24 January 2017
Budget 2017-18
What to expect from Union Budget 2017-18?
Relief to tax payers and a targeted pro-poor scheme most likely
The Union Budget 2017-18 is scheduled to be released on 1 February 2017.
Uncertainty looms large ahead of the budget, especially with the economic impact of
demonetization still unfolding and the timing of GST implementation yet not clear.
However, with the government garnering additional resources post demonization, the
market holds high expectations from the budget.
We believe that to strike a balance between economics and politics, the government
could use half of the additional resources to provide relief to (individual/corporate)
tax payers and the other half for major pro-poor schemes (under revenue spending).
Also, in our view, the government would not want to breach its self-committed deficit
target of 3% of GDP for FY18 to uphold its credibility in the market and among the
ratings agencies.
The upcoming budget will be a key event from an equity market perspective. We
believe the expected measures to reduce tax liability for individuals may provide a
much-needed boost to the consumer-related sector. Companies with higher rural
exposure (such as HMN, HUVR, Colgate, Dabur, JYL, Hero Motocorp, TVS Motor and
M&M) could be the potential beneficiaries, in our view. Furthermore, higher capital
spending may help the defense, road and railways sectors. Bharat Electronics, L&T,
Bharat Forge, and Cummins are our top picks (refer the table on Page 3 for details on
the potential beneficiaries of the Union Budget 2017-18).
st
Preview
Maintain fiscal deficit
target at 3% of GDP for
FY18
Expect additional
resources to be utilized
for
(individual/corporate)
tax sops and one pro-
poor spending scheme
Net borrowings likely to
fall further to INR4.1t (or
2.4% of GDP) in FY18
Potential beneficiaries:
Consumer/retail sector:
HMN, HUVR, Colgate,
Dabur, JYL
Auto sector: Hero
Motocorp, Tata Motors,
M&M
Capital goods sector:
L&T, BEL, Bharat Forge
The impact of the Indian government’s recent demonetization drive on economic
activity is yet to be fully ascertained. Our monthly economic activity index (EAI)
indicates that the Indian economy grew 6.2% YoY in November 2016 (the month in
which demonetization was announced), as against +6.8% YoY in October 2016 (and
average growth of 6.6% in 1HFY16). Although official macroeconomic data do not
show any significant drag on economic growth, we believe the confidence level has
been impacted to a certain extent. This is visible in some high-frequency surveys
such as PMI, which declined from 55.4 in October 2016 (composite index) to a
three-year low of 47.6 in December 2016. The resultant uncertainty has forced
some participants to defer their high-ticket consumption/investment plans. This is
evident from two-wheeler sales, which fell to a six-year low in December 2016.
Exhibit 1: Motilal Oswal’s expectations on key fiscal indicators from Union Budget 2017-18
Economic indicators
Gross fiscal deficit
Gross market borrowings
Net market borrowings
Nominal GDP
MO= Motilal Oswal’s estimate
Unit
INR b
% of GDP
INR b
% of GDP
INR b
% of GDP
INR b
% YoY
FY15
5,107
4.1
5,920
4.7
4,532
3.6
124,882
10.8
FY16
5,351
3.9
5,850
4.3
4,406
3.2
135,761
8.7
FY17BE
FY17MO
FY18MO
5,339
5,342
5,131
3.5
3.5
3.0
5,820
5,820
6,672
3.9
3.9
4.0
4,082
4,082
4,105
2.7
2.7
2.4
150,695
150,695
168,778
11.0
11.0
12.0
Source: Union Budget documents, MoSL
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
8 August 2016
1
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Research Team
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405