The story of IT and pharma is slightly more convoluted when it comes to assessing the impact of the Union Budget. Both these sectors are considered more of global sectors since they derive over 80% of their revenues from global markets rather than from the domestic markets. The Union Budget, therefore, tends to have a more limited impact as far as the IT and pharma sectors are concerned. However, there are some takeaways for both these sectors. Let us look at a few of them..
What the budget means for IT sector
If you consider any of the large IT companies in India, the business model is still focused on the US and European markets and in a much smaller way to Japan. The domestic business is still very small to be considered genuinely significant. But the Union Budget 2018 could open up some interesting opportunities for the IT sector. Here are 2 such implications for the IT sector..
The budget has subtly placed a lot of emphasis on the digital push. The government has made an allocation of Rs.100,000 crore for the education by leveraging on the power of technology. This could be a big opportunity for companies that are into software education and education delivery. Secondly, the massive programs like National Health Plan will require a tremendous leveraging of data and technology as well as a very sharp last-mile focus. IT companies that are largely technology enabled and provide last mile hops to customers could benefit.
Secondly, the Indian IT industry normally benefits from a stronger dollar and a weaker rupee. The US Fed is likely to hike rates during the year by up to 100 basis points. The RBI has indicated that while it is open to rate hikes, it will not be to the extent that the US will undertake. That will still leave the INR at a disadvantage vis-à-vis the US dollar and other hard currencies. If the rupee weakens during the year, as looks likely at this point of time due to high fiscal deficit and revenue deficit, the IT industry could actually stand to gain. That is a key take-away from this Union Budget.
What the budget means for the pharma sector
The Union Budget has been neutral to negative for the India pharma sector. That is evident from the way many pharma companies took hits in the aftermath of the Union Budget announcement. Here is why..
There was a strong expectation that pharma manufacturers will be allowed to claim input tax credit (ITC) on the GST that has already been paid on inputs. Currently, that facility is not available for pharma companies and that was becoming a problem because the GST on many of pharma inputs had been hiked. However, but not extending that benefit to the Indian pharma companies, the budget has surely disappointed the Indian pharma industry.
The reintroduction of standard deduction up to Rs.40,000 per annum will be another big boost for domestic medicine consumption. The original limit used to be Rs.15,000 for medical reimbursements which now standard subsumed into the standard deduction. This move improves the affordability of higher quality medicines in the Indian context and that should benefit pharma companies marginally.
The National Health Scheme is intended to cover 10 crore families with a medical insurance cover of Rs.5 lakhs per annum. While this is unlikely to be a big boost for the manufacturers of generic medicines, it is going to be a big boost for allied services. The focus will be more on delivery of medical services than on manufacture of medicines. Thus hospitals, healthcare service providers, diagnostic centres, critical care centres and last mile connectors in the pharma value chain could benefit quite substantially from this trend. In fact, in terms of stock market returns, this budget could see a shift from the traditional drug makers to the service providers.
Indian pharma companies have seen their valuations compress over the last couple of years as the growth rate and the OPMs have compressed. This budget was expected to increase the weighted deduction on R&D expenditure but that was not done. However, the weaker rupee during the year should be positive for pharma. That is not to take away from the fact that the Indian pharma industry is going through a structural shift and that has not really been addressed by this budget!
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