sectors like Roads, Railways, Housing and Urban Development Total capital outlay of `2.41Lakh Cr Increase in budgetary allocation Positive for infrastructure & capital goods companies Import duty on Aluminum 7.5% currently Increase to 10% Positive for Hindalco & Vedanta Customs duty on coking coal 2.5% currently Reduce to Nil Positive for domestic steel players Metal Oil & Gas Inclusion of natural gas in GST 20-25% tax currently 5% Reduction of Basic custom duty on Liquefied Natural Gas Currently 2.5% Reduce to Nil Positive for City Gas Distribution companies Positive for City Gas Distribution companies Pharma GST Refund Rates Currently 20-25% lower than the previous excise duty refund rates. Expected to reduce Will benefit all pharma companies R&D Sunset clause Only till 2020 Extension is expected Will benefit all pharma companies Source: Company Please refer to important disclosures at the end of this report (22 January 2018) 5
Head Current Status Expected Change Potential Impact GST rates Deduction limit on interest and principal on housing loan Single-window clearance Increased allocation toward Housing for All 2022 scheme and other housing schemes Under-construction properties are levied a GST of 12% Deduction Interest `2,00,000 Principle -`1,50,000 Multiple agency approval required at different stages Real Estate Allocation to Affordable Housing by 24.8% to `38,043cr Expected to reduce Expected to increase Expect to reduce clearance time for projects Expected to increase allocation Revival in subdued demand Improved housing demand positive for housing finance and real estate developers Positive for real estate developers Positive for affordable housing developers Import duty on gold Source: Angel research Retail Custom duty was increased from 2% Expected to reduce to 10% in FY2013 Positive for jewellery companies like Titan, PC Jeweller, TBZ, etc. Please refer to important disclosures at the end of this report (22 January 2018) 6
Please refer to important disclosures at the end of this report