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
 Motilal Oswal Financial Services
Union Budget 2017-18 | Preview
However, we believe the
monetary authority has
very limited room to cut
interest rates further
Nevertheless, with the
central government
garnering additional
resources post
demonetization,
expectations of a significant
fiscal stimulus are very high.
Against this backdrop, the markets, not surprisingly, are expecting some relief from
the policy makers. However, we believe the monetary authority has very limited
room to cut interest rates further. We expect a maximum of one rate cut of 25 basis
points (bp) over next 12-15 months. The Reserve Bank of India (RBI) could cut rates
next month (or in April 2017) before taking a prolonged pause. Nevertheless, with
the central government garnering additional resources post demonetization,
expectations of a significant fiscal stimulus are very high. Thus, in this note, we
present our expectations from the Union Budget 2017-18.
Our two key expectations from the Union Budget are: (1) reduction in tax liability for
individuals, which should provide a boost to the consumer sector, and (2) higher
capital spending, which should benefit sectors such as defense, roads and railways.
Please see the table on the next page, which highlights sector-wise expectations, as
well as the potential beneficiaries if those expectations are met.
Exhibit 2: Motilal Oswal’s expectations from Union Budget 2017-18 in numbers
FY16A
INR b
Total Receipts
Revenue receipts
Gross Taxes
Net Taxes
Direct taxes
Corporation Taxes
Income Taxes
Indirect taxes
Customs
Excise Duties
Services tax
Non-tax revenue
Non-debt capital receipts
Divestment
Total Expenditure
Total excl. Subsidies
Revenue expenditure
Interest payments
Defense
Subsidies
Grants to states & UTs
Pensions
Pay & allowances
Assistance to States & UTs
Other
Capital expenditure
Fiscal Deficit
Revenue Deficit
Nominal GDP
* Motilal Oswal’s estimate
12,409
11,953
14,569
9,446
7,348
4,545
2,803
7,221
2,103
2,872
2,114
2,508
456
247
17,733
15,155
15,380
4,417
1,432
2,578
1,082
957
1,717
2,018
1,178
2,353
5,324
3,427
135,761
FY17BE
INR b
% of GDP
14,442
13,770
16,309
10,541
8,471
4,939
3,532
7,838
2,300
3,187
2,310
3,229
671
565
19,781
17,466
17,310
4,927
1,628
2,314
1,184
1,234
1,979
2,276
1,770
2,470
5,339
3,540
150,651
9.6
9.1
10.8
7.0
5.6
3.3
2.3
5.2
1.5
2.1
1.5
2.1
0.4
0.4
13.1
11.6
11.5
3.3
1.1
1.5
0.8
0.8
1.3
1.5
1.2
1.6
3.5
2.3
INR b
14,759
14,289
17,550
11,355
8,302
4,820
3,481
9,248
2,264
4,100
2,605
2,934
470
423
20,100
17,786
17,630
4,927
1,628
2,314
1,184
1,234
2,529
2,276
1,540
2,470
5,342
3,342
150,651
FY17RE*
% YoY % of GDP
18.9
19.5
20.5
20.2
13.0
6.1
24.2
28.1
7.6
42.8
23.2
17.0
3.1
71.0
13.4
17.4
14.6
11.5
13.6
-10.2
9.4
28.9
47.3
12.8
30.7
5.0
9.8
9.5
11.6
7.5
5.5
3.2
2.3
6.1
1.5
2.7
1.7
1.9
0.3
0.3
13.3
11.8
11.7
3.3
1.1
1.5
0.8
0.8
1.7
1.5
1.0
1.6
3.5
2.2
11
INR b
17,281
16,576
19,695
12,802
9,240
5,243
3,997
10,455
2,513
4,920
3,022
3,774
705
599
22,412
20,097
19,571
5,518
1,790
2,314
1,302
1,295
2,681
2,503
2,167
2,841
5,131
2,995
168,729
FY18BE*
% YoY
17.1
16.0
12.2
12.7
11.3
8.8
14.8
13.0
11.0
20.0
16.0
28.6
50.0
41.7
11.5
13.0
11.0
12.0
10.0
0.0
10.0
5.0
6.0
10.0
40.7
15.0
% of GDP
10.2
9.8
11.7
7.6
5.5
3.1
2.4
6.2
1.5
2.9
1.8
2.2
0.4
0.4
13.3
11.9
11.6
3.3
1.1
1.4
0.8
0.8
1.6
1.5
1.3
1.7
3.0
1.8
12
Source: Union Budget documents, MoSL
24 January 2017
2
 Motilal Oswal Financial Services
Union Budget 2017-18 | Preview
Key budget expectations
Sector
Auto
Current state
of the sector
Major budget
expectations
Expected change, if
expectations are met
Key stocks to watch
out for
Hero MotoCorp, TVS Motor,
M&M
Demand environment
remains weak across 2W/PV,
impacted by
demonetization, with -
5%/2% growth in 3QFY17.
Considering the likely GST
Lower income tax and the
implementation from July
focus on rural markets could
2017, we do not expect any
put 2W industry back on the
changes in indirect taxes.
growth path. This, coupled
However, we expect an
with the benefit of normal
th
increase in income tax
monsoon and 7 Pay
exemptions and higher
Commission, could drive 2W
allocation toward rural-
volume CAGR of 10-12%
focused schemes.
over FY17-19E.
CV volume growth
Introduction of scrappage
Scrappage scheme
moderated to ~6% in
scheme, which would
(depending on whether it is
9MFY17 and flat in 3QFY17.
incentivize scrapping of
mandatory/voluntary and
trucks older than 10 years.
magnitude of incentives) can
drive 15-18% CAGR for the
CVs (current est. of ~12%).
Focus on the infrastructure
Ramp-up in infrastructure
segment with higher
activity will drive demand for
allocation.
Tippers and overall CV
demand from ~12% CAGR
estimate to 15-18% CAGR
over next two years.
Cigarette segment has been
We expect a blended excise
We expect ITC to implement
showing flat-to-positive
duty increase of ~15%.
a weighted average price
volume growth over past
hike of 14-15% to pass on
three quarters after
the excise duty increase. The
moderate increase of 10% in
company has already taken
excise last year.
price increase of ~15% in key
Demonetization and
brands Gold Flake and Navy
unfavorable base, however,
Cut toward the end of
will affect volumes in
December in anticipation of
2HFY17.
excise increase. We model in
cig. volume increase of 3% in
FY18 as a result of relatively
moderate excise increases
for two consecutive years.
Government allocation
Any increase in rural
toward rural schemes has
spending/infrastructure
waned off in the recent
spending/tax exemption
period. Rural growth has
which can put money in
thus tapered down and is
hands of consumers, thereby
now equal to urban growth
benefiting the FMCG sector.
(we note in FY15 rural
markets were growing at
1.5-1.6x of urban markets).
We expect an increase in
allocation toward the rural
sector due to the weak
environment and
forthcoming crucial state
elections.
PSB banks starved for
Higher capital allocation for
Would lead to higher credit
capital.
re-capitalization of PSU
growth, reviving the
banks.
investment cycle.
Slow recovery environment
Higher allocation of funds to
Would help in faster
with continued stress in core core sectors like
recoveries and thus improve
sectors.
infrastructure, housing and
asset quality position of the
urban development.
banking system.
AQR and demonetization
Higher tax relief/concessions
Improve profitability and
have contributed to
for loan loss provisions.
would lead to more capital
significantly higher bad loan
available for lending and
provisioning.
reduce regulatory arbitrage.
Ashok Leyland, Bosch
Consumer
ITC
Broad implication across our
coverage universe; however,
rural salience is higher for
HMN, HUVR, Colgate, Dabur
and JYL.
Financials:
NBFC
PSU banks
PSU banks
All banks
24 January 2017
3
 Motilal Oswal Financial Services
Union Budget 2017-18 | Preview
Key budget expectations
Sector
Current state
of the sector
Muted retail environment.
Major budget
expectations
Expected change, if
expectations are met
Key stocks to watch
out for
Boosting retail demand
through announcements
such as increased interest
tax exemptions on home
loans (current exemption
limit at INR0.2m).
Transitioning from paper
To increase digital
money to digital payments.
penetration, the GoI may
consider tax exemption for
a) customers conducting
transactions
digitally/electronically over a
certain limit. b)
vendors/merchants
exceeding a certain
threshold in value of digital
transactions.
Schemes to promote
Expect interest subvention
affordable housing.
schemes announced by PM
to be implemented.
Revision of import duty on
Reduction in gold import
gold.
duty
Reintroduction of infra
Incentives for issuance of
bonds.
infra bonds.
Weak environment prevails
Roadmap to GST with
with low-single-digit SSG for
timelines. We also await if
retail companies. Festive
any fat tax is imposed on
season reported moderate
QSRs.
sales, and demonetization
has further weakened
sentiment.
Improved demand for
Retail focused banks
housing (bulk of retail) could
revive retail credit growth.
Reduced operating costs,
Retail focused banks
higher transaction fee
income and increased float
in the banking system.
Pick-up in growth rate
depending on feasibility of
final guideline.
Could negatively impact
growth rate of gold
financiers.
Pick-up in loan growth.
Gruh Finance, Repco Home
Finance
Muthoot Finance,
Manappuram Finance
IDFC Bank
Retail
Capital
Goods &
Infrastructure
Implementation of GST can
Broad implication across our
eventually boost margins,
coverage universe.
but will have an initial
negative impact as indirect
tax incidence is likely to be
higher after GST compared
to prevailing rates. Fat tax
will be a negative for QSRs.
Defense: Sector companies
Increased allocation toward
An increase in budgeted
Bharat Electronics, L&T,
await an increase in orders
capital spending in the
spending would be positive
Bharat Forge
from the government post
budget.
for companies as it implies
the thrust toward "Make in
higher ordering and
India". FY17 budgetary
execution.
allocation at INR858b for
capital spending.
Roads: Increased budgetary
Roads: Increased budgetary
Higher road ordering and
L&T, Cummins India
support in FY17 (INR440b)
support toward road is
construction would be a
along with various steps
expected to maintain
positive for the companies in
taken by the government
continuity in ordering and
the sector.
have revived the sector.
execution. Proposed
spending for FY17E was
INR1t.
Railways: Government is
Rail: Increased budgetary
Higher railway spending is a
L&T, Siemens India, ABB
taking steps to decongest
support and in turn spending key positive for rail
India, Crompton Greaves,
the existing network,
by the Indian Railways.
equipment suppliers and
KEC Intl.
improve safety of
Proposed capex for FY16
contractors.
passengers and return the
was at INR984b, which is
railways to profitability.
unlikely to be met given
tepid growth in 1HFY16.
Namame Gange: While
National mission for clean
Higher allocation toward
VA Tech Wabag, L&T, KEC
much ground work has been Ganga: Increased allocation
Ganga clean-up would result Intl
laid, ordering for the
to the mission would imply a in a positive change in
Namame Gange mission is
pick-up in orders and
orders for companies in the
yet to see a pickup in orders. execution for the clean
wastewater treatment
FY17 allocation was at
Ganga mission.
space.
INR23b.
24 January 2017
4
 Motilal Oswal Financial Services
Union Budget 2017-18 | Preview
Key budget expectations
Sector
Current state
of the sector
Major budget
expectations
Expected change, if
expectations are met
Key stocks to watch
out for
Generation-based incentives
Extension of the GBI benefits
Extension of the benefits to
Inox Wind, Suzlon Energy
(GBI) for the wind sector set
by another five years.
lead to strong wind capacity
to expire in March 2017.
addition in the 13th plan.
Air conditioners:
Increasing
awareness of energy
efficiency to drive customers
toward higher-rated and
inverter air conditioners.
Basis rate of Income tax
currently at 30%
Cement
Cement dispatches declined
15% MoM in November, and
dispatches are expected to
decline in double-digits YoY
in December.
Demonetization has affected
cement dispatches pan-
India, except in south due to
low base and higher
spending in AP/ Telangana.
Prices have been stable, with
uptrend in prices observed
in north and central regions
for Jan-17.
Higher operating cost due to
increase in fuel and freight
to pressure cement
company profitability.
No incentive for hospitals
and diagnostic centers to
undergo accreditation.
Lower excise duty on 5-
Positive for companies
Voltas, Blue Star, Hitachi
star/inverter air conditioners which have a higher focus on Home, Whirlpool
to promote usage.
energy-efficient air
conditioners.
Cut basic rate of corporate
Reduce the tax burden for
tax by 1% to 29%.
companies.
Increased infrastructure
spending to benefit the
cement sector.
All companies in the sector
Higher spend toward
SRCM, TRCL, Dalmia Cement
infrastructure and low-cost
housing could boost cement
demand.
Benefits to low-cost housing
to increase demand from
individual housing segment,
which was impacted by
demonetization.
Introduction of clean energy
Implementation of cess
cess of INR400/t in Petcoke
would increase cement costs
by INR30/tonne.
Healthcare
Priority sector status to
Healthcare including
Hospitals and Diagnostics
Centers.
5-year tax benefit on capex
Tax benefit to extend for 10
for hospital projects.
years on capex for hospital
projects.
Weighted deduction of
Allow weighted deduction of
~200% on approved
~250% on approved
expenditure incurred on
expenditure incurred on
R&D activities.
R&D activities pertaining to
indigenous development of
medical technology or bio-
technology. Also, extend
benefit to expenses outside
approved facilities.
Inverted duty structure, that
Streamline the duty
is, higher rate of excise duty
structure by reducing the
on inputs and lower rate of
duty structure on API so as
excise duty on finished
to have better utilization of
goods.
credit.
100% deduction on
approved expenditure
incurred for securing
accreditation from National
Accreditation Board for
Hospitals and Healthcare
Providers (NABH), and from
National Accreditation Board
for Testing and Calibration
Laboratories (NABL).
Status to change from
priority sector to
infrastructure sector.
Effective tax rate might
reduce
Sun Pharma, Alkem, Lupin,
Dr Lal Pathlabs, Thyrocare,
Apollo hospitals, Fortis
Healthcare
Reduction in cost of funds to
enhance profitability.
Lower effective tax rate for
extended period.
Encourage higher spend on
R&D; lower effective tax
outgo.
Lower duty would enhance
profitability
24 January 2017
5
 Motilal Oswal Financial Services
Union Budget 2017-18 | Preview
Key budget expectations
Sector
Media
Current state
of the sector
Major budget
expectations
Expected change, if
expectations are met
Key stocks to watch
out for
Zee Entertainment
Enterprises
Dish TV
Hindalco, Nalco, Vedanta
Effective service tax: 15%;
ent. tax: 6-7%; customs duty
on set top boxes: 10%.
Metals/
Rise in LME aluminum prices
Mining
has led to restart of
closed/new aluminum
capacities in China. This can
pose a risk on global
demand-supply balance if
demand does not catch up
with expected rise in supply.
Import of steel products has
declined significantly with
anti-dumping/MIP measures
against imports. However,
domestic demand remains
tepid amid weak
capex/construction activity.
Demonetization too has
impacted near-term
demand.
Domestic iron ore
production has increased
significantly on resumption
of mining post the MMDRA
Act. There is a 30% export
duty on iron ore. Lower
grade (less than 58%) ores
have nil export duty.
Technology
Duality of pressure in
traditional services and
growing opportunity in
emerging technologies have
been impacting companies
based on portfolios and
strategies.
Margins are under pressure
in the near term, led by
regulatory risks around H1B
visas in the US
E-Commerce
Increased focus of industry
toward monetization and
profitability, either through
commercialization of assets
or cost-optimization
initiatives.
GST subsuming ST and ET to
Measures to improve
help aid margins of
competitiveness of domestic
distribution platforms.
set top box manufacturers.
Aluminum companies are
An increase in duty will drive
expecting an increase in
higher realization for
custom duty (current 7.5%)
domestic aluminum
or imposition of minimum
companies. Volumes could
import price on aluminum
also increase as consumers
and scrap.
shift to cheap domestic
aluminum.
Higher allocation toward
infrastructure spending,
which in turn will boost
demand for steel products.
Steel product demand will
Tata Steel, SAIL, JSW Steel
get a boost from the
current ~4-5% run-rate.
The nil export duty should
be extended to at least 60%
Fe content iron ore grades
from current less than 58%.
Boost exports of iron ore
NMDC
and improve domestic
demand-supply balance.
Clarity on whether in-house
research & development
facility for computer
software is covered within
weighted deduction of
200%.
N.A.
ETR to reduce marginally,
N.A.
impact earnings positively.
N.A.
N.A.
Telecom
Demonetization is a long-
Reduction in effective tax
term positive. High spend
rate
incurred in customer
acquisition, incentivisation
and marketing/advertising
(function of competitive
intensity).
Telecom receipts estimated
This year’s telecom budget
Key concern: Any spectrum
Bharti Airtel, Idea, Reliance
at INR990b for FY16-17, out
receipts should come down
auction in FY18 may force
Communication
of which there should be
to ~INR50b, excluding
operators to participate and
budget deficit of INR30-35b.
INR35b upfront spectrum
increase capex spends.
The biggest amount of
auction amount in the
INR35b was generated
absence of no auction. The
Currently, business loss can
be carried forward and set-
off for a period of 8 years,
restricting it if shareholding
varies by 51% or more in the
year. Shareholding
restriction may get exempt
for e-commerce.
Allowing 200% weighted
deduction on scientific
research expenditure by e-
commerce companies
investing heavily in
technology.
Reduction in effective tax
Info Edge
rate.
24 January 2017
6
 Motilal Oswal Financial Services
Union Budget 2017-18 | Preview
Key budget expectations
Sector
Current state
of the sector
Major budget
expectations
Expected change, if
expectations are met
Key stocks to watch
out for
through the upfront
spectrum auctions amount
while rest of the amount
included INR10b deferred
spectrum payment and
INR22-24b license and
spectrum fee.
increase of INR15b would be
toward higher deferred
spectrum payment as the
two-year moratorium ends
for FY15 spectrum
acquisition.
There could be additional
upside in telecom receipts if
telcos decide to pay off high
interest govt. debt by
refinance spectrum deferred
payments or if there is any
spectrum auction scheduled
for FY18.
Government had increased
Cess may be reduced to
Positive for CGD companies
cess from INR4,500/mt to
10%.
and LNG importers.
20% ad valorem in the last
Lowering of cess will be
budget.
positive for upstream
companies.
Est. ONGC FY18/FY19 EPS to
increase by 2%/3%; OINL
FY18/FY19 EPS to increase
by 3%/4%.
In FY17, the government has
Expect clarity on modality
No change.
ruled out any subsidy
for FY18; we build in nil
burden on OMCs and
subsidy burden for OMCs
upstream companies due to
and upstream.
low oil prices.
Import duty of 5% charged
To increase affordability of
Lower import tax will boost
(excluding imports for power natural gas (cleaner fuel), we gas usage in India, benefiting
generation).
expect removal of 5%
companies across the gas
customs duty on LNG
value chain. Positive for CGD
imports irrespective of the
companies and LNG
usage.
importers.
The Ministry of Power (MoP)
Extension of Sec 80-IA till
The measures are more
has initiated a series of
FY20E.
facilitator in nature and
reforms in terms of domestic
would help keep up
coal supply improvement,
investment.
subsidy for LNG for gas
power project, DISCOMs
restructuring, etc. However,
with supply being higher
than demand, operating
rates remain low.
Debt burden at DISCOMs is
Higher capital allocation to
Network upgrade can help
impacting investing in
schemes like IPDS can
reduce AT&C losses, and
distribution upgradation.
support capex of DISCOMs.
increased reach/reliability of
supply can drive electricity
demand growth.
Petcoke substituting
Cess on petcoke
Improve competitiveness of
demand for domestic coal in
domestic coal for the
the cement industry.
cement industry.
Domestic coal has a cess of
INR400/t, while there is no
cess on petcoke.
Monsoon has been good this
Removal of excise duty
Removal of excise duty can
year, but on account of
levied on pesticides, as there significantly improve sales of
demonetization, farmers
is no excise duty on seeds
agro-chemicals, boosting
have been impacted.
and fertilizers.
growth for the companies.
Incentives to education of
Education of farmers will be
farmers on advanced and
long term positive for the
Oil & Gas
ONGC, OIL, CAIR IN
IOCL, BPCL, HPCL, ONGC, OIL
IGL, Gujarat Gas, MGL, PLNG
Utilities
NPTC, PWGR, JSW Energy,
CESC and COAL
Coal India
Agro
chemicals
PI Industries, Insecticides
India,
Dhanuka Agritech,
Monsanto India,
Coromandel International
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Key budget expectations
Sector
Current state
of the sector
Major budget
expectations
Expected change, if
expectations are met
sector.
Key stocks to watch
out for
modern techniques of
agriculture, as productivity
in India is almost half that of
China.
Customs duty rationalization
for raw materials that go as
inputs in phosphatic
fertilizers.
Urea price correction by 5-
10%, so that subsidy portion
receivable from government
reduces.
Fertilizers
Seeds
Irrigation
Tax sops for investments
made in R&D and plant
breeding activities since
various components take
years of investments.
Further clarity and updates
Increase in allocation
on Pradhan Mantri Krishi
towards various schemes
Sinchai Yojana. Increase in
will indirectly boost rural
allocation of various
economy.
schemes to revive rural
economy, which shall
indirectly benefit.
Urea price increase will lead
Coromandel International
to decline in subsidy
receivable from government,
which will in turn ease out
working capital and finance
requirements. Customs duty
rationalization shall aid in
decline in raw material
prices, leading to overall
volume growth. Currently,
while we factor in a volume
growth of 12-14% in
expectation of normal
monsoon, lower raw
material prices can expand
the same.
This can result in increase in
Kaveri Seed, Monsanto India
R&D and developing newer
varieties of seeds.
Jain Irrigation
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1
What makes Budget 2017-18 unique?
Level of uncertainty is higher than in previous budgets:
Almost all budgets come
with some degree of uncertainty. It is inevitable because the central government
has to make assumptions on GDP growth, which acts as the base for tax collection.
However, we believe the Union Budget 2017-18 brings with it much more
uncertainty. There are at least four channels, which will lead to additional ambiguity
to Union Budget 2017-18 numbers.
Gross tax collection could
increase by up to INR200b
by assuming additional
growth of 1 percentage
point (pp) in nominal GDP in
FY18
a. Basis of the Union Budget – nominal GDP growth
The Central Statistics Office (CSO) pegs its advance estimate of nominal GDP growth
at 11.9% for FY17, higher than market consensus of ~11% (and ~11.5% pre-
demonetization) and our expectation of 10.2%. In fact, the central government
assumed nominal FY17 GDP growth at 11% in its Budget 2016-17. With
demonetization, 12% growth in nominal GDP appears ambitious and unrealistic, in
our view. However, if the central government decides to use the CSO’s advance
estimates, it could easily peg FY18 nominal GDP growth estimate at 13% (as against
market consensus of 12% and our expectations of ~11%). The higher the nominal
GDP growth, the higher would be the tax collection assumption, allowing the
government to make higher spending allowances. A simple calculation shows that
gross tax collection could increase by up to INR200b by assuming additional growth
of 1 percentage point (pp) in nominal GDP in FY18. Although this risk is run every
time the government presents its budget, the rise in uncertainty due to
demonetization has created an additional layer of vagueness to such estimates.
Exhibit 3: Tax base growth is directly linked with nominal GDP/GVA growth
% YoY
GDP
GVA
Agriculture
Industry
Manufacturing
Services
Tax base
AE= CSO’s advance estimate
FY13
13.9
13.6
11.9
10.9
11.6
16.0
14.9
FY14
13.3
12.7
13.2
9.4
9.0
14.6
13.2
FY15
10.8
10.5
4.9
7.6
7.6
14.3
12.7
FY16
8.7
7.0
4.9
6.0
8.1
8.3
8.3
FY17AE
11.9
10.8
10.8
7.4
9.6
12.7
12.0
FY17MO
10.8
10.0
7.8
6.9
9.0
12.4
11.6
FY18MO
11.2
10.9
8.9
8.6
9.7
12.8
12.1
MO = Motilal Oswal’s Estimate
Source: Central Statistics Office (CSO), MoSL
b. Tax receipts collected through involuntary/undisclosed declaration
At the time of presenting
the Union Budget 2017-18,
the government is unlikely
to have firm information
about undisclosed income
that could be declared in
these cases and the
associated level of tax
collection.
One of the side effects of demonetization has been the resurgence of the Income
Tax (IT) department, which has been conducting searches on a regular basis.
According to the recent information released by the IT department, a number of
investigations resulted in an admission of undisclosed income of approximately
INR26b, as of
December 16, 2016.
Further, the IT department
identified
a total of
~6.8m potential non-filers, who had carried out high-value transactions in the
financial year 2014-15 but did not file returns. These non-filers (~18% of total tax
return filers in the economy) could have potential tax liabilities associated with
them. At the time of presenting the Union Budget 2017-18, the government is
unlikely to have firm information about undisclosed income that could be declared
in these cases and the associated level of tax collection. Furthermore, it would be
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difficult to ascertain the timing of such declarations. This thus creates further
ambiguity, in our view.
The multi-layered tax
structure proposed under
GST – which will get
implemented in the middle
of a financial year – will
bring opaqueness on
associated tax collections
c.
Impact of Goods & Services tax (GST) on tax receipts
In a meeting concluded early this week, the GST Council is understood to have
reached a consensus on the contentious issue of dual control for administering the
tax and defining the boundaries of a state to levy tax. This has instilled some
confidence among the market participants that GST could be implemented in July
2017. Although this is one of the most awaited indirect tax reforms in the economy,
the multi-layered tax structure proposed under GST – which will get implemented in
the middle of a financial year – will bring opaqueness on associated tax collections,
at least in the initial few months. Such uncertainty will also make the numbers
presented in the Union Budget highly skeptical.
Some of the schemes,
under which the
government could
potentially raise tax
receipts, would continue till
March 31, 2017. Thus, the
government’s estimates on
tax collection on account of
these schemes would be
open to doubts.
d.
Will the government include all additional resources?
All the government spending plans will have to be approved in the Parliament, and
the government thus needs to balance all the expenses with the source of financing.
Apart from the uncertainties associated with the aforementioned factors, it is also
important to note that some of the schemes, under which the government could
potentially raise tax receipts, would continue till March 31, 2017. Thus, the
government’s estimates on tax collection on account of these schemes would be
open to doubts. The Pradhan Mantri Garib Kalyan Yojana (PMGKY) 2016 is open up
to March 31, 2017. Furthermore, certain branches of the RBI will continue collecting
specified bank notes until end-March 2017. Since the RBI functions on July-June
year, the actual amount of special dividends that could arise from the
extinguishment of the RBI’s liabilities would be known at a much later date.
Consequently, the Union Budget 2017-18 will come with an additional layer(s) of
ambiguity, raising questions on the numbers presented by the government on
February 1, 2017.
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2
What is FY18 Union Budget expected to deliver?
All said and done, notwithstanding the additional ambiguity attached with the 2017-
18 Union Budget, almost all sections of the society expect the central government to
provide some relief.
The government is
expected to provide some
relief to
(individual/corporate) tax
payers and announce an
exclusive scheme for the
poor.
Expectations of a stimulus have peaked:
Exhibit 2
below categorizes major
expectations from the Union Budget, based on the probability of these measures
being adopted and their popularity (measured by its sentimental impact on the
financial market). We believe that the government might not announce significant
relief to any single section of the society in the budget. This is primarily because the
additional resources available are unlikely to be significant enough to finance major
relaxations. Nevertheless, the government is expected to provide some relief to
(individual/corporate) tax payers and announce an exclusive scheme for the poor.
Exhibit 4: How do various expectations rank in terms of probability and popularity?
Probability
HIGH
Incentivize further adoption
of digitalization
Provide additional incentives
to start-ups
Increase income tax slab exemption
Increase deduction
of investments under 80C
Reintroduce tax-free infrastructure bonds
Reduce corporate tax rate
Targeted social scheme for poor people
Increase capex by >15%
LOW
Compensate states for likely loss
due to demonetization
Disincentivize large cash payments
Farm loan waiver
Cash incentives to rural sector
Universal minimum income plan
for poor people
LOW
Increase PSU banking recapitalization
Increase spending on education & skill
development
Increase health spending
HIGH
Popularity
Source: Union Budget, MoSL
By Popularity, we imply its potential impact on the stock markets
In terms of personal income
tax, we believe the Union
Budget 2017-18 could be a
reflection of the first budget
of the current government
presented in July 2014.
a. Expected measures on individual income tax
In terms of personal income tax, we believe the Union Budget 2017-18 could be a
reflection of the first budget of the current government presented in July 2014. In
our view, some increase in the income tax exemption slab (by INR50,000) and
deduction under Section 80C (by another INR50,000) would be announced. We also
expect the government to reintroduce tax-free, long-term infrastructure bonds with
a limit of up to INR50,000-100,000 per annum. While the first of these three
measures may partly help boost consumption, the other two measures will lead to
higher savings (replacing) and thus investments.
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b. Expected measures on corporate tax
The upcoming Budget thus
would be the perfect time
for the government to cut
the basic rate on corporate
tax by 2pp. However, we
believe that a cut in the
basic rate by 1pp is more
realistic in this Budget.
We also expect the government to act on its commitment to reduce the basic rate
of corporate tax from 30% to 25%. The government had promised to cut the basic
rate in four years, of which two years have already passed. Demonetization is
expected
to have impacted the earnings performance significantly in 3QFY17. The
upcoming Budget thus would be the perfect time for the government to cut the
basic rate on corporate tax by 2pp. However, we believe that a cut in the basic rate
by 1pp is more realistic in this Budget. It would certainly raise questions on the
ability of the government to meet its 25% tax rate target by 2018-19.
We believe that the
government may announce
one major pro-poor
program.
c. Budget measures for the poor
One of the focus areas of the budget would be the rural sector. It is widely expected
that the government would announce few measures to the poor section of the
population. A number of measures ranging from
farm loan waiver
to
social security
program
are expected from the government. Furthermore, some sections expect
universal/guaranteed minimum income plan for the poor. However, this concept is
too
complex
(and costly) to be undertaken in the Indian economy and
implementation would be a real challenge. In the wake of the UP elections,
however, we believe that the government may announce one major pro-poor
program. The program, in our view, would likely be a targeted rather than universal
measure, consuming almost half of one-time additional resources garnered post
demonetization.
d. Continuation of emphasis on “less-cash” society
We also believe that the government would step up its efforts to encourage
digitalization and less-cash economy by incentivizing usage of electronic payments
(or less likely by
disincentivizing cash usage).
With states likely to begin
implementation of pay
commission awards from
FY18, the central
government must shift its
focus back on capital
spending.
e. Central government must boost capital spending
We also believe that the Union government must increase its investment spending.
In the current financial year (FY17), due to the implementation of the 7
th
Central Pay
Commission (CPC), revenue spending was budgeted to grow 12.5%, as against ~5%
in FY16. Nevertheless,
state governments
took the responsibility to increase
investment this year. With states likely to begin implementation of pay commission
awards from FY18, the central government must shift its focus back on capital
spending. Consequently, we expect the government to increase its capex at least by
15% for FY18.
As
Exhibit 2
above shows, there are also few more expectations – increased
spending on education, skill development and health, providing compensation to
states for the potential loss of revenue due to demonetization, etc. Nevertheless, it
would be unfair to expect the government to be able to meet all these expectations.
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We would be disappointed
if economics is not given
due importance in the
upcoming Budget.
We would be disappointed if economics is not given due importance in the
upcoming Budget. This is because it would, otherwise, tilt the budget more towards
populist schemes, which is more likely to be inflationary in nature
(Exhibit 3-4).
In
our view, although inflation has eased considerably over past few months, it is likely
to average 4.7% in FY17 and move toward 5.5% next year. Consequently, we would
expect the government to resist inflationary measures in the budget, which is only
possible if economics is given due importance.
Exhibit 6: …translates into higher retail inflation for the
economy
25
20
15
10
5
0
-5
0
5
10
15
y = 1.4694x - 1.1261
R² = 0.7662
Exhibit 5: Strong correlation between central government’s
core revenue spending and rural wages…
50
40
30
20
10
0
(10)
Oct-01
Oct-04
Oct-07
Oct-10
Oct-13
0
(5)
(10)
Oct-16
RS ex interest (-24m)
(% YoY,
12mma)
Rural wages (RHS)
15
(% YoY)
10
5
Nominal rural wage growth (%, YoY)
Labour Bureau, CSO, CGA, MOSL
RS = Revenue spending
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3
The government could end
FY17 with total receipts
worth INR14.76t, about
INR320b higher than the
budgeted estimate (BE).
How could FY17 data stack up?
Additional resources in FY17 to be utilized for payment under 7
th
Pay
Commission…:
Our calculations reveal that the government could end up with gross
tax receipts amounting to INR17.55t in FY17, as against the budgeted estimate of
INR16.3t. After adjusting for devolution of taxes to state governments, the central
government could have net tax receipts of INR11.36t in FY17, almost INR810b
higher than the budgeted estimate. However, more than half of the higher tax
receipts would be offset by lower receipts on account of non-tax revenue and non-
debt capital receipts. Thus, the government could end FY17 with total receipts
worth INR14.76t, about INR320b higher than the budgeted estimate (BE).
Nevertheless, instead of reducing fiscal deficit, these additional resources would be
utilized by the government to make payments under the 7
th
CPC. As we had pointed
out in our
report
earlier, as against the estimated provision of INR859b, the
government provided for only INR247b (~29%) in its 2016-17 Union Budget. Since
the decision on the revised rates and the date of effect of all allowances (except
Dearness allowance) is not yet notified, we believe the actual provisions provided by
the government should have been ~INR800b, which is about INR550b more than
what the government had provisioned (since the increase in some allowances is still
pending). Therefore, all the additional resources collected would be utilized toward
payment under the 7
th
CPC.
Nevertheless, instead of reducing fiscal deficit, these additional resources would be
utilized by the government to make payments under the 7
th
CPC.
…and the government thus will meet deficit target of 3.5%:
The government had
decided to make payment of all arrears under the 7
th
CPC with
the salary of August
2016.
Thus, although the government did not make full provisions of the due
payment under 7
th
CPC in the budgeted estimate, we believe that the revised
estimates will reflect these payments. Consequently, we believe that revenue
spending growth in FY17 was higher than budgeted, which will entirely offset
additional resources garnered this year. Consequently, the bottom line (i.e. fiscal
deficit) will remain unchanged at 3.5% of GDP (assuming 11% nominal GDP growth).
Nevertheless, instead of
reducing fiscal deficit, these
additional resources would
be utilized by the
government to make
th
payments under the 7
CPC.
We believe that revenue
spending growth in FY17
was higher than budgeted,
which will entirely offset
additional resources
garnered this year.
Exhibit 7: Government to maintain FY17 fiscal deficit at 3.5% of GDP
Total receipts
Gross taxes
Net taxes
Corporate taxes
Personal income taxes
Union excise duty
Customs
Services tax
Non-tax revenue receipts
Non-debt capital receipts
Total expenditure
Revenue spending
Capital spending
Fiscal deficit
# Up to November 2016
Budget estimate (BE)
Apr-Dec 2016
14,442
8,287#
16,309
11,438
10,541
8,084
4,939
3,192
3,458
2,317
3,187
2,446
2,300
1,660
2,310
1,618
3,229
1,750#
671
326#
19,781
12,867#
17,310
11,443#
2,470
1,424#
5,339
4,580#
* Includes INR84b due to IDS 2016
FY17MO
Change from BE
14,759
317
17,550
1,241
11,355
814
4,820
(119)
3,481*
(50)
4,100
913
2,264
(36)
2,605
295
2,934
(295)
470
(201)
20,100
320
17,630
320
2,470
0
5,342
3
Source: Union Budget, MoSL
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4
We firmly believe that the
government would not
want to hurt its credibility
by relaxing its self-imposed
fiscal deficit target of 3% of
GDP for FY18.
What are our expectations from FY18 Budget?
Expect the government to maintain 3% deficit target:
We firmly believe that the
government would not want to hurt its credibility by relaxing its self-imposed fiscal
deficit target of 3% of GDP for FY18. There are at least three reasons for this:
a. The government has already once relaxed its deficit target two years ago in
2015-16, when it postponed its target to reach 3% by one-year to FY18. We do
not think that the government would want rating agencies to raise concerns
about the credibility of the government’s commitment by relaxing it again.
b. With the government expected to receive a significant amount of additional
resources in FY18 (~INR730b, according to our calculations) due to
demonetization, breaching the deficit target is even more unexplainable.
c. In case the government decides to support economic growth at the cost of
relaxing its self-imposed deficit target, it will be seen as the government’s
acceptance of demonetization hurting the economy in FY18. We do not think
the government would want to send such signals.
4.a. What could be the amount of additional resources collected?
Exhibit 6
below shows the calculation of additional resources likely to be received by
the government due to demonetization. Although PMGKY 2016 is open up to March
31, 2017, most of the declarations are done by December 30, 2016. All tax liabilities,
thus, under this scheme would be collected in FY17. Nevertheless, the IT
department is expected to remain very vigilant in coming years, disclosing a
substantial amount of undisclosed income and thus related tax liabilities.
Demonetization could help
the government collect
additional taxes worth
INR328b in FY18.
Additional tax collection to be ~INR330b…
It is not possible to project tax receipts from the searches conducted by the IT
department. However, for the purpose of making estimates, we assume that the IT
department helps unearth income worth INR285b (50% of the income considered to
be declared under PMGKY 2016) implying tax receipts of INR242b. Further, based on
our assumption of voluntary declarations under PMGKY and involuntary
declarations, the individual tax base will widen by 57,000 people earning more than
INR10m per annum (more than 45,000 people in 2013-14). This will also garner
another INR86b as individual taxes. It implies that demonetization could help the
government collect additional taxes worth INR328b in FY18.
Exhibit 8: The government could garner additional tax receipts of INR730b in FY18
% of non-deposited SBNs till December 19, 2016#
Unit
10
30
Taxable deposits (TD)
INR b
114
342
Tax on voluntary disclosure to be collected in FY17 (@50%)
INR b
86
257
Involuntary/Forced disclosure (50% of TD)
INR b
57
171
Tax on involuntary disclosure to be collected in FY18 (@90%)
INR b
48
145
Permanent tax collection from wider tax base in FY18 @15%
INR b
17
51
Total additional tax collection in FY18
INR b
66
197
Special dividends from RBI to be received in FY18
INR b
Total additional resources in FY18
INR b
#As per our calculations, almost INR14.3t (out of INR15.44t) of SBNs were deposited by December 19, 2016
50
570
428
285
242
86
328
400
728
70
798
599
399
339
120
459
90
1,026
770
513
436
154
590
Source: MoSL
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…and RBI could transfer another INR400b as special dividends:
On December 30, 2016, the government had passed an
ordinance
to extinguish the
RBI from liabilities related to the specified bank notes. Thus, the amount of SBNs
that does not return to the banking system by end-March 2017 could be transferred
to the government as special dividends. The question is “How will RBI transfer these
extinguished liabilities to the government?”
Since RBI liabilities get extinguished, a matching entry has to occur either by
increasing liabilities or by reducing assets. Assuming that the RBI has to transfer the
entire portion of extinguished liabilities to the government, either the RBI will credit
the government’s account by a similar amount (thereby increasing government’s
deposits with the RBI (on liability side)), or the RBI will choose to terminate a portion
of short-term government papers maturing within one year, reducing its assets. The
former will create additional resources for the government to be utilized in FY18,
while the latter will not add anything to the government’s resources but reduce its
repayments and thus gross borrowings. We assume that the RBI will decide to keep
the size of its balance sheet unchanged and provide special dividends to the
government as additional resources to be utilized in FY18.
The RBI could transfer a
maximum of INR400b to the
government, which will be
included in the latter’s non-
tax revenue receipts for
FY18.
Unfortunately, the RBI had not provided any data on deposited SBNs after
December 10, 2016. Nevertheless, our calculations using the currency in circulation
data released by the RBI and total supply of currency by December 19, 2016 data
provided by the RBI show that more than INR15t is back into the system. Thus, the
RBI could transfer a maximum of INR400b to the government, which will be included
in the latter’s non-tax revenue receipts for FY18.
Thus, additional tax resources worth INR328b and non-tax revenue of INR400b will
add INR728b to the government’s kitty next year.
Almost half of these
additional resources
(INR380b) are expected to
be used to provide relief to
(individual/corporate) tax
payers, while the other half
(INR350b) could be used for
the major pro-poor
schemes (under revenue
spending).
4.b. How could these additional resources be utilized?
Government unlikely to be able to meet high expectations…:
With the government
collecting additional resources of about INR730b in FY18, it is highly unlikely for the
government to be able to meet high expectations of providing stimulus to almost all
sections of the society. Almost half of these additional resources (INR380b) are
expected to be used to provide relief to (individual/corporate) tax payers, while the
other half (INR350b) could be used for the major pro-poor schemes (under revenue
spending).
a. As we discussed above, on the individual tax front, the government could
announce the same measures which were announced in its first budget three
years ago. A combination of an increase in the income tax exemption limit by
INR50,000 to INR300,000 and an increase in deduction under section 80C by
INR50,000 to INR200,000 could provide a respite worth INR230b to individual
tax payers.
b. Further, although the government has only two years left to meet its
commitment to reduce the basic rate of corporate tax by 5pp, we expect a
reduction of 1pp in the corporate basic tax rate to 29% in the upcoming Union
Budget. This could cost INR156b to the exchequer.
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c. Finally, although the shape and the form of a pro-poor stimulus are difficult to
envisage, we believe that there will be one major package directed toward the
poor population. Since the government will have about INR350b with it, this
directly rules out any farm-loan waiver or universal income plan, which would
certainly cost way much higher. As we discussed above, some sort of targeted
policy will be announced for the poor population.
Exhibit 9: Utilization of additional resources received due to demonetization in FY18
Amount (INR b)
Total additional resources
Tax receipts
Non-tax receipts
Individual income tax relief
Corporate tax relief
Higher revenue spending
What must be ignored?
A universal minimum income plan/ or a new program on the lines of MGNREGA
What would be more desirable?
Disproportionately higher spending on education, health, etc.
Source: MoSL
728
328
400
~230
~156
350
Increase in income tax exemption limit by INR50k
Increase in deductions under 80C BY INR 100k to 250k
Re-introduce tax-free infrastructure bonds of INR50k-100k
Cut the basic rate of corporate tax by 1%
Available resources to announce one major pro-poor (targeted) scheme
Please see
Exhibit 6
above
Comments
Overall, we do not believe that some big-bang fiscal stimulus is in store – not
possible unless the government compromises with the fiscal deficit target (a
relaxation of 0.1% of GDP in the deficit will free ~INR170b for the government).
Given below are our key expectations/hopes from the Union Budget 2017-18:
1. No extraordinary increase in the income tax exemption slab (expect it to be
increased by INR50,000 to INR300,000).
2. A token reduction in the basic rate of corporate tax by 1pp to 29%.
3. Unlikely to finance a farm-loan waiver or a universal/guarantee income plan.
4. Expected to announce a pro-poor package costing about INR350b.
5. Hope to increase capex by 15% (or higher).
Such small but effective measures will help boost sentiment. Interestingly, this
combination will also help balance out the consumption and investment theory. A
large part of the relief to tax payers and higher capex by the central government will
likely add to savings/investment, while the pro-poor scheme is expected to give a
push to consumption.
While these schemes will
help boost sentiment across
the economy, it is unlikely
to be converted into higher
GDP growth,
While these schemes will help boost sentiment across the economy, it is unlikely to
be converted into higher GDP growth, as we have argued in one of our recently
released
report.
This is primarily because the Union Budget 2017-18 will effectively
be redistribution of wealth rather than a real fiscal stimulus. The budget thus is not
expected to have an impact on FY18 GDP growth.
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THEMATIC/STRATEGY RESEARCH GALLERY
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Union Budget 2017-18 | Preview
NOTES
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