Published on 4/02/2017 4:18:09 PM | Source: Religare Capital Markets Ltd

FY18 Union Budget Review - Prudent math but growth support limited - RCML

The Union Budget’17-18 chose to slightly deviate from the fiscal consolidation path, budgeting for a FY18 fiscal deficit at 3.2% of GDP (vs. 3% earlier). Tax revenue assumptions were modest, but disinvestment and telecom receipts projections were optimistic even as demonetisation-led gains could help bridge the shortfall. Expenditure growth was muted and most existing schemes were continued. In all, while the budget avoided populist measures, it offered little growth support to fix post-demonetisation issues.


* Slight deviation in fiscal consolidation path:

Amid expectations of a relaxation in the fiscal consolidation roadmap, the FM surprised by budgeting for a slightly higher FY18 fiscal deficit number of 3.2% (~3.3-3.5% estimated) vis-à-vis the targeted 3%. The estimated net market borrowings stand at Rs 4.2trn for FY18 (RCMLe Rs 4.2tn), only slightly higher than FY17’s Rs 4trn. This should provide comfort to bond markets.


* Tax assumptions prudent, but disinvestment target optimistic:

The budget largely factored in reasonable assumptions on tax revenues, notwithstanding the revenue uncertainty from GST. It assumes a 12.7% increase in net tax revenue led by a 24.7% surge in income tax on IDS-2-related one-offs. All other taxes are budgeted to rise by 5-12%, while non-tax revenue is expected to drop by 13.7%. However, a record Rs 725bn is pegged from disinvestment while telecom receipts are budgeted at Rs 443bn – too optimistic in our view.

On a positive note, the Govt. cut the corporate tax rate for small businesses to 25% (from 29%) and the personal income tax rate for the lowest income band (Rs 0.25mn-0.5mn) by 50%.


* Upsides from demonetisation likely:

Interestingly, the Govt. has not provided for a higher dividend transfer from the RBI on account of the currency ban due to demonetisation. If this materialises, it could plug in a possible shortfall in disinvestment and telecom receipts. Also, an above-expected surge in tax collections from IDS-2 could aid revenues.


* Prudence on spending front but growth support limited:

The Govt. has hiked expenditure for FY18 by just 6.6%, avoiding populist measures and refraining from uncontrolled spending despite the upcoming state elections. However, the budget offers little growth support with aggregate spending of the rural development and agri ministries increased by just 8.9% for FY18 vs. a 26.6% hike in FY17. Also, most major schemes such as MGNREGA and PMGSY received no allocation hike.

Similarly, the capex is budgeted to rise by just 10.7%; we expected a sharp hike in agri/rural as well as capex spending to support growth, especially after a derailed growth trajectory post demonetisation.


FY18 fiscal deficit budgeted at 3.2% vs. 3% earlier

The Govt. managed to contain the FY17 fiscal deficit target at 3.5% of GDP. A surge in indirect tax collections owing to multiple excise hikes on petrol and diesel enabled it to contain the fiscal deficit at Rs 5.3tn, in line with the budgeted amount. In fact, the Govt. even hiked capital expenditure by 10.6%, as against a budgeted growth of just 3.9%.

For FY18, the Centre has chosen to delay the fiscal consolidation roadmap slightly. It has budgeted for a 3.2% fiscal deficit as against a target of 3%. This however, is lower than market expectations of 3.3-3.5%. In absolute terms, the deficit at Rs 5.5trn is slightly higher than the FY17 number. The quality of consolidation seems reasonable, with a slight over-budgeting on the disinvestment and telecom receipts front. Overall, non-debt receipts are expected to rise by 8.1% in FY18. Importantly, the Govt. has not budgeted for a higher dividend from the RBI in lieu of gains from the extinguishment of unreturned currency on account of demonetisation (estimated at ~Rs 400bn based on media reports of Rs 15trn deposits). If these gains were to materialise, it could offset the shortfall from telecom and disinvestment receipts.


Corporate tax rates cut, uncontrolled spending curbed

The Govt. has budgeted for a surge in income tax collections due to IDS-2 in FY18. It has also cut personal income tax rates for the lowest income band (Rs 0.25mn-0.5mn) and has reduced corporate tax rates for businesses with a turnover of <Rs 500mn.

The Govt.’s expenditure budgeting seems prudent. It has budgeted for a 6.6% growth in total expenditure in FY18. To its credit, it has avoided any populist measures and has refrained from uncontrolled spending despite the upcoming state elections. It has budgeted for a 10.7% hike in capex for FY18. We had expected a higher capex along with a significant hike in agriculture and rural spending, given the need to support investment amidst the ongoing slump in private capex.


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