Union Budget analysis by Kotak Securities
CREDIBLE & RESPONSIVEWhile being devoid of big bang announcements, Union Budget 2015-16 focuses on all the relevant issues. Additional spends of Rs.700bn in infrastructure from the Government, creating enabling climate for private sector investments and enabling reforms to bring long term money into the system (presumably to be used in infrastructure) are the highlights. Reforms on black money, social security, predictability in taxation, ease of doing business, among others, are noteworthy. The 3.9% FD is tolerable especially in view of the acceptance of the 14thFinance Commission impact and is achievable. We expect RBI to cut interest rates by 50-75bps over FY16. Markets will stay buoyant, if execution matches intent.
The FM has targeted real growth of 8.1% for FY16. The Central plan expenditure is targeted to rise by 37% to Rs.2.6trn, which is encouraging. Revenue and capital expenditure are projected to rise by similar margins. Infrastructure and manufacturing, which can create several jobs, have received significant attention. Infrastructure Funds, Tax free bonds, revamped PPP model and further clarifications on REITs / InVITs should help. We expect these initiatives to boost growth rates, going ahead.
We opine that, the budget has set 'achievable' revenue targets for FY16. A 16% growth in tax revenues looks within reach, based on a real GDP growth of 8.1% and nominal GDP growth of 11.5%. Increase in Service tax rates and higher surcharge on super-rich should enable this growth, we opine. Growth in indirect taxes should be also supported by higher excise duty on diesel/petrol, imposed in the latter part of FY15. Divestment target of Rs.695bn (strategic sale of Rs.285bn and divestment of Rs.410bn) should also not face major headwinds.
Subsidies are budgeted at 1.7% of GDP v/s 2.1% in FY15RE. The saving in revenue expenditure (only 3% growth YoY in FY16BE) is sought to be gainfully deployed towards capital expenditure (26% growth YoY in FY16BE). We believe the Government will not need to carry forward any fuel subsidy burden to the next fiscal. Thus, we think that, the FD target of 3.9% of GDP is achievable. We feel the 3.9% FD is tolerable as it is a result of higher spends towards capacity creation to aid long term growth.
The FM has tried to attract more funds from the private sector as well as through foreign investors. Various initiatives have been announced to increase ease of doing business and remove uncertainties on the taxation of foreign capital like postponement of GAAR, extension of reduced withholding tax, modified permanent establishment norms, etc.
One of the corner-stones of the budget has been the various reforms which have been announced. Initiatives on black money, social security, predictive taxation, subsidy rationalisation, infrastructure funding, ease of doing business, cooperative federalism, among others, should go a long way in improving the financial savings rate and funding long term investment needs of the Government.
Inclusive growth and inflation control have also found significant focus in the budget and these should allow a more balance growth of the country in the long term.
On the taxation front, corporate tax rates will be brought down to 25% from the current 30% over 5 years, whereas exemptions are sought to be done away with in tandem. This brings in more predictability and should attract corporate investments. However, surcharge has been increased for companies from 10% to 12%.
In indirect taxes, surcharge and cess on excise duty have been subsumed in the basic duty, which now stands at 12.5%. Service tax rate has been increased to 14%, to bring it in line with the proposed GST rate. Excise duty of cigarettes has been increased by 15% - 25%. Excise / customs duties on few items have been tinkered with to promote 'Make in India'. Individual tax payers will benefit due to higher deduction on contribution towards Pension Funds as well as due to higher medical insurance deduction and increased travel allowance.
Overall, we believe that, the budget has the heart in the right place in trying to provide a significant thrust on growth through investment-related initiatives (increase in plan expenditure, adjusted for shift of schemes in light of 14th Finance Commission recommendations). There is a shift from demand pull growth (which resulted in high and sticky inflation) to supply push growth. More private sector investments will be encouraged only by reform initiatives taken outside the budget, though.
The budget is silent on some important issues like labour reforms, FDI in more sectors, etc. We expect to get more clarity on these over the course of the fiscal.
"From the stock market perspective, the corporate tax rate reduction over FY17-FY20 is a mild positive. The tax burden will increase slightly in FY16, though. GAAR has been postponed for two years likely with grand-fathering, which should improve sentiments. 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 50-75bps in FY16. We believe that, a bottoms-up approach will be the best approach over this time-frame", says Kotak Securities research report.
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