The Union Budget was expected to be a game changing scenario for the newly elected Government at the Centre. The industry and the corporates were expecting a lot to be delivered by the BJP led Government in a scenario of benign inflation levels and declining interest rates. The Union Budget 2015 presented by the Finance Minister in reality has sought a balance between achieving fiscal consolidation and encouraging economic growth. Putting it in simple terms the Union Budget 2015 has considered the constraint on Government spending and then given incentives for sectors to drive economic growth.
A positive macro-economic environment is expected to revive growth for the Indian economy and at the micro economic level the industry is expected to drive this growth in the time to come. Some sectors are direct beneficiaries after the announcement of the policies in the Union Budget delivered on 28th February 2015. The other sectors would indirectly benefit from the positives and would strengthen the linkages between industries.
It would be interesting to understand the outlook for sectors of the economy after the announcement of the Union Budget 2015.
Infrastructure – Key Points
- Budgetary allocation: Total outlay for infrastructure has been increased by 1.5 times to Rs.2.8 trillion (roads, railways and urban infrastructure the biggest beneficiaries).
- Roads: Investments for development of national highways proposed to be hiked by 178% y-o-y to Rs.856.07 billion. A major portion of this increase would be funded by a Rs.4 per litre increase in the road cess on petrol and diesel. Completing 0.1 million km of roads currently under construction and sanctioning and building another 0.1 million km.
- Railways: Total outlay raised by 52% to Rs.1,000.11 billion. In the Railway Budget 2015-16, there have been many announcements of PPP projects in areas of coastal connectivity, gauge conversion, dedicated freight corridors (DFCs) and the Mumbai suburban rail.
- Airports & Ports: No new project announcements. Exemption on service tax for constructing airports and ports has been withdrawn.
- Funding availability: A Rs.200 billion National Investment and Infrastructure Fund to be set up for infrastructure finance companies to raise debt. The budget also provides for issuance of tax-free bonds for roads, railways and irrigation projects, and aims to rationalise the tax regime for Infrastructure Investment Trusts.
Outlook for Infrastructure Sector-
The focus of the Government clearly remains on development of infrastructure with a sharp increase in the allocation towards roads, railways and rural infrastructure. Companies that undertake construction of roads would benefit from the contracts they would receive from the Government. IRB infrastructure would be a key beneficiary in the increased allocation towards roads.
Availability of funds for infrastructure has been made possible through implementation of road cess on diesel and petrol. Funding through the National Infrastructure Investment Fund, tax-free bonds and rationalisation of taxes for infrastructure investment trusts is the other route.
Cement- Key Points
- Investments outlined under various infrastructure schemes related to areas such as roads, urban development and irrigation indicate a targeted government spending of Rs.1,080 billion in 2015-16.
- Duties and tariffs directly levied on cement have increased marginally. The effective excise duty on cement has increased marginally from 12.4% + Rs.120 per tonne to 12.5% + Rs.125 per tonne.
- The clean energy cess on coal (domestic and imported) has been hiked to Rs.200 per tonne from Rs.100 per tonne.
- The rail freight rate for cement has been increased by 2.7% and for coal by 6.3%.
Outlook for Cement Sector-
Rise in the spending for infrastructure would indirectly benefit the cement companies as infrastructure companies would consume more amounts of cement to build more number of roads along with urban development.
Rise in the duties and tariffs along with energy cess and rail freight for cement companies would marginally increase the cost burden.
Power and Renewable Energy – Key Points
- Capacity additions: Installed capacity target for renewable energy set at 175 GW, led by additions of 100 GW of solar power capacity by 2022. Setting up of five ultra-mega power plants (UMPPs), each of 4,000 MW, with pre-awarded clearances and fuel linkages envisaged.
- Budgetary allocation: Allocation to transmission & distribution (T&D) segment increased by 26% to Rs.63.5 billion. Funding to renewable energy sector has also been increased by 5% to Rs.61.6 billion.
- Funding availability: Rs.200 billion National Investment and Infrastructure Fund to be set up for infrastructure finance companies to raise debt.
- Duties and levies: Clean energy cess on coal doubled to Rs.200 per tonne in 2015-16; however, the rise in generation cost of Rs.0.06/unit to be largely passed through. Moreover, steps have been taken to correct the inverted duty structure in renewable energy for selected components. However, the overall impact on capital costs is less than 5%.
- Dispute redressal: Public Contracts Bill introduced for resolving contractual disputes to create a conducive environment for PPP projects.
- Other benefits: Additional depreciation of 20% granted to new plant and machinery installed by a manufacturing unit or a unit engaged in generation and distribution of power.
Outlook for Power and Renewable Energy-
The government has set an aggressive target for renewable energy of close to 175 GW, including 100 GW of solar capacity by 2022.
Five new UMPPs for conventional power would benefit power producers in India. The government has increased the allocation towards transmission and distribution by 26% in 2015-16 as compared to FY 2014-15. Coal cess has also been increased which would marginally increase tariffs.
Companies such as BHEL, L&T, Thermax, NTPC and Powergrid to benefit in the long term from the opportunity as these companies are in a good position to cater to the plans of the Government.
Automobile and Auto Ancillaries – Key Points
- Allocation of Rs.750 million to promote manufacturing of electric vehicles (EVs). Concessional customs and excise duties on hybrid and EV parts extended until March 2016.
- Increase in customs duty on fully-built commercial vehicles (CVs) from 10% to 20%. Reduction in excise duty on ambulance chassis from 24% to 12.5%.
- Tax on royalty payments to foreign companies reduced to 10% from 25%.
- Creation of a trade receivables discounting platform for medium and small enterprises (MSMEs).
Outlook for Automobile and Auto Ancillary Sector-
The reduction in the excise duties would promote the manufacturing and sale of hybrid and electric vehicles. Increase in the customs duty for Commercial vehicles would promote manufacturing and sale from domestic manufacturers. Tata Motors would benefit from the incentives as the Commercial Vehicle segment of the Automobile industry is struggling to recover in the past few years. Possibility of reduction in the interest rates by the RBI would bring the CV segment growth back on track.
Auto Ancillaries supplying equipment and raw material to Commercial Vehicle OEMs would benefit in the time to come. The recovery is however expected to slow and steady in the near future.
Consumer Goods – Key Points
- Basic customs duty on organic LED (OLED) panels removed.
- Specific excise duty on tobacco and tobacco products increased 15-25%.
- Excise duty of 2% without CENVAT credit or 6% with CENVAT credit levied on condensed milk and peanut butter.
- Basic excise duty increased to 18% from 12% on mineral water and aerated water containing added sugar or other sweeteners/flavours. Additional excise duty of 5% on the products exempted.
- Excise duty on leather footwear with retail price exceeding Rs.1,000 per pair halved to 6%.
Outlook for Consumer Goods Sector-
The only positives are for the leather footwear industry as reduction in the price of products would increase their demand and benefit the manufacturers.
Rise in the excise duty for cigarettes is a huge negative for the Indian Tobacco Company (ITC) as rise in prices would dent the sale of its products.
Banks and Financial Services – Key Points
- The Union Budget has proposed to provide Rs.79.4 billion as capital support to all public sector banks (PSBs) in 2015-16.
- Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs.200 billion and credit guarantee corpus of Rs.30 billion, to be created.
- MUDRA Bank will be responsible for refinancing all microfinance Institutions, which lend to small entities, and focusing on scheduled caste/ scheduled tribe entrepreneurs.
- Farm credit target increased by Rs.500 billion to Rs.8.5 trillion. Higher allocation to rural financing agencies such as NABARD and RRBs, and to initiatives such as MGNREGA, micro-irrigation watershed programs.
Outlook for Banks and Financial Services Sector-
Capital support to all the public sector banks is a huge positive and would revive the beaten down sector that has shown rise in the value of non-performing assets in the recent time period.
Oil and Gas – Key Points
- Government announces oil subsidy of Rs.300 billion for 2015-16.
- Change in excise duty structure on petrol and diesel: Reduction in CENVAT by Rs.3.5-3.7 per litre, increase in road cess by Rs.4 per litre, removal of 3 per cent education cess levied on overall excise duty.
- Exemption of special additional customs duty on petrol and diesel, in excess of Rs.6 per litre
Outlook for Oil and Gas
Oil marketing companies such as BPCL, HPCL and Indian Oil Corporation would benefit from pass through of oil prices to end user. Diesel and petrol have been completely freed from the subsidy mechanism but other products such as Cooking gas and Kerosene have been given subsidies by the Government, budgeted at Rs.300 billion.
Prices for Petrol and Diesel have been increased by Rs.3.18 per litre on account of rise in the international crude oil prices in the recent time period. Oil Marketing companies have taken the price hikes positively and stocks rose on the markets after the news.