Economic Snapshot

Union Budget 2018-19

India’s Government announced its Budget for FY19 (March year end in India) on February 1, 2018. Given the rural dissent, observed during the Gujarat Elections (farmers and rural population in Gujarat voted against PM Modi’s party, the BJP) and a spate of state elections in 2018 and national election in 2019, expectations were that the government would take a populistic approach in its budget proposals and hand out many freebies to farmers and the rural population.

As per expectations, the government did adopt a populistic approach, though it maintained its focus on infrastructure build and reforms. On the positive side, it refrained from any big bang distribution of free cash incentives or farm loan waivers. The budget proposals push out the fiscal deficit target of 3% in FY19 (Budgeted target 3.3% in FY19) further to 2022. Some of the key proposals in the budget were:

Populist Measures

  • Rural allocation of US$224bn
  • Proposal to fix the minimum support price of all summer(kharif) crops at cost plus 50%
  • A national healthcare protection scheme that will cover an estimated 100 million poor families
  • Free gas connections to target now 80m households vs. 50m earlier
  • Electricity connection to 40m households; Govt. to bear ~US$2.5bn (INR160bn) cost on this
  • 5.1 million new houses in rural and 3.7 million urban houses to be built

Infrastructure Build

  • Total Infra Allocation at US$785bn, with an extra budgetary allocation of US$94bn
  • Total expenditure on transportation sector US$21bn
  • Total expenditure for Railways at US$24bn
  • Affordable Housing to get a dedicated housing fund under National Housing Board
  • Digital India allocation doubled to US$0.5bn
  • An expenditure allocation of US$32bn for Smart Cities

Tax Changes

  • Introduced long-term capital gains (LTCG) tax of 10% on equity gains above US$1567 (Rs.0.1m)
  • All investments made before 31-Jan-18 will be grandfathered for the above LTCG
  • Equity mutual funds will also need to pay a distribution tax of 10% of long-term capital gains
  • Reduced the corporate tax rate to 25% from 30% for medium sized companies (i.e., those with turnover of less than US$40mn
  • A standard deduction of ~US$626 offered to salaried citizens, which will increase disposable income, albeit after eliminating few existing deductions in the annual tax filing

Union Budget FY19 was business as usual for the government, except for a few populist measures (higher rural allocation, cost + 50% MSP for farm products, national healthcare protection scheme, etc.). These was largely expected considering the national elections due in 2019. The rural thrust will exert some pressure on the fiscal, but at the same time propel consumption and boost the ongoing recovery in rural India. The spend on infrastructure will also provide the necessary investment led impetus to growth. Inferring from the budget proposal, it appears that the government is committed to fiscal consolidation, the pace though will be slower than that expected earlier. The announcement of introduction of LTCG, while widely debated pre-budget, still came in as a surprise and is a sentiment dampener.

GDP Growth

India’s real gross domestic product (GDP) growth came in at 7.2% YoY during 3QFY18 (Year end, March), its fastest pace in five quarters. The GDP numbers were higher than the market consensus of 7.0% YoY growth and up from 6.5% YoY growth in 2QFY18. The Government marginally increased its estimate for the full year’s growth to 6.6% from its earlier estimate of 6.5%.

The pick-up in GDP growth during 3QFY18 was mainly driven by investments (+13% YoY v/s 8.9% in 2QFY18), which rose at the fastest pace in 23 quarters. Growth in private consumption expenditure though slowed down to 5.6% YoY in 3QFY18 (2QFY18: +6.6%), while imports surged 8.7% YoY (2QFY18: +5.4%). As a result, net exports dragged down GDP growth by 1.6 percentage points in 3QFY18. Construction activities rose by 6.8% YoY in 3QFY18, up from 2.2% in 1HFY18, this was the fastest pace of its growth in six years. The recovery in the manufacturing sector gained pace. Manufacturing growth touched a four-quarter high of 8.1% in 3QFY18 (2QFY18: + 6.9%), growth in services weakened slightly to 7.7% from 8.4% in 1HFY18.

Exhibit: Contributors to GDP Growth in 3QFY18


The latest GDP release signals that India’s economy is on a gradual recovery path supported by the Government’s infrastructure spend. The recovery in aggregate demand spurred by rural recovery and the Government’s infrastructure spend will lead to higher capacity utilization rates which, coupled with improving corporate earnings and balance sheet fundamentals is expected to revive private capital spending in 2018.

With some state elections in 2018 and the national election in 2019, the Government has rolled out few populist schemes in its last Budget in February. These will exert some pressure on the fiscal. Rising crude prices and recapitalisation of state owned banks (Rs.2.11tn, AU$42.2bn), plagued by bad debts, will add to the fiscal strain.

The fiscal strain will reduce the Government’s ability to push through any major reforms or to spend on building infrastructure.  Amid such an environment, we believe that economic growth in CY18/FY19 will be relatively muted, unless private capex revives strongly. Nevertheless, the Government is working to find innovative ways to fund infrastructure projects. Auctioning of existing national highways on Toll-Operate-Transfer basis to raise resources is one such way.