The Indian government will present its budget for FY19 (April 2018 – March 2019) on 1st February 2018. This will be the final full year budget under the current term of the BJP-led central government before general elections in April/May 2019. There are four key state elections this year, which will continue to be seen by the market as a referendum on BJP-led government and a forerunner to the general elections.
India’s economic growth has seen significant pressure over the past year following two major structural changes – demonetization (November 2016) and the implementation of a nationwide goods and services tax (GST) (July 2017). Growth fell to a three-year low in Q1Fy18, although a nascent recovery is evident. GDP growth was recorded at 6.3% for Q2Fy18 against a backdrop of GST issues. Going by record high levels of Sensex & Nifty, which indicate high growth in corporate revenues and earnings, GDP growth rates should print higher in the 2nd half of Fy18. The improving fiscal dynamics was recognized by Moody’s (Credit Rating Agency) with a sovereign rating upgrade (from Baa3 to Baa2) in 2017.
Click here to read analysis on “Growth, Deficit & Polls 2019 are a TightRope Walk for the Government- Expenditure Budget 2018-19”.
Government will be able to far exceed its FY18 divestment target of Rs.725 billion due to last minute transfer of its holding in HPCL to ONGC. Till date the Government has raised Rs.535 billion by way of divestment. The transfer of its 51% stake in HPCL to ONGC would fetch Rs.370 billion. Hence total divestment figure for FY18E could reach Rs.905 billion. Government has also initiated the divestment plan of Air India which is likely to fetch revenues for Government by the end of 2018.
On the macro front, this fiscal year’s deficit target (3.2% of GDP) would be stretched mainly due to lower tax revenues (mainly due to GST reforms & cut in excise duty on petroleum products), lower nominal GDP growth and lower dividend transfers from RBI (due to excessive liquidity because of demonetisation). Market participants will be keenly watching for fiscal deficit numbers. The government has touched 96% of its fiscal deficit target as of October 2017.
In the 2017 budget, the government projected FY19 fiscal deficit at 3% of GDP i.e. lower than FY18E (3.2% of GDP) fiscal deficit.
Rural demand conditions appear to be improving in the backdrop of good back to back monsoons, farm loan waivers (by State Governments) and fading impact of demonetisation. Collapse of food prices in 2017 has led to lower agricultural incomes in rural areas, going against one of the central government’s goals of “doubling farm income by 2022”. The budget 2018-19 would attempt to support and accelerate the momentum in rural areas/ agricultural incomes not just with 2019 elections in mind but also in consonance with PM’s stated objective of “doubling farm income by 2022”. Rural economic growth averaged 3.5% (Y-o-Y) in 2017 versus Urban economic growth of 7.4% (Y-o-Y) (Source – Bloomberg). In Gujarat state elections (2017) the BJP got a set back from the rural areas. Considering that most of the states going in for elections in 2018 are more rural in nature this could have influence in the budget speech.
When international oil prices declined significantly in 2014-15, the Indian government raised oil and petrol excise taxes and absorbed some of the benefits of lower oil prices on its fiscal balances. Market will be watching closely on Government’s move towards rising crude oil price (CMP -USD 69 per barrel). Government can either increase the excise duty on petroleum products to balance its expenditures or it would increase its subsidies expenditure, latter part would bring additional pressure on fiscal deficit target for Fy19. Going forward the rise in crude prices could pose a threat to the government’s fiscal target of Fy19.
Market Participants will also be keenly watching for:
- Change in long term capital gains in equities, changes in long term capital gains (either in the form of change in tenure or tax rate) would bring negative sentiment in market in short run. Having said that, given improving corporate earnings, macros and FIIs/FPIs inflows, markets will shrug of the changes in long term capital gains in equities.
- During the Budget speech of 2015-16, Finance Minister has mentioned about bringing down the corporate tax by 200bps-400bps by 2019. Decrease in corporate tax will improve margins and profitability for Indian companies and also would attract new investments, which will boost Sensex & Nifty to all-time highs. USA has laid plans to cut its corporate tax rate from 35% to 20%.
Sector-Wise Trends & Expectations:
- Finance Minister has unveiled details of the recapitalisation package for Public Sector Banks (PSB) that was announced in October 2017. Budgetary allocation would be Rs. 81 billion and recapitalisation through bonds would be Rs. 800 billion. Recapitalisation plan will the help PSB’s with capital requirements and provide significant amount towards growth capital for increasing lending to the economy.
- Proposals regarding consolidation of PSB’s would be positive for this sector.
- Government might subsidise interest rate for housing up to some extent in order to promote “Housing for all by 2022”. This would help to spur growth in loan book of affordable housing finance companies.
- Government’s key focus for this budget is to improve income in the rural sector with an ambitious target of “doubling farm income by 2022”. Given such focus on this sector there would be good traction for Tractors and Two -wheelers going ahead.
- Society of Indian Automobile Manufacturers (SIAM) has suggested that all passenger vehicles be kept under two tax rates under the GST (Goods and Services Tax) vs. multiple tax rates levied currently. Currently, small petrol cars (engine capacity less than 1,200cc) attract 28% GST plus 1% cess, diesel cars (engine capacity less than 1,500cc) attract 28% GST plus 3% cess and hybrid cars, including mid, large and SUVs, attract 15% cess currently.
- The auto industry has also urged the government for tax on used cars to be fixed at 5% on the differential value between sale and purchase price of the used car. This was the VAT rate paid by dealers during the pre-GST period. The current GST framework levies tax rate between 28% and 43% on dealer margins, depending upon type of vehicle.
- SIAM has suggested Government to exempt 10-13 seater ambulances from levy of compensation cess. Currently ambulances with 10-13 seats are subject to 15% cess plus 28% GST.
- For electric vehicles (EVs), the industry has sought extension of custom duty concessions for additional critical components. SIAM has suggested reduction of GST on such automobiles to 5%, besides one-time income tax deduction of 30% of vehicle price for non-financed buyers. SIAM said, GST rate for all EVs may be brought down from 12% to 5% and road tax to be fully exempted. To determine the cut-off price for such an incentive, a maximum vehicle price of Rs25 lakh (the same used to define SUVs as per SIAM classification) may be considered.
- The body has also asked the Government to clearly provide definition of CKD (completely knocked down) and SKD (semi knocked down) units of EVs and denial of any custom duty concessions to CBUs (completely built units) of electric vehicles to support ‘Make in India’ program.
- Higher allocations in the rural economy for “doubling farm income by 2022” and job creation would increase their expenditure levels. Organised players in this sector will gain significant market share in the rural parts of the country going ahead.
- In urban areas the consumers are preferring products which are organic in nature, any cut in tax rate for organic foods/products will help manufacturers to gain market share in urban areas.
- Continued emphasis on infrastructure capex in the form of higher budgetary allocations for various infrastructure development schemes. Last year Government has announced the biggest road construction programme in Indian history to create 84,000 kms of roads over the period of next 5 years with a total investment of Rs 6920 billion. Click here to read our analysis on “3 Best Road Construction Stocks – Government’s “Bharatmala Pariyojan scheme”.
- Notwithstanding the fiscal constraints, the government had continued to focus on the infrastructure sector, largely to offset the lack of private sector investment. Government would focus on improving private participation in this sector during this fiscal year.
Oil & Gas:
- In India infrastructure for gas pipe lines is very under-penetrated due to expensive capex. Market participants will be keenly watching for policy for providing financial support for building of gas pipelines during the budget speech. City gas distributors would be the biggest gainers if Government announces policies regarding gas pipe lines.
- Government might introduce cess on polluting industrial fuels (e.g. petcoke) and exempt clean fuels (e.g. CNG) from excise duty, this move will incentivize conversion of gas.
- Oil & Gas ministry has requested GST council to consider petroleum products & gas under GST regime.
The budget would be prepared by the government in determining how best to support growth while maintaining fiscal discipline and keeping inflation close to the RBI’s target. Impact of budget on markets will fade off in next 1-2 months. Markets trends will more likely to depend on global cues, quarterly earnings, FIIs/DIIs/FPIs inflows & political scenario in India.
In March 2017, we first put out a presentation on why the Sensex will touch 40k in 2019. The Sensex was trading at 29,000 levels when we put out our analysis and it is trading at close to record high levels of 36,000, a gain of 24% since March 2017. Click here to read our analysis on “Sensex 40K in 2018”.