The Union Budget for FY2017-2018 aims to stimulate the Indian economy through healthy allocation toward Housing, Agriculture and Rural sectors, besides infrastructure development - with primary focus on Railway, Roads and Waterways. At the same time, the Budget projects to limit the fiscal deficit at 3.2% of GDP. The net market borrowings at Rs3.48 trillion in FY2018 is lower than market expectations of around Rs4.2 trillion. Continued fiscal prudence and a comfortable liquidity situation leave scope for the Reserve Bank of India (RBI) to maintain its accommodative monetary stance. The reduction in tax liability for small-sized companies with a turnover under Rs50 crore, and the relief for individual tax payers with income between Rs2.5 and Rs5 lakh per annum are additional feel-good factors. Lastly, no bad news on the long-term capital gains tax (LTCG) in equities is good news for investors. However, the limits proposed on cash transactions could further squeeze the unorganised sector, which is already reeling under the adverse impact of demonetisation. The unorganised sector would also have to face challenges post the implementation of the Goods & Services Tax (GST), which is scheduled to be rolled out some time during FY2018. Overall, the Budget is positive for the Indian economy in general and equity markets in particular.
Some of the key takeaways are:
Healthy allocation for Housing, Rural & Agriculture sectors and infrastructure development
• The government has stepped up capital expenditure by 25.4% over the previous fiscal year. For the transportation sector, the Budget allocation stands at Rs2.41 trillion (includes Railway, Roads and Waterways). In addition, allocations have been made for Solar Power, Digital Infrastructure and other allied segments, resulting in a total infrastructure development allocation of Rs3.96 trillion for FY2018.
• Rural and Agriculture & Allied sector allocation is higher by 24% to Rs1.87 trillion.
• Affordable Housing has been given infrastructure industry status while interest subvention of 3% has been announced for borrowers of home loans up to Rs12 lakh. The holding period for computing LTCG on immovable property has been reduced from three years to two years.
Financial sector: No negative surprises
• Phasing out of the Foreign Promotion & Investment Board (FIPB).
• Creation of an integrated spot and derivatives market for commodities.
• No change in LTCG for equities (though off-market buying post October 2004 could be disallowed benefits of LTCG as per the fine print).
• Listing of public enterprises under the Central Government.
• Target for small loans for marginal borrowers doubled to Rs2.44 trillion under the Pradhan Mantri Mudra Yojana.
Government finances: Deficit targets encouraging; lowerthan-expected market borrowings leave scope for RBI to reduce policy rates
• The size of the Budget stands at Rs21.47 trillion, which includes revenue expenditure of Rs17.3 trillion. The Budget estimates a 12.2% increase in net revenue receipts on the back of a 15.7% upsurge in direct taxes, largely supported by expectations of a 24.9% jump in personal income tax collection. We believe that the assumption of healthy growth in personal income tax is based on better tax compliance and inflows from the Income Disclosure Scheme.
• Revenue deficit for FY2018 is pegged at 1.9% of GDP, which is well within the 2% target as per the Fiscal Responsibility and Budget Management (FRBM) Act. However, the government has pegged the fiscal deficit at 3.2% of GDP (higher than 3% as per the FRBM ACT) as an exception in order to stimulate the Indian economy.
• Net market borrowings for FY2018 are pegged at Rs3.48 trillion, which is lower than expectation and positive for the bond market. Also, the continued fiscal prudence and a comfortable liquidity condition would leave scope for the RBI to maintain its accommodative monetary stance.
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