Published on 2/02/2017 3:45:50 PM | Source: Kotak Securities Ltd

Union Budget Analysis : FY 2017-18 - A nuanced approach - Kotak Sec

FM has projected a 3.2% fiscal deficit for FY18, which looks 'Achievable', with total receipts projected to rise by only 6% YoY. Net tax revenues are projected to rise by 13%. The budget has rightly focused on maintaining the fiscal disciple while maintaining the direction of the economy by allocating higher investments on infrastructure, rural and agriculture sector, to support equitable growth. We expect RBI to cut interest rates by 50 bps over FY18, providing the required support to the private sector investments. Apprehensions on changes in capital gains tax structure have not come and Foreign Portfolio Investors (FPI) have been exempted from the tax provisions governing indirect transfer of assets, which is a relief for the markets. We expect markets to remain buoyant, if execution matches the intent.

* The FM has tried to achieve a balance between growth and fiscal prudence. Despite the 7% rise projected in overall expenditure and 11% rise in capital expenditure, FD is targeted to come down to 3.2% in FY18 from 3.5% in FY17RE. We opine that, the budget has set 'achievable' tax revenue targets for FY18. A 13% growth in net tax revenues looks within reach, based on a nominal GDP growth of 11.8%. Divestment revenue target of Rs.725bn needs to be closely monitored, though.

* With the FD number at 3.2% and the net Government borrowing budgeted at Rs.3.48tn (v/s Rs.3.47tn in FY17RE), we expect market yields to remain soft. This may provide the required support to the private sector, which has been reeling under low demand and high indebtedness.

* While revenue expenditure is projected to rise by 7%, capital expenditure (scheme and other than scheme) is budgeted to see a 14% rise. While the increase in scheme expenditure of 9% is slightly disappointing, there can be higher allocation towards capex through IBER. Total railway capex is budgeted at Rs.1.31tn of which, the budgetary support is only Rs.550bn. Rural development and infrastructure sectors, have received significant attention; which can also create several jobs. These factors are expected to provide a boost to growth in times when private sector capex is yet to pick up.

* On reforms, there are various announcements like abolishment of FIPB, creating an integrated public sector 'oil major', listing of railway PSUs, preparation of model law on contract farming, efforts to delist perishable items from APMC Act. We note that, important legislative agenda including GST are pending. All these are expected to further facilitate better competitiveness of PSUs, provide better realization to farmers and increase ease of doing business, in turn, encouraging private sector capex (interest rate reduction should also help). The cut in corporate tax rate has come through but only for smaller companies.

* Overall, we believe that, the budget has tried to maintain the fiscal discipline, by targeting FD of 3.2%. Growth is expected to come in through higher consumption (post demonetization) and from priority areas like rural and infrastructure sectors. More private sector investments will be encouraged by reform initiatives taken outside the budget, though.

* There has been no change in the corporate tax rates for companies having turnover of more than Rs.500mn. On the personal income tax front, tax rate in the Rs.0.25mn - Rs.0.50mn income bracket has been halved from 10% to 5%, providing relief to the extent of Rs.12,500. However, some deductions / exemptions have been rationalized.

* From the stock market perspective, no change in LT Capital Gains tax rules, is a big relief. GAAR will be implemented WEF FY18, which was largely expected. With the major event out of the way, the markets will likely focus on issues like RBI action and global economy. Off-budget action on budget initiatives will sustain the confidence of the markets over the medium term. Government's ability to pass significant legislations in ongoing parliament session would bode well for sustained market performance. We expect RBI to reduce rates by 50bps in FY18. We believe that, a bottoms-up approach will be the best approach over this time-frame.


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