In our pre budget note released on 27nd February, 2016 we mentioned that market is going into the budget with very high expectations as this is the first budget after demonetization & was perceived to be some kind of “fix it” budget. We believe our expectation from this budget has come out to be mixed bag with positive coming from not tinkering with long term capital gains taxation regime & doing away with of CBDT circular on taxation of indirect transfers by FIIs. However, the overwhelming need of the hour on measures for reviving economic growth especially after expectation of retardation in pace of growth due to demonetization did not really come about. While we are mindful of government’s fiscal constraints we expected some “out of box thinking” ideas on providing credit to MSME, rural & informal economy which is impacted the most by demonetization. Similarly we did not find any budget provisions that can speed up consumption which again has taken a strong beating in last few months. We feel the budget was mostly focussed on Farmers/rural population & housing. However the solace was that it did not go too far in announcing populist schemes which was one of the fears of the markets pre-budget.
We caution investors not to judge the effect of budget on economy by one day stock market reaction. We believe market’s reaction was “No bad news is good news”. We opine sustainability of outperformance of our markets will be dependent on basic fundamentals of economy & return of corporate earnings which in turn will be impacted by a whole host of factors –domestic as well as international.
Key highlights of this budget
As regards to total income, the budget assumes gross tax revenue growth of 11.7% over FY17RE. While the government has estimated ~25% growth in tax to be collected from individuals the expectation from corporate is at much muted rate of 9%. We believe this exuberance on individual is on back of similar growth in FY16-17.
We believe corporate tax collection growth rate is more reasonable especially in view of GST coming up sometime in FY18E. Also the bonanza of huge excise collections of petroleum products due to low crude prices will not be available in next year.
Our expectation that there is no merit in too many changes in indirect taxes as GST is due in few months has been met. There is not much change in excise/customs duty barring a few incidences. Similarly there is no change in Service tax rate.
For FY18 on the Non tax revenue side, income from disinvestment has been pegged at Rs 725 bn including strategic divestments. (During FY16-17 BE was Rs 565bn,RE is Rs 455bn & till date achieved Rs 310bn). We highlight that there has been consistent disappointment on this front as government has not met targets in past many years.
Total subsidy bill for FY18 is estimated to be Rs2.7tn (almost similar to Rs2.6tn FY17RE, ~1.7% of GDP). The major part of subsidy bill is taken away by food & fertilizer. Subsidy on Petroleum is estimated to go down by ~9% on assumption of more customers moving away from Kerosene to gas & crude price to remain at previous year levels. There is no mention of direct transfer of fertilizer subsidy through DBTL although this has already started on pilot basis. We expected some more clarity on this front.
Although the target on Fiscal Deficit (FD) for FY17RE has been maintained at 3.5% of GDP, for FY18BE it is estimated at 3.2%. This is a slip of 20 bps from earlier stated target of 3%. For FY19E FD target has been pegged at 3% in line with recommendation of FRBM committee. There was mixed reaction amongst stake holders on relaxation or sticking to guide map given on FD target. As of now market is likely to be pleased with 3.2% for FY18E.
The government has reiterated its objective of doubling farm income by 2020. This is intended to be achieved through increased expenditure on irrigation schemes, providing unified agriculture market & increase allocation on rural, agriculture and allied sectors. An amount of Rs1872bn has been allocated towards these.
FM has made announcement regarding revoking of controversial CBDT circular regarding taxation on indirect transfers by FIIs. This particular tax provision was bone of contention for FII & under pressure government had put this in abeyance a few days back. Today’s clarification puts to rest any negativity from tax angle on FII. We believe a lot of market movement today is positive reaction to this clarification.
As part of ease of doing business the government ha abolished FIPB. Since India has opened many sectors for foreign direct investments in last 2 years & most of foreign ownership restrictions are already removed there was no logic of keeping FIPB in existence. Hence we believe this is a logical step & will be taken positively by foreign investors in general. We expect this step should boost more investments into India.
Real estate sector has been demanding infrastructure status since a very long time. In budget FY18 the FM has agreed to accord infrastructure status to affordable housing segment. In our pre budget expectations note we were expecting this demand of industry to be met taking cues from PM’s speech on Dec 31, 2016 wherein he outlined his focus on “Housing for all”.
Total investment on Infrastructure (Including Road, Railways, Urban / Rural Development) has been pegged at Rs 3961bn, growth of ~10% YoY.
The government will look at changing laws to allow it to build airports in Tier 2 towns in PPP mode. Desire to rework PPP contracts & removing any bottlenecks in this regard is a positive.
Plan to reduce Corporate tax by 5% in next 4 years on track with few exemptions taken away from April 01, 2017. Corporates (MSME) with turnover of Rs 50 mn in FY2015-16 will now be taxed at rate of 25%. According to FM this will help almost 96% of MSME who filed their return in last fiscal. For larger corporates roadmap of 1% reduction every year along with setoff against removal of exemptions will kick start in next year.
Meager capital allocation of Rs 100 bn towards banks recapitalization was a disappointment. Post the large scale cleaning up of books of banks mostly upon insistence of RBI, the banks need a large amount for capital. As is evident from reported results for Q3FY17 by the banks, the problem of NPA continues. In light of huge amount of NPAs reported by Banks, this amount is far lower than market expectations. Although FM announced his full commitment to provide additional capital as and when required; but he did not give any definite plan or road map on provision of this amount.
A start has been made on funding to political parties. Although this subject could have been dealt outside budget too as it has nothing to do with fiscal arithmetic for next year but FM chose to make this a part of budget speech. We believe this is just a start of process and 7 they will need to travel a long way in this regard. Cleaning of political funding (supposed to be source of corruption) may help in elevating India’s reputation but no direct financial impact on country’s finances.
For markets No bad news is good news but is it same for economy?
After many years the markets approached budget with heightened expectations & a few fears like imposition of long term capital gain, taxation on indirect transfers by FIIs. Fortunately the 2 negatives expected did not come in the budget hence a relief for the markets. However the moot point is what happens in the long term? We were looking at this budget with perspective to provide some impetus to recover loss of growth momentum due to demonetization. Unfortunately the budget print does not inspire anything on that count.
In the past many months our markets have been reeling under selling pressure from FIIs. We do not believe this budget does anything to change that trajectory. It will neither increase nor decrease their selling meaning, no respite from pressure on markets. We do not see any major impact of this budget on corporate earnings too.
There is a case for rate cut by RBI as government has stuck broadly to its stated position on fiscal consolidation program. We have factored 75-100 bps cut in rates by RBI through CY17.
What should investors do now?
We expect pressure from global turmoil especially after Trump coming in as president of US & start of wave of de-globalization coupled with dampened corporate earnings for FY17E & FY18E will limit any upside in the markets. We remain cautious & continue with stock specific approach.
Impact of budgetary provisions:
The impact of specific budget provisions on specific sectors is discussed in following pages. Please read on to know which sectors get impacted in which way
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