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India Budget 2017-18: Many Firsts, A Move in the Direction of Transformed, Energised and Clean India

India Budget 2017-18 contained many firsts. This was the first time the budget was presented on 1st February as compared to the conventional practise of presenting it on the last day of February, enabling Ministries to operationalise all activities from the commencement of the financial year. Second, the practise of presenting separate Railway budget was done away with and was merged with the general budget to bring Railways to the centre stage of Government’s Fiscal Policy and thirdly the complex and confusing classification of plan and non-plan expenditure was removed to facilitate a holistic view of allocations to different sectors and ministries.

India’s Finance Minister Arun Jaitley’s (FM) agenda for 2017-18 has been to transform the quality of governance and quality of life in India, energize the youth to unleash their true potential and clean the country from the evils of corruption, black money and non-transparent political funding. To achieve this, the FM announced a series of measures, including:

  1. Increased spend in rural, agricultural and allied sectors (Allocation of AU$37.5 bn, up 24% YoY),
  2. Enhanced thrust on infrastructure build (AU$80 bn spend, up 25%),
  3. Learning outcome based skill building programs for youths,
  4. A thrust on the digital economy to rein in on the menace of corruption and
  5. A new path breaking clean direction for political funding in India.

The FM has tried to achieve the above, while observing fiscal prudence and maintaining a lower market borrowing of AU$70 bn as against last year AU$85 bn. The fiscal deficit for 2017-18 is targeted at 3.2% of GDP with the government being committed to achieving 3% in the following year. Some of the key budget proposals are listed below.

Key Budget Proposals:

Agri & Rural Thrust

  • Provided for record agricultural credit of AU$200 bn, increasing coverage of crop insurance and doubled the corpus of irrigation development fund to AU$8 bn
  • Increased Rural Employment Guarantee (MNREGA) allocation from AU$7.7 bn to AU$9.6 bn
  • Increased rural housing allocation from AU$3 bn to AU$4.6 bn for building 10 mn houses for poor

Infrastructure Push

  • Planned AU$26 bn (up 8%) of Capital and development expenditure by Indian Railways for modernising and upgrading its network, of which AU$11 bn will be provided as budgetary support
  • Increased budgetary allocation for construction of highways from AU$11.5 bn to AU$13 bn
  • Infrastructure status to affordable housing

Relief to Foreign Investors

  • Boost to Foreign investments by abolishing the Foreign Investment Promotion Board (FIPB)
  • Concessional withholding rate of 5% charged on interest earnings by foreign entities on Indian bonds and government securities extended to 30.06.2017
  • Foreign Portfolio Investors (FPI) category I & II exempted from indirect transfer provisions.

Other Significant Proposals

  • Steps to increase digital transactions including a proposal to mandate all government receipts through digital means beyond a prescribed date and ban on cash transactions above AU$6,000.
  • Political funding above AU$40 to be received only through digital mode, cheque or the newly proposed electoral bonds
  • Allowable provision for non-performing assets (NPA) of banks increased from 7.5% to 8.5% and interest will now be taxed only on the actual receipt instead of accrual basis.
  • Holding period for computing long-term capital gain on real estate reduced from 3 to 2 years and base year for indexation shifted from 1.4.1981 to 1.4.2001
  • Reduced tax rate to 25% (earlier 30%) for companies with annual turnover of upto AU$10 mn
  • Personal income tax relief of 5% provided to lowest tax bracket (AU$ 5,000 to 10,000) of individual assesses and 10% surcharge imposed on higher tax bracket assesses between AU$100,000 and AU$200,000.
  • No major changes in indirect taxes, ahead of GST rollout

Our View:

The budget strives a balance between government spend to accelerate growth (in the backdrop of the slowdown due to demonetisation) and fiscal prudence, while providing a roadmap to a transformed and clean India. Consumption driven growth has been provided a push by infusing a reasonable amount of allocations into rural India.  The rural thrust in the budget though was quite pragmatic in its approach and was not populist to appease the voters in five election bound states, as was widely expected. The lower tax rates at the bottom of the pyramid should help provide a boost to consumption demand. Lower taxes on mid and small size companies should improve the health of these sector, which was severely impacted due to the economic slowdown as well as demonetisation. This should also increase the employment in the sector and provide a boost to consumption. The thrust on infrastructure will provide the necessary investment driven boost to the economy enabling it to grow comfortably in the range of 6.75% to 7.50% envisaged in the economic survey published a day prior to the budget. Doing away with bureaucratic hurdles like the FIPB and clarity on FPI taxation provides comfort that the government is serious about improving ease of doing business in India.

The budget did take cognizance of the fact that Tax to GDP ratio is very low. Of the 37 million individuals filling tax only 2.4 million individuals show income of above AU$20,000, contrasting this data, over 3 million cars get sold annually in India and over 20 million individuals travelled overseas either on business or vacation. This implies that India is largely a tax non-compliant society. The government is planning to use the data availed from the demonetisation exercise to increase the tax base. Tax compliance will also be sought by reducing the level of cash transactions in the economy and adoption of digital modes of payment. Benefits arising of demonetisation and increased tax base will reduce the fiscal burden and at some stage will also enable the government to roll out further developmental and social security schemes like universal basic income scheme talked in the economic survey. For now, though the FM had to be contained with a 3.2% fiscal deficit as compared to the planned fiscal deficit of 3.0% fro FY2017-18 in last year’s budget. This increase in fiscal deficit though may not be viewed negatively, as it is on account of increased capital expenditure and amalgamation of the Indian Railways.

The introduction of electoral bonds and non-cash funding of political parties is a significant move towards ending the role of black money in political funding. This will go a long way in ending the nexus between politicians and corporates, a step forward towards a transformed and clean India.

Market Movement:

The budget was a no shock budget from the market’s perspective. The market behaved well and remained range bound during the whole budget speech and cheered to the end, as it emerged that there were no changes to the treatment of long-term capital gains as widely feared. Investors though were a bit disappointed as income tax for large corporates was not reduced. India’s benchmark index the NSE Nifty 50 closed-up 1.8% at 8716. Some doubts though remain on the issue of long term capital gains as the fine print does mention incidence of long term capital gains tax on shares acquired prior to 2004. Hereon for the next few days, Indian markets will be busy digesting revelations from the budget fine prints and thereon focus on the state elections and the developments in the US. In the long-term, the budget proposals are positive from a markets perspective as they will provide the necessary impetus to corporate earnings growth from increased consumption and infrastructure spend.

Beneficiary Sectors:

SECTOR

IMPLICATION

Real Estate Major Beneficiary, stands to gain from the impetus on low cost housing (accorded infra status and allocations increased) and the lowering of the period for long term capital gains.
Financials Benefit from a recovery in economic activity. NBFC’s like Gruh Finance, Repco, etc., funding low cost housing finance projects will stand to gain.

The relaxation of tax treatment for NPA accounts will benefit Banks.

Cement Benefit from Infrastructure spend and spend on low cost housing
Engineering & Construction Companies Benefit from the infrastructure and low cost housing build
Consumer Staples Benefit from consumption demand emanating from the agriculture and rural thrust