Anoop Bhaskar

Snippets of Budget 2018..

By: Anoop Bhaskar

While the budget is an annual exercise of the government’s finances, a holistic way to analyse the budget is to look at the path chosen by the government over its entire term – if it has been consistent with its promises. In this context, NDA’s governments 4th budget has been consistent in its approach with the overall fiscal math appearing to be adhering to its stated objective of fiscal consolidation over the medium term.
 

While the overall allocation towards capex has increased by a modest 3.7%, it is the longer term trend that needs focus with overall capex spends from FY2014-2019 increasing by 73%. This growth is much higher than the 51% growth from FY2009-FY2014.
 

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On the subsidy side, the three key subsidies have been virtually flat growing at a total of just 8% over FY2014-2019. However, food subsidy has increased at a whopping 84% but this has been compensated by a 71% fall in oil subsidy over the same period. This compares to a doubling of subsidies by the previous government between FY2009 to FY2014.

 
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The prudence shown by the current government on controlling subsidies and using the resultant savings towards increasing capex outlay has resulted in a modest 24% increase in absolute Fiscal Deficit from FY2014-2019, as compared to a 49% jump from FY2009-2014. At the same time, India’s nominal GDP has grown 68% from FY2014-2019, thereby resulting in lowering of Fiscal Deficit as a % of GDP from 4.5% in FY2014 to 3.3% in FY2019. While there has been a minor slippage in FY2018, the FM has also adopted recommendations of the new Fiscal Responsibility and Budget Management Act with a commitment to reach 3% by FY2021, thus maintain the glide path.

 
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Tax collections have been buoyant, with Corporate, Income and Indirect taxes increasing 57%, 122% and 124% respectively from FY2014-2019. Taxes as a % of GDP have seen a continuous increase from 10.1%in FY2014 to 12.1% in FY2019.

 
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To summarize
 
Over FY2014 – FY2019, the government has done a reasonable balancing act by boosting capex through both budgetary as well as non-budgetary sources while curbing the growth in subsidies and improving tax collections.
 
As compared to other pre-election budgets, the government hasn’t gone the whole hog in terms of spending – 2008-09 budget increased by 20.8%, 2013-14 budget increased by 13.8% whereas the proposed budget expenditure increased by 10.8% which is lower than the nominal GDP growth estimate. Hence, the budget cannot be viewed as inflationary/expansionary in this context.
 
With respect to taxation, the reintroductions of long term capital gains can result in a period of uncertainty as investors adjust to the new regime after enjoying 12 years of tax-free returns. Going forward, this reintroduces an element of uncertainty in every budget with a built in volatility which was absent earlier. However, flows into any asset class should be driven by its attractiveness of potential returns, rather than the tax treatment.
 
We feel that the economic cycle is showing signs of an upturn with improvement in earnings growth expected. Going forward, improving earnings aided by global cyclical upturn would be a bigger trigger for markets than the short-term uncertainty over the LTCG and budget.
 
Key Takeaways from the budget
 
FY 18 Revised budget front loads Revenue expenditure at the cost of capital expenditure
 
1. FY 18 Revenue Expenditure is pegged at Rs 19.4 lakh crore, a growth of 15% YoY. Capital expenditure is pegged at Rs 2.73 lakh crore, de-growth of 4% over FY 17. Revenue expenditure has been bumped up 6% from the budget estimate, whereas Capital expenditure has been bumped down 12% from the budget estimate.
 
2. Off-budget expenditure (through PSUs and other non-budgetary sources) has seen a 41% increase from Rs. 3.38 lakh crore to Rs. 4.77 lakh crore to compensate for the low budget capex, resulting in 20.5% growth in total capex.
 
3. For FY 19, both Revenue & Capital Expenditure are budgeted to grow 10% with flat off-budget capex.
 

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Budget tilts towards Populism after the focus on capex in the first 4 years. Though no rural specific schemes have been announced, higher Minimum Support Prices and greater allocation to food subsidy seem to be aimed at reliving farm distress
 
1. One of the Big Headlines of the Budget 2018 was FM announcing that MSP will be 1.5 times Cost of Production (CoP). According to the FM, FY18 Rabi MSP has already declared at least 1.5x the cost of production (Avg increase in Rabi crop MSP in FY18 was 8.3%). Therefore expect Kharif MSP to be higher in the similar range.
 
2. The provision for higher MSPs is visible in the food subsidy – the FY 18 RE implies a growth of 27% over FY 17 and the FY 19 BE implies a 21% growth over FY 18.
 

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3. For other rural oriented schemes, the spending growth is on the lower side – 7.8% FY 18 RE and 6.5% FY 19 BE. The RE for FY 18 is 5% more than the original budget, with MNREGA allocation increased by 15% from Rs. 48,000 cr to Rs. 55,000 cr. Total allocation under the head ‘Rural Development has been increased 2.8% in FY 19, after a 19% increase in FY 18 BE.
 
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Infra spending muted over a high base as budget expenditure gets the cut in FY 18 RE – focus on off-budgetary sources to boost capex.
 
1. Total capital expenditure in FY 18 up 20.5% in FY 18 RE, Budget expenditure down 5% (Rs 2.73 lakh cr) and non-budget expenditure up 41% (Rs 4.77 lakh cr). In FY 19, total capital expenditure is expected to increase 4% (10% from budget and flat off-budget)
 
2. Focus on Roads and Railways with healthy double digit growth in both segments both in FY 18 and FY 19. Budgeted Growth in other segments muted.
 
3. Allocation to housing muted. Allocation to the flag-ship Pradhan Mantri Awas Yojna cut by 5% for FY 19 ( Rs 27,505 cr) after a strong 39% increase in FY 18. Also, a major chunk of this amount directed towards Rural Housing (Rs 21,000 cr). Government will also establish a dedicated Affordable Housing Fund (AHF) in National Housing Bank, funded from priority sector lending shortfall and fully serviced bonds authorized by the Government of India. In addition budget document mentions Internal Extra Budgetary Resources (IEBR) for PMAY (Urban) at Rs25,000cr. If this fund is implemented, total allocation to housing gets bumped up to Rs 52,500cr. We await details on this fund.
 

Total Capex: Budget + off-budget
 
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Budget Capex
 
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Subsidies up 15% in FY 19 BE and 12.6% in FY 18 RE as compared to 10% and 12% growth in total expenditure, respectively.
 
1. Growth in subsidies led by 20% + growth in food in both years.
 
2. Despite the recent surge in oil prices and halt in price hikes on subsidised LPG, the government has kept its FY19 petroleum subsidy estimate unchanged at Rs 250bn (flat over FY18). While FY18 estimates appear in line, the FY19 figure (at US$ 65/bbl oil price) looks low vis-à-vis estimated Rs 290bn (without subsidised LPG price hikes). This marginally raises doubts over whether the government will continue with its reform agenda of sparing ONGC, OINL and OMCs the subsidy burden.
 
3. Total fertiliser subsidy allocation is Rs 700.8 bn (Rs 449.89 bn for urea and Rs 250.90 bn for complex fertilisers). Revised estimates for subsidy allocation in FY18 are Rs 650 bn (Urea is at Rs 427.2 bn and complex fertiliser at Rs 222.5 bn). Actual FY17 total fertiliser subsidy stood at Rs 663.1 bn. The subsidy is largely flat (up 7.8%). Any steep increase in raw material price would nudge players to increase MRP.
 
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Fiscal math looks largely credible:
 
1. The budget math looks credible, with the government targeting to increase spending by 10.1%YoY. Assumptions on the tax revenue front (direct and indirect taxes) look largely achievable – more for direct tax collection growth than GST collections, given the uncertainty around GST collections until now. The divestment target of Rs800bn, while achievable, could be slightly ambitious in context of a busy election year.
 
2. Growth in Corporate tax (10%) and Income tax (20%) appears reasonable, given the past trends though growth in Indirect taxes at 19% appear on the higher side given the recent GST-led disruptions.
 
3. FY 19 Divestments are pegged at Rs 80,000 cr from Rs. 1,00,000 cr in FY 18. Other capital receipts, including spectrum are also reasonable.
 
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Fiscal deficit pegged at 3.3% – nominal GDP growth assumption of 11.9% in FY 18 and 11.3% in FY 19 appears reasonable.
 
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The source of all data presented here are Budget Documents.
 

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