Analysis of Union Budget 2016-17: Kudos to Finance Minister Arun Jaitley for sticking to the fiscal deficit target
Despite accounting for higher government salaries (7th Pay Commission) and not increasing taxes sharply, FM Jaitley stuck to the 3.5% fiscal deficit target (as a proportion of FY17 GDP). The net government borrowing target of Rs 4.25t was significantly below expectations. BNPP chief economist Richard Iley opines, and we agree, that RBI could reward this with a rate cut in the near term.
Rural and infrastructure spending remain key focus areas
The increase in capex outlay (plan + non-plan) in the budget was a trifling 3.9%. However, if one takes a holistic view of infrastructure spending —including provisions of the railway budget and some joint centre-state programmes (e.g. PMGSY road projects)—the total increase in key areas of infrastructure spending is projected to be in excess of 23%. Together with projected rural spending growth of 10%, this underscores the government’s twin targets of rural demand support and investment acceleration.
Some of the tax proposals will likely disappoint the market
Principal disappointments were the imposition of a Dividend Distribution Tax (DDT) of 10% for dividend income of Rs 1 m and above, and increased Securities Transaction Tax (STT) on sale of stock options to 0.05% from 0.017%.
Assumptions are credible on the whole, but some aggressive elements remain
Assumption of 11% nominal GDP growth in FY17 and an 11.7% increase in tax revenue appear credible to us. However, the assumption of Rs 500 bn non-tax revenue from telecom spectrum auctions and Rs 565 bn from divestments appear aggressive and could upset the fiscal arithmetic towards end-FY17e.
Beneficiaries: wholesale-funded FIs, real estate, downstream oil, cement
A low government borrowing programme leads to the possibility of a rate cut, which is obviously positive for wholesale-funded institutions. Second-tier mortgage companies (e.g. LICHF) and cement manufacturers could benefit from a boost to low-cost housing. Non imposition of DDT on REITs benefits a select few property companies (DLF, Prestige). Rural-focused companies (e.g. M&M) benefit from higher rural spending.
Losers: telecom, auto, upstream oil and jewellery sectors
Service tax on spectrum will make telecom spectrum trading expensive. Luxury tax on vehicles priced above R1m impacts M&M and Maruti negatively. Ad valorem cess (20%) on domestic crude oil was much higher than the market expected—impacting the upstream oil sector negatively.
India’s underperformance may continue in the near term; H216e appears better
India has underperformed AxJ in 2016 YTD, correcting from its super-premium valuations, and the budget does precious little to change sentiment about the corporate earnings environment. Investment acceleration and rural demand recovery might come through, but possibly no earlier than 2H16, in our view. The longer-term stability of India remains intact, however, due to benign commodity prices and continuing fiscal discipline, potentially leading to further monetary easing.
Fiscal discipline is encouraging; growth focus somewhat low-key
The FY17 budget had raised hopes of growth-supportive measures and rural stimulus, possibly even at the cost of fiscal discipline. In the end, FM Jaitley stuck to the promised fiscal deficit target and provided the necessary rural stimulus, but the hopes of acceleration in capital expenditure were somewhat dashed, with a trifling 3.9% budgeted increase in total capex. Including the railway budget and central enterprises, the total capex outlay wasn’t so disappointing (23% increase over FY16 RE), but implementation of railway capex disappointed severely in FY16— and the FY17 capex target will have to be monitored closely against actual progress.
In the final analysis, what the FM didn’t do became more important than what he did. An increase in service tax and re-imposition of long-term capital gains tax on e
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