The Union budget 2017 was remarkably simple, consistent and without any surprises. In line with the earlier budgets, it was consistent with the government's strategic direction, the key elements of which are:
- Accelerate growth, job creation and investments.
- Fiscal discipline, low inflation and interest rates
- Focus on agriculture / rural incomes / housing for all by 2022.
- Reduction of informal economy, simplification of taxation and widening of tax base
Indirect tax rates were broadly left untouched as GST is due from July 2017. The budget also does away with the distinction between plan and non-plan expenditure and only retains the revenue – capital split. This budget has also subsumed the railways budget within itself.
Impact on various sectors:
- Capital allocation of Rs 100 bn for PSU banks in line with "Indradhanush" programme
- Focus on digital transaction to benefit banks.
- Higher deduction for NPA provisioning would reduce banks' tax liability.
- Listing and trading of Security Receipts issued by a securitization company or an asset reconstruction company. This will enhance capital flows into the securitization industry.
- Most Budget proposals intend to bring down investor demand/pricing and promote affordable housing. Positive for affordable housing and sector in longer term.
- Infrastructure status to affordable housing – will lead to a higher availability of funds with longer tenures and at lower cost.
- Affordable housing classification changed to carpet area from built up area earlier (means an increase of 12-15%). Also 100% tax exemption eligibility criteria extended to project completion in 5 years vs. 3 years earlier.
- Construction of 1 Crore houses by 2019 for the houseless and those living in kutcha houses.
- Rs 2.0 Lac cap on claiming loss from investment property (2nd or subsequent house) vs. unlimited loss allowed earlier (though carry forward allowed for 8 years). This may impact investor-led demand.
- Reduction in LTCG holding period may increase secondary market transactions and may lead to better price discovery.
- More options to reinvest capital gains from property.
- Capital gains from house property to be calculated on higher of fair value or transaction value. Likely to reduce cash transactions.
- JDA agreements - liability to pay capital gains will arise only in the year the project is complete. This is positive and will encourage more JDAs.
- Custom duty lowered on LNG – will lower the cost of fuel for gas based plants.
- MAT credit carry forward extended to 15 years from 10 years.
- Allocations to DDGUJY/IPDS increased.
- Second phase of Solar Park development for 20,000 MW capacity to be taken up.
Oil & gas
- Proposal to create an integrated public sector 'oil major' which will be able to match the performance of international and domestic private sector oil and gas companies. Possibility of large PSU oil companies being merged is a positive.
- Cut in customs duty on LNG positive for gas distribution companies.
Media / Telecom/ Pharma/ Metals/ IT
- No material change.
Consumer / Auto
- Thrust on affordable housing could lead to higher demand for home improvement products.
- Changes in indirect tax regime likely during GST implementation.
- Higher allocation to NPK Fertiliser subsidy aims to achieve right usage of fertiliser based on soil health card.
- Flat subsidy allocation at Rs 70,000 crore – should lead to liquidation of outstanding dues to companies.
- Focus on Housing and infrastructure to drive demand.
Indian Economy: Steadily improving
The policy direction in India is right and economy is making good progress on most parameters. Impact of higher infra allocation and the several steps taken by government over the last two years is expected to be felt strongly with Railways, Power Transmission and Distribution, Mining, Roads and Urban Infrastructure likely to lead growth.
Steel demand is improving and there is a sharp increase in domestic production of steel (refer chart above). Exports are also stabilising now, December exports growth was at 5.7% yoy vs. H1FY17 at (-) 1.4 and (-) 15.5% in FY16. Outlook for agriculture growth is also positive due to good monsoons and growth in Rabi sowing.
Equity market have lagged nominal GDP growth for several years now (refer chart above). With a sharp fall in interest rates, improving growth outlook and signs of improving corporate profitability the outlook for equity market is positive. In our opinion therefore, there is merit in increasing allocation to equities (for those with a medium to long term view).
Debt Market Outlook:
The government has shown commitment to fiscal prudence by proposing a lower fiscal deficit of 3.2% for FY18 compared to 3.5% for FY17. It has delayed the FRBM fiscal target by a year. i.e. achieve 3% target by FY19 instead of FY18. Considering the domestic and global backdrop, it is a positive step. The fiscal room has been used to increase the capital expenditure from 13.9% of total expenditure in FY17RE to 14.4% in
FY18BE. Fiscal prudence and improvement in quality of expenditure should open up scope for further monetary easing by RBI.
The net market borrowing has increased modestly from Rs 406,708 crores to Rs 423,226 crores and hence 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 to incrementally invest in short/medium term funds and credit strategies.