indian union budget fy18 - · pdf file2 key highlights gross domestic product (gdp) nominal...

February 2017

Indian Union Budget – FY18 One step at a time…

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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

Source: Indian Union Budget Document, February 2017

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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


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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

Budget impact on markets

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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


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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


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Key sectorial impact

Sector Measure Likely impact

Infrastructure

and Real

Estate

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

Second phase of Solar Park development to be

taken up for additional 20,000 MW capacityPositive for Solar Power developers and EPC players

A boost to affordable housing via higher allocation

to the government’s low-cost housing scheme

and by including low-cost housing in the definition

of infrastructure

Positive for Real estate developers

Consumer

Sector

Minor reduction in personal tax rates in the INR

250,000 to INR 500,000 Income Slab could lead

to higher income in the hands of people

This would be positive for consumption spends and hence

consumer companies at the margin

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

This would be positive for companies focused in rural

areas

Excise Duty increase of around 6% on cigarettesPositive for cigarette firms as this hike is lower than market

expectation and could be mitigated with a little price hike

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Key sectorial impact

Sector Measure Likely impact

Financials

Capital infusion of INR 100 bn for PSU banksLower than INR 250 bn in FY17 but will help improve

capital adequacy of the PSU banks

Tax deductions on provisions towards NPLs has

been raised from 7.5% of total income to 8.5%

Positive for Banks that are incurring higher credit cost and

unable to claim full tax deduction

Reduction in corporate tax rate for small

companies (with turnover of up to INR 500 mn) by

500 bps

Positive for cash flows of SMEs and indirectly for banks'

and NBFCs' asset quality

Listing and trading of Security Receipts issued by

a securitisation company or a reconstruction

company under the SARFAESI Act

This will enhance capital flows into the securitization

industry and help in dealing with bank NPAs

Affordable housing given infrastructure status and

increase in minimum size of unitsPositive for mortgage credit demand

Focus on digital payments (Ban on cash

transactions above INR 300,000)Increased digital payments will improve fee pools for banks

Energy

Proposal to create an integrated oil major

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.

Reduction of basic customs duty on LNG from 5%

to 2.5%

Positive for LNG re-gasifiers, gas supply / distribution

companies and LNG users

Materials

Increased allocation to infra and focus on

affordable housing

Positive in terms of demand, prices and utlisations across

building materials and metals

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%)

Positive for non-ferrous companies

The import duty on HR coils that are meant for

welded tubes and pipes manufacture has been

reduced to 10% from 12.5% earlier

Positive for pipe manufacturers

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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

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%

Fiscal deficit

*Maturities of FY18 are projected to be lower on account of estimated buyback of INR 34k

crores


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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


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