Feb 1, 2017
Broad Macro Takeaways
The expansionary budget notwithstanding, the FM pegged the fiscal deficit for FY18 at 3.2% of GDP and remains committed to achieve 3% in FY19.
Net borrowings: The budgeted net market borrowing significantly declined -18% to INR 3.48 lakh crore compared to the budgeted amount in FY17.
Disinvestment update: The divestment target (from PSUs) was raised to INR 72,500 Cr. in FY18, including potential listing of 3 railway PSUs (IRCTC, IRFC and IRCON). This is higher than the INR 45,500 Cr. to be raised in current financial year and bodes well for the Government coffers.
Continued focus on Rural and Infra: Overall, the budget maintained its focus on spurring agricultural and rural development along with infrastructure with the Government maintaining its goal of doubling farmer income by 2022, setting up of irrigation funds and other initiatives.
The overall FY18 budget expenditure increased 6.6% to INR 21.47 lakh crore vs. a mere 1.8% growth in FY17, highlighting the overall fiscal expansion. This increase was primarily driven by expenses focused on Rural and Transport.
FIPB abolished: Since more than 90% of the total FDI inflows are via the automatic route without approvals, the FIPB (Foreign Investment Promotion Board) would be abolished in FY18 highlighting the improved ease of doing business.
Real Estate-friendly policies: Holding period for long term capital gains tax for immovable property (land and buildings) was reduced from 3 to 2 years. This should facilitate movement of immovable capital easier. Also, the base year for indexation is proposed to be shifted from 01-Apr-81 to 1-Apr-01 for all classes of assets including immovable property. Further, classification of Affordable Housing as “infrastructure” should assist developers via likely lower loan costs.
MGNREGA allocation increased from INR 38,500 Cr. to INR 48,000 Cr. (highest ever).
Lending target under Pradhan Mantri Mudra Yojana to be doubled to INR 2.44 lakh crore.
Taxation Takeaways
For the consumer, the Government has announced a reduction in the tax rate from 10% to 5% for individual assesses with income between INR 2.5 lakhs to INR 5 lakhs. This has partly been offset by surcharge of 10% for income between INR 50 lakhs to INR 1 crore. 15% surcharge continues for assesses earning more than 1 crore.
For Corporates, the FM presented an effective corporate tax rate of 25% for small companies (revenues lesser than INR 50 Cr.), thus highlighting the Government’s pro-MSME stance. MAT credit is allowed to be carried forward up to a period of 15 years instead of 10 years at present.
Equity shares acquired post-2004 without payment of STT (such as shares acquired pre IPO, during IPO, via rights, bonus, private equity, ESOPs etc.) would now attract LTCG subject to certain exceptions which remain to be finalized.
Outlook
Equities
Within equities, the budget augurs well for OMCs with the consolidation of a single integrated oil major.
Real Estate as well should benefit from the lowering of the long term holding period and the classification of Affordable Housing as Infrastructure.
Recapitalization of PSU banks should assist the sector, though the allocation of INR 10,000 Cr. stands lower than the approved capital infusion of INR 25,000 Cr. in FY17.
Infrastructure (EPC segment) emerges as another clear gainer with the Government’s sustained focus on Transport and broad infrastructure.
With the Government well on its way to achieve 100% rural electrification, by May-18, we expect transformer, transmission and cable companies to benefit.
Swachh Bharat Mission (Gramin) to promote sanitation should give a fillip to piped water supply companies, ceramics, tiles and sanitary ware.
Fixed Income
The bond market reacted mildly negatively to the Budget, with the 10 year moving up by a small 5 bps. Bond market investors welcomed the fiscal restraint shown by the FM not yielding to calls by the market to move to a larger fiscal deficit, and yet delivering a pro-growth, non-inflationary plan.
The FM demonstrated fiscal restraint in formulating the budget and is clearly moving India towards a pro-growth, controlled inflation path. While the Budget was clearly cheered by Equity investors, the bond market will take its cues from the data that comes forth in coming weeks on the economy.
On first cut, we didn’t see much that would suggest a continued decline in interest rates and see a range bound scenario. We also don’t see any necessity for the RBI to step in and deliver a rate cut at the upcoming meeting.