Decoding Union Budget 2017-18

KEY HIGHLIGHTS

Though the Union Budget is essentially a Statement of Account of public finances, it has historically become a significant opportunity to indicate the direction and the pace of India’s economic policy. The 2017-18 Union Budget was presented amidst a somewhat wobbly backdrop of the world economy facing considerable uncertainty, increasing signs of a retreat from globalization of goods the world over, and high expectations from people back home relating to good governance. Amidst all these developments, India has stood out as a bright spot in the world economic landscape. India‟s macro-economic stability continues to be the foundation of economic success.

Economy

  • Net tax revenues are expected to grow by 12% in FY18, maintaining a double digit growth rate for third year in a row.
  • Total expenditure is slated to grow more modestly at 6.6% in FY18 from 12.5% last year.
  • Revenue expenditure is expected grow at 5.9% in FY18 (12.8% last year) while capital expenditure will grow at 10.7% (basis FY17 RE) in FY18 (10.6% last year).
  • Adherence to fiscal consolidation path reiterated with fiscal deficit target of 3.2% in FY18
  • Use of ETF as a vehicle for further disinvestment in listed CPSEs to continue as the government plans to launch a new ETF with diversified CPSE stocks in FY18.
  • Net market borrowing limited to Rs. 3.48 lakh crore, much lower than Rs. 4.25 lakh crore of the previous year.

Direct Taxes

  • Personal income tax rate at lowest slab (Rs. 2.5 lacs to Rs. 5 lacs) is reduced to 5% from 10%.
  • While the taxation liability of people with income up to Rs. 5 lakhs is being reduced to half, all the other categories of tax payers in the subsequent slabs will also get a uniform benefit of Rs. 12,500/- per person. The total amount of tax foregone on account of this measure is Rs. 15,500 crores.
  • A surcharge of 10% has also been introduced for individuals whose annual taxable income falls between Rs. 50 lakhs and Rs. 1 crore.
  • The concessional with-holding rate of 5% (charged on interest earned by foreign entities) on ECBs / Govt bonds / Masala bonds got extended up to June 2020 (from June 2017)
  • Corporate tax rate for MSMEs with annual turnover up to Rs50 crore is reduced to 25% from 30%. Government expects 96% of all companies filing taxes to benefit.
  • LTCG holding period for immovable property reduced to 2 years from 3 years.
  • Foreign Portfolio Investor (FPI) Category I & II receives exemption from indirect transfer provision. Budget clarified that indirect transfer provision shall not apply in case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India.
  • Positive: Reduction in corporate tax for MSMEs and tax rate cut for lowest slab (of Rs. 2.5 lac to Rs. 5 lac) are positive developments for investors/individuals/savers. The benefits will accrue on account of tax saved as well as help create a corpus for the future.

Miscellaneous

  • Rs. 10,000 crore recapitalisation for PSU banks during FY18 in line with “Indradhanush” roadmap.
  • Agriculture credit for FY18 targeted at Rs 10 lakh crore, with 60 days interest waiver.
  • The government intends to double the NABARD fund (for long term irrigation) corpus from Rs. 20,000 crore to Rs. 40,000 crore.
  • The government plans to spend Rs 3 lakh crore on rural India. With MGNREGA, it aims to double farmers’ income.
  • The government aims to achieve 100% rural electrification by March 2018.
  • Total allocation for infrastructure development in FY18 pegged at Rs 3.96 lakh crore.
  • Affordable housing receives infrastructure status.
  • Railway lines of 3,500 km to be commissioned in 2017-18
  • Foreign Investment Promotion Board (FIPB) will get abolished in FY18.
  • Further liberalisation of FDI policy is under consideration.
  • The shares of Railway PSEs like IRCTC, IRFC and IRCON will get listed on stock exchanges.
  • A committee will be constituted to create legal framework to integrate spot market and derivatives market in the agricultural sector for commodities trading.
  • Cash Donations which can be received by a charitable trust will now be restricted to Rs 2,000 from earlier limit of Rs 10,000.

Equity Market

  • Equity markets reacted positively on the Budget day. An immediate relief rally was witnessed as soon as the finance minister Mr. Arun Jaitley ended his speech without commenting anything on the LTCG (long term capital gains) for equity investments. In the run up to the budget, investors were worried that the government might tinker with the 1 year period by raising it to 3 years.
  • The government managed to avoid populist measures as widely anticipated by the market and opted to move ahead on the steady path of fiscal prudence.
  • At market closing, S&P BSE Sensex settled at 28,142 levels with a gain of 1.76%.
  • Among the BSE sector indices, Realty index was up by 4.83% while Auto index gained almost 3.5%. FMCG, Bank, Metal and Capital Goods were up by 2.79%, 2.76%, 2.28% and 2.18%, respectively. IT sector index lost 1.07%, while Telecom and Health Care lost 0.5% and 0.3%, respectively.
  • Among Sensex stocks, Maruti Suzuki (4.7%), M&M (4.6%), ITC (4.5%) & ICICI Bank (4.4%) were the top gainers while TCS (-2.7%), Infosys (-1.4%) and NTPC (-1.3%) were among the major losers.

Debt Market

  • The Union Budget took a middle path by balancing the need for higher public infrastructure spending with the medium-term need for continued fiscal prudence.
  • The fiscal deficit has been budgeted at 3.2% of the GDP in FY18 with a target of achieving 3% in FY2019. The net market borrowing has been pegged at Rs. 3.48 lakh crore in this financial year, lower than Rs. 4.25 lakh crore in the last year
  • Adherence to the fiscal deficit number by the centre arms the central bank with ammunition to cut rates further.

FY18 fiscal deficit target set at 3.2% of GDP – Assumptions on higher income tax compliance critical to meeting targets; FY17 RE revenue a little on the higher side

FY18 centre fiscal deficit target at Rs. 5.47 tn; nominal GDP growth assumed at 11.75%

FY18 total receipts estimated to rise 8.1% to Rs. 16 tn

FY18 gross tax receipts seen rising 12.2% YoY, leading net tax up by 12.7%

 FY17RE revenues on the higher side, biasing up FY18 numbers by ~Rs. 0.4 tn

  • Corporate tax forecast expected to rise 9% in FY17RE as opposed to 4.8% growth seen in the Apr’16-Dec’16 period
  • Excise duty growth also appears highly elevated given current run rate

FY18 income tax growth at 25% appears to be aggressive, especially given 23% growth rate in FY17RE. It will also require large scale efforts by tax authorities to identify and correct tax avoidance

FY18 non-tax revenues seen lower at 13.7%, with 43.7% fall in telecom revenues (no spectrum auction) and lower dividends (special dividends taken in FY17)

Non-debt capital receipts up 49.3%; pickup hinges on disinvestments in insurance and SUUTI

FY18 expenditure estimated to rise 6.6% to Rs. 21.5 tn

  • Revenue expenditures seen rising slowly at 5.9%, with salaries, defence & pensions reverting after the 7th CPC led jump in FY17.
  • Robust increases budgeted in water, health and rural development spending
  • Capex growth budgeted at 10.7% with focus on railways, roads, urban development and energy

 

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EQUITY MARKET OUTLOOK AND STRATEGY

  • The Union Budget 2017-18 delivered a pleasant surprise by sticking to the fiscal deficit target of 3.2% of GDP as this move is likely to have a positive impact on the macro economy by preserving stability.
  • The Union Budget puts forward Government’s focus of continuing on the path towards fiscal consolidation which also makes it easier for the central bank to continue with its accommodative stance.
  • The Budget also underlines the Government‟s determination to provide an impetus to the economy especially through the infrastructure, rural and financial sectors.
  • The Indian economy is poised to grow at a healthy rate in contrast to the global economy which is expected grow at a slower rate of 3.1% in CY 2016 to 3.4% in CY 2017 (as per the IMF estimates).
  • India’s macroeconomic fundamentals remain intact with improvement in growth, moderate inflation, improving CAD and robust Forex reserves.
  • Amidst a global slowdown in economic growth, India continues to be a leading investment destination.
  • Equity market valuations are also reasonable when compared to their long term Price to Earnings (P/E) averages.
  • With a sharp fall in interest rates, improving growth outlook and signs of improving corporate profitability, the outlook for equity market is positive.

DEBT MARKET OUTLOOK AND STRATEGY

  • The government has retained its fiscal deficit target for BE 2017-18 and BE 2018-19 at 3.2% and 3%, respectively.
  • The Centre is likely to borrow Rs. 5.8 lakh crores in FY18 (same levels as seen in FY17). However, the net borrowings in FY18 will be Rs. 3.48 lakh crores (Rs. 4.25 lakh crores in FY16), after considering repayments of past loans and interests.
  • Gross supply of Central and State government securities is likely to be around Rs. 10.50 lakh crore in FY18, compared to ~ Rs. 9.3 lakh crore in the current fiscal.
  • The RBI in its December monetary policy stated that they continue to maintain an accommodative stance, while keeping an eye on inflation data. With the Government committed to walk a tightrope and stick to its fiscal deficit target of 3.2%, the onus now shifts to RBI on the monetary policy front.
  • Although the net market borrowing has dropped to ~Rs 3,48,000 crores from ~Rs 4,25,000 crores last year, markets shall now focus on global yields and oil prices. Even though there is downward bias to interest rates, room for further fall is limited given the sharp fall from 8.8% to 6.5% in last 3 years and hence investors may consider incrementally investing in short/medium term funds and dynamic bond funds.

    Source: Axis Bank

 

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