By: IDFC MF
FY18 union budget walked the talk and performed a fine balancing act – focus on social expenditure and infrastructure without deviating much on the path of fiscal prudence. It is imperative to note the backdrop for the current year’s budget with mounting uncertainties on both global and domestic fronts. With demonetization temporarily disrupting the business environment and moderating economic growth, the market was expecting the government to respond with a dose of populism (cut in tax rates, rural packages, rise in tax deduction limits, etc.) in the budget. At the same time, anxiety was high around factors like LTCG and service tax hike. In absence of any such negative announcements in the budget and with fiscal deficit target at 3.2% for FY18, the budget addressed most of the concerns from equity market perspective.
Government stepped up its social expenditure which was up 11% in FY18 (on FY17RE). Allocation for MNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) set at an all-time high of Rs48,000cr. At the same time focus on capex / infrastructure remains, with the total government infra investment projected to grow 10% YoY in FY18 (on FY17RE) to Rs3,96,000cr (US$58bn). As expected, investment in railways, roads, waterways and other transport infra remains the focus with allocations for roads up 13%, railways up 8% while capex on defense was flat. Disinvestment appears to be a big thrust for FY18 with budgeted revenues of Rs72,500cr (vs 45,500cr in FY17RE and Rs56,500cr in FY17BE).
FM provided relief to the low-income individual taxpayers and reduced corporate tax for small companies – the segments most impacted by demonetization, in our view. Personal income tax rates at lower end (income between Rs2,50,000 – Rs5,00,000) reduced from 10% to 5% i.e. an annual saving of Rs12,500. This is small saving for existing tax payers but in the larger context it’s an incentive for the non-payers to become tax compliant. For MSME, corporate income tax has been slashed from 30% to 25% for unlisted MSMEs with turnover less than Rs50cr. This is clearly with a view to promote job creation at MSMEs. As per the government’s data, almost 96% of companies (667,000) filing taxes will benefit.
Affordable housing has been given infrastructure status, which could result in lower cost of funding, higher liquidity and wider investor base. There are some further incentives given to developers of affordable housing. Currently, developers can claim 100% deduction on profits subject to certain restrictions like size of the house, geographical location and time taken to complete the project. This budget proposes minor relaxations in these conditions. This increases opportunity size for financiers in the affordable housing space.
The amount set forward for the recapitalization of PSU banks remained unchanged at Rs10,000cr for FY18, in line with the roadmap that had been set under the ‘Indradhanush’ scheme. However, the government assured that additional funds will be available for equity infusion in PSU banks, if required. The allocation for last year was Rs25,000cr of which full allocation has not yet happened.
Another relief was on NPA provision taxability with increase of allowable provision for NPA from 7.5% to 8.5% which will reduce tax liability of banks (particularly PSBs) who are already reeling under asset quality pressure & higher provisioning.
As a measure to deal with bank NPAs is to enhance capital flows into securitization industry through listing and trading of Security Receipts issued by a securitization company or a reconstruction company under the SARFAESI Act will be permitted in SEBI registered stock exchanges.
Govt. has indicated its plan to merge public sector oil/gas companies in order to create an ‘integrated’ player. This would perhaps create one public sector behemoth, intended to create efficiencies of capital and other resources. Import duties on LNG import has also been reduced to 2.5% from 5%, thus helping the imported fuel demand. Oil and Gas subsidy is reduced to Rs 27,500cr from Rs 29,000cr for FY17 revised estimates. FY18BE budgeted subsidy is reduced by 9% YoY to Rs 25,000cr.
Increased outlays on roads, housing, sanitation and electrification through various schemes would help improving rural economy. In the process, there would be significant opportunity to the construction, cement and metals sectors. A push for social housing should augur well for cement and low cost housing finance companies. For urban India, there is an 80% increase in allocation towards metro rail.
Considering the impending implementation of GST in the next few months, there were minimal announcements on indirect taxes which could have an impact on companies within the consumption basket. However, cigarette taxation has increased by 6-7% against an expectation of double digit excise hike so that should be a relief for ITC. This will be the lowest excise duty hike in the last 5 years. The budget has also introduced a cap of Rs 3lakh on cash transaction which can have some impact on high ticket consumption items.
Budget continued the government’s focus on improving credit flow to farmers, irrigation facilities, soil testing, crop-insurance coverage, and selling and distribution of produce. Fertiliser Subsidy maintained at Rs 70,000cr for 2017-18 (Urea Rs 49,768cr and NBS –Rs 20,232cr). The status quo on subsidy allocation is positive given benign input costs and expected cut in NBS for FY18E.
Higher outlay toward rural electrification is expected to increase rural power demand and lower distribution losses. This, in turn, would benefit the power generation segment. Higher budgetary allocation for renewable energy will also facilitate higher capacity additions in the segment through higher disbursement under various viability gap funding schemes and other central financial assistance.
Equity markets gave initial thumbs up to the budget getting comfort from 3.2% fiscal deficit target coupled with absence of any announcements on changes in Long term capital gain (LTCG) taxation.
Going forward, markets will continue to monitor earnings as the impact of demonetization has not been felt materially in the reported 3 Quarter numbers, so far.
Last year, the markets had corrected going in to the budget largely due to the risk off trade and bottomed out on the budget day. Thereafter as liquidity improved, we witnessed a rally. For the year ahead, the Union Budget appears to have calmed any frayed nerves, the global sentiments – the first 100 days of president Trump, US Fed’s trajectory on rate hikes and any geo-political sensitivities, however, would continue to influence the market direction.
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