Union Budget 2017-2018 Review: Systematix

In Union Budget 2017, the government carried on with its Transform-India mission started in 2016, by a continued focus on rural, social welfare, infra, ease-of-doing business, fiscal prudence and tax reforms. With a focused eye on Rural India and Farm Sector, the FM outlined mega investments for rural expenditure (MGNREGA, crop insurance, irrigation, electrification, dairy processing). Key positives emerged from no changes in existing tax structure in LTCG/STCG, no farm loan waivers and rationalisation done in both corporate and personal tax rates. Also, the government’s attempt on fiscal deficit targets at 3.2%/3% for FY18/19 would lend a strong support to India’s credit rating, stability of INR and enable RBI’s accommodative stance on interest rates. Some initiatives planned like FIPB abolishment, exempting FPI investors (Category I & II) from indirect transfer provision, reforms in political funding and disincentivising usage of cash/promoting digitisation demonstrate the government’s resolve to make India an investor-friendly destination. Disappointments were on the fronts of limited steps to boost consumption, no mention of windfall gain from relinquished currency post demonetisation and imposition of 10% tax on dividend for any amount received (Rs1mn earlier).

Fiscal prudence to persistIn this Budget, the government continued on its fiscal consolidation path and delivered a pragmatic but not a populist budget. It committed to a realistic fiscal deficit target of 3.2% of GDP in FY18, which would be consolidated further to 3% by FY19 – in line with market expectations. We believe that the government has stuck to fiscal prudence, because demonetisation is likely to have only a transitory effect on the macro-economy. Additionally, markets would like the lower net borrowing figure of Rs3.48trn in FY17 vs Rs4.25trn in FY16, with a revenue deficit of 2.1% in FY17 and 1.9% in FY18. Contrary to market expectations, there was no mention of a universal basic income transfer scheme, which reaffirmed the government’s commitment on fiscal consolidation. The government targets an aggressive disinvestment worth Rs720bn (vs Rs565bn in FY17, of which ~40% is achieved till date) through additional means like listing of public sector enterprises (IRCTC, IRFC, IRCON etc) and listing of ETFs on stock exchanges, in line with the Further Fund Offering recently of the existing listed ETFs.

Reforms at the forefront - taxation, ease of doing business, minimising cash usageTo make India an attractive investment destination, the FM announced a series of initiatives like (1) abolishment of Foreign Investment Promotion Board (FIPB), (2) exempting FPI investors (Category I & II) from indirect transfer provision (transactions wherein transfer of shares or interest in a foreign entity deriving its value substantially from Indian assets), irrespective of the fact whether it is redeemed in India or abroad, (3) lowering of corporate tax rate to 25%, from 30%, for MSMEs with an annual turnover up to Rs500mn; 96% of all companies filing returns (0.69mn companies) will get this benefit while impacting the exchequer by Rs72bn. This is in line with the commitment made in Budget 2015 to lower tax rates to 25% in five years, (4) rationalisation of personal tax rate for incomes in Rs0.25mn to Rs5mn bracket, leading to a tax saving of Rs12,900 per individual, while impacting the exchequer by Rs155bn, (5) banning any cash transaction above Rs0.3mn, while also promoting digitisation and (6) limiting cash donation to Rs2,000 per person and a proposal of electoral bond.

Rural welfare/upliftment, Infra push gets continued focusThe impetus on rural and infrastructure continued through 24% higher allocation of Rs1.9trn towards rural, agri & allied sectors. Of this, Rs200bn (taking total to Rs400bn) has been allocated for Long Term Irrigation Fund, Rs50bn for micro irrigation fund, Rs80bn for dairy processing fund, all under NABARD. Another Rs480bn for MGNREGA (vs Rs385bn in FY16), Rs90bn (Rs132bn: RE FY17, Rs55bn: BE FY17) for crop insurance and Rs190bn under the Pradhan Mantri Gram Sadak Yojana has been allocated. Besides this, the emphasis is on infrastructure, given 11% higher outlay at Rs2.4trn (including Rs1.3trn for railways, up 8% yoy), while a higher allocation was done for rural electrification at Rs106bn (up 25%), roads at Rs649bn (up 12%), Pradhan Mantri Awas Yojna at Rs290bn (up 45%) and metros at Rs180bn (up 80%), besides giving infra status to affordable housing developers.

Sectoral impactsWe believe budget proposals are positive for infra (higher outlay for road, rail, rural electrification), consumer & agri (higher disposable income post tax cuts, multiple measures to double farm income, bank credit to agri up 11% to Rs10trn) and banks (in-line fiscal deficit targets resulting in an accommodative monetary policy regime).Disclaimer: The views and investment recommendations expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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