The Sensex and the Nifty rose 1.76% and 1.81% respectively, after the announcement of the Budget for FY 2017-18. The market was really worried about the impact of demonetization on the economic, industrial and company specific growth, but after the announcement of the Budget for the FY 2017-18, market is looking at demonetization impact as transitory. The rural economy has much to cheer in the time to come. Industries and companies that thrive on the rural economy would directly benefit from the increase in rural expenditure. Other than the increased spending on infrastructure the tax cut of 5% for individuals having income in the range of Rs 2.5 lakh to Rs 5 lakh would directly increase the buying power of middle class consumers. Sectors that depend on urban and rural consumption would witness an uptick in demand for their products and allied sectors would indirectly benefit from it.
The Government has given preference to increased spending for the rural economy by increasing the allocation to already existing schemes. Budgetary provision for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) for the FY 2017-18 stands at Rs.480 billion, up from the Rs 380 billion for FY 2016-17.
The coverage under the crop insurance scheme known as the Fasal Bima Yojana is to be increased from 30% of cropped area in 2016-17 to 40% in 2017-18 and 50% in 2018-19. Provision of Rs.55 billion for this scheme in 2016-17 was raised to Rs90 billion for 2017-18.
Fertilizer subsidy for 2017-18 was allocated Rs.700 billion, similar to 2016-17. Agricultural credit target for 2017-18 was fixed at Rs.10 trillion, an 11% increase from the 2016-17 target of Rs.9 trillion. A dedicated micro irrigation fund is to be set up at the National Bank for Agriculture and Rural Development (NABARD), with an initial corpus of Rs.50 billion. Rural roads construction scheme Pradhan Mantri Gram Sadak Yojana (PMGSY) has been allocated Rs.190 billion for FY 2017-18. Adding the contribution of states, an amount of Rs.270 billion is budgeted to be spent on PMGSY in 2017-18.
The allocation under the Pradhan Mantri Aawas Yojana-Gramin was also increased to Rs.230 billion from last year’s Rs.150 billion. The affordable housing segment would be given infrastructure status by the Government. Total allocation for rural, agriculture and allied sectors is Rs.1.87223 trillion, 24% higher than the allocation of the last year’s budget.
Sectors such as Real Estate and Construction, Infrastructure, Microfinance, Housing Finance, Fast Moving Consumer Goods, Automobile, Oil and Gas and Banking would benefit from the outlay.
Real Estate and Construction
The Real Estate sector had received a setback in the month of November 2016 due to the demonetization move by the Government. The industry was expecting some kind of a relief to be given in the Union Budget so that demand would come back to normal levels.
The Union Budget for FY 2017-18 announced certain measures, which is expected to boost demand for the sector. The affordable housing segment was given an infrastructure status as the Government has already planned to provide affordable housing for all till the year 2022. This would make it possible to grant loans at a cheaper rate, similar to those like the infrastructure sector and make housing affordable mainly for rural areas.
The reduction in the income tax rate for the middle class would marginally help in supporting demand particularly for the urban areas.
Reduction in the holding period for gains accruing from selling of immovable assets like land and building from the current 3 years to 2 years is positive and would marginally increase the liquidity of these assets. Amendment in the base year indexation (from 1.4.1981 to 1.4.2001) would considerably reduce capital gains tax providing tax relief for several asset holders.
Before the demonetization move the Real Estate sector was involved in huge cash transactions which led to significant amount of corruption and black money in the economy. Capping cash transactions to a maximum of Rs.3 lakhs would help in increasing the transparency and formal investment in this sector. The benefits of this move for the real estate sector would be reflected not in the immediate future but over a longer period of time.
The BSE Realty index rose 4.7% after the announcement of the Union Budget 2017-18.
The BJP led NDA Government was already focusing on infrastructure as it was one of its main agenda after it came into power and the increase in the outlay by 10% to Rs.3.96 trillion as compared to the last year’s budget is the testimony.
The allocation for Roads and highways has increased to Rs.649 billion for FY 2017-18 from the earlier FY 2016-17 allocation of Rs.524.47 billion. Rural roads construction work is expected to accelerate to 133 kms. per day in 2016-17 from 73 kms. per day in 2011-14. There is an increase of 8% in the allocation for railway expenditure to Rs.1.31 trillion with 3,500km of railway lines to be laid in 2017-18 against 2,800km in 2016-17. The increase in allocation for the infrastructure sector would mean that companies in the public private partnership space would receive more orders from the Government. Companies that build roads and highways would be big beneficiaries as increase in their order book would eventually translate into higher revenues and profitability for them.
Cement and Steel companies which provide the necessary raw material for construction of roads, highways and rails would directly benefit from increased Government spending on infrastructure as it would add to their topline and bottomline.
The BSE India Infrastructure Index rose 1.49% after the announcement of the Budget.
The Union Budget 2017-18 has proposed Rs.100 billion for recapitalisation of PSU Banks which is marginally positive for PSU banks. Banks can now deduct provisions made for non-performing assets (NPAs) up to 8.5% of total income for tax purposes which was 7.5% till now. The question now remains is whether such an allocation is really adequate for the Public Sector Banks which are reeling under the pressure of rising non-performing assets for a long time now.
India’s Government banks are undercapitalised. RBI financial stability report mentions Indian banks will require an additional capital of Rs.5 trillion to implement the Basel III norms, including Rs.3.25 trillion as non-equity capital and Rs.1.75 trillion in the form of equity capital in the next 3-4 years. Plans have been approved to raise about Rs 1.6 trillion (USD 25.76 billion) by selling some stake in state-run banks by 2019.This move would give sound corporate governance and make the PSU Banks efficient giving a positive outlook for longer term. Also government will infuse Rs.700 billion capital till the year 2018-19 under PSU bank recapitalisation plan.
The Banking sector had faced two major issues in the year 2016 – rising percentage of NPAs and demonetisation shock. It was overall a muted year for the banking sector as banks continued to struggle with rising NPAs. Overall Indian banking sector asset quality has seen deterioration with gross non-performing advances for the banking system trending sharply upwards at 7.6% as on March 2016, 1.8% bps increase since September 2015, PSU banks had the highest level of stressed assets at 10.57% while Private banks were at 3.17%. Though private sector banks have comparatively less NPAs they are not showing any significant improvement in lowering of NPAs. As per RBI financial stability report if macro situation worsens then banking Gross NPAs may rise to 9.3% of advances.
Sectors such as iron & steel manufacturing, food processing, transport equipment, textiles and infrastructure have contributed significantly to the non-performing assets (NPA) of banks.
RBI has cut the benchmark repo rate by 50 bps in the year 2016 but lending activity could not take off. Banks credit growth remained subdued below 6% showing weakness in economy along with the adverse effects of demonetisation.
Clearly the Banking sector has not received any significant boost from the announcements made in the Union Budget of 2017-18. The only positive is that the higher spending on affordable housing and infrastructure along with increased allocation for rural economy would increase the stagnated credit growth to some extent. One percentage increase in the provisions for tax deduction would be a welcome relief for Banks.
To maximize financial inclusion RBI distributed small finance bank and payment bank licenses in the year 2015-16. Some of the licensee such as Equitas, Ujjiwan, Suryodaya have started operations as small finance banks. Banking sector is likely to witness stiff competition in the time to come, from players that have been licensed to deal as payment banks.
Demonetisation Rs 500 and Rs 1000 notes has led to surge in bank deposits and surge in system liquidity. It is expected to lower cost of funds helping lower lending rates and in the near term support credit growth which currently stands at levels of 6%.
The BSE Bankex rose 2.76% after the announcement of the Budget.
Microfinance and Housing Finance
The allocation under the Pradhan Mantri Aawas Yojana-Gramin was increased to Rs.230 billion from last year’s Rs.150 billion. The affordable housing segment would be given infrastructure status by the Government.
In the short term NBFCs and Microfinance institution could see asset quality deterioration as their repayment in cash would get affected due to demonetization, but longer term outlook remains strong as the Government has increased the allocation for affordable housing and given infrastructure status to it.
Increased allocation would give more scope for housing finance companies to reach the affordable housing segment customers and indirectly support the microfinance sector to help disburse loans.
The BSE Finance Index rose 2.86% after the announcement of the Budget.
Oil and Gas
The Government has proposed to reduce the basic customs duty on liquefied natural gas (LNG) from the existing 5% to 2.5% for the FY 2017-18. Subsidy provided for the oil sector is about Rs.250 billion for 2017-18. This includes Rs.2.5 billion towards liquified petroleum gas (LPG) connection to poor households.
The finance minister proposed to create an integrated public sector “oil major.” This entity would be able to match the performance of international and domestic private sector oil and gas companies. The proposed integrated public sector company would create economies of scale for the benefit of the economy.
Reduction in LNG custom duty is an encouraging move by the Government for the oil and gas sector. Petronet LNG Company is the primary beneficiary of reduction in the basic customs duty and Gas distribution companies such as Indraprastha Gas, Gujarat Gas and Mahanagar Gas are also expected to benefit from this move. Their profit margins could improve depending on the extent of the reduction in prices the companies pass on to consumers. In general, reduction in LNG custom duty is expected to encourage the use of natural gas, which is considered a relatively cleaner fuel.
The BSE Oil and Gas Index rose 1.49% after the announcement of the Budget.
Consumer Durables, FMCG and Automobiles
There was nothing specific announced for Consumer Durables, FMCG and Automobiles in the Union Budget of 2017-18 but there would be an indirect benefit for them as there was an increase in the spending for the rural economy as compared to the last year’s budget.
The 7th Pay Commission and a healthy monsoon in the year 2016 is expected to prop up demand for FMCG, Consumer Durables and Automobiles but the demonetization effect would postpone purchases for individuals. The Budget has tried to give an indirect incentive to these sectors after the demonetization move temporarily decreased demand in the economy.
Budgetary provision for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) for the FY 2017-18 stands at Rs.480 billion, up from Rs.380 billion for FY 2016-17. This is expected to increase the wages in the hand of the rural population and give rise to increase in buying of consumer durables and fast moving consumer goods in the rural economy.
Demand for Two wheelers segment in the Automobiles industry was affected to a significant extent due to demonetization as most of the buying was in cash but the demand for four wheelers and commercial vehicles was least affected as bulk of the purchases happens to be through financing.
The tax cut of 5% for individuals having income in the range of Rs 2.5 lakh to Rs 5 lakh would directly increase the buying power of middle class consumers. This move is expected to give additional thrust to buy automobiles in the rural as well as the urban areas. Two Wheelers would witness sizeable increase in the demand from the rural as well as the urban areas due to the reduction in the rate of taxation for the middle class. Farm sector equipment and vehicles such as tractors would witness increase in demand from rural areas.
Increase in the spending for infrastructure would accelerate demand for Commercial vehicles, Passenger Vehicles and Two Wheelers but this effect would be visible with a considerable amount of lag. The allocation for Roads and highways has increased to Rs.649 billion for FY 2017-18 from the earlier FY 2016-17 allocation of Rs.524.47 billion. Rural roads construction work is expected to accelerate to 133 kms. per day in 2016-17 from 73 kms. per day in 2011-14.
The BSE Auto and FMCG Index rose 3.45% and 2.78% respectively after the announcement of the Budget.
The Government is very clear on its objective of reviving and supporting the rural economy and it has increased the overall rural allocation significantly. Total allocation for rural, agriculture and allied sectors is Rs.1.87 trillion, 24% higher than the allocation of the last year’s budget. The sectors that come under the purview of higher spending in the rural economy would stand to benefit in the time to come.
Apart from increase in the allocation of funds for the rural economy higher disposable income in the hands of the middle class has given the chance to revive economic growth further through rise in consumption levels.
Sectors that stand to benefit directly and indirectly from the announcements in the Budget are Real Estate, Infrastructure, Banking, Microfinance, Housing Finance, Consumer Durables, FMCG, Automobiles and Oil and Gas.