1 Please refer to important disclosures at the end of this report (22 January 2018) 1 1
Union Budget 2018-19 Preview
Will the budget focus on fiscal maths, election or
inflation?
The Finance Minister (FM) Arun Jaitley will present NDA’s fourth budget under the
current term on February 1, 2018. This year FM faces a unique dilemma of
balancing growth and inflation amid rising crude oil prices and bond yield. We
believe that the government is likely report a fiscal deficit target in the range of
3.4-3.5% of GDP, higher than budgeted target of 3.2%. However, the effect of the
slew of tax reforms would be seen in the form of rising revenue from FY19
onwards. Overall we expect (1) push in infrastructure spending to revive capex
cycle), (2) developmental schemes to push rural economy and (3) providing sops
/relaxation in income tax slabs / tax rate to boost consumption.
Amidst waning tailwinds, reforms likely to provide support
The government has been enjoying the fortunate tailwinds like falling crude oil
prices, bond yield and inflation in the last 2-3 years. As a result of these factors,
fiscal deficit was coming down as % of GDP. However, with rising crude oil prices
and bond yield, the government is now in a tougher spot to manage growth amid
inflation. However, the array of reforms likes GST (stable GST rates likely to push
collections from FY19 onwards); better tax compliance and digitization are likely to
keep the government’s kitty in a healthier position to fund development and
growth. Also, disinvestment targets and RBI dividend may be upped in order to
lower fiscal gap.
Rural economy and affordable housing to remain the concurring
theme
The government would continue its focus on rural economy and infrastructure
development with schemes like MNREGA, affordable housing, roads, irrigation,
interest subvention, credit support for small businesses, etc. We expect more
measures in the upcoming budget to remove distress from rural economy.
However, these measures in the form of subsidies like food (expansion of MSP
across categories), interest (affordable housing) and fuel (crude oil touching ~70$)
are likely to put stress on the fiscal prudence.
Major changes in taxation measures unlikely
We believe that any major change in corporate taxation is unlikely (while various
industrial bodies continue lobbying for various tax sops and rebates), as the
government’s focus will be to maintain fiscal discipline. In the personal taxation
space, government may offer minor relief/ exemptions to boost consumption,
especially from the bottom of the pyramid.
Budget conviction picks
With a focus on boosting rural and affordable housing space, we expect
consumption sector would continue to be a direct beneficiary from this budget. We
expect FMCG, consumer durables, retail and building material sectors to benefit
going ahead. We prefer companies like ITC, HUL, Maruti, etc. in this space. We
also expect the government’s impetus on housing sector and companies like, GIC
Housing and DHFL to remain our best play.
2
Union Budget 2018-19 Preview
Please refer to important disclosures at the end of this report (22 January 2018)
2
Exhibit 1: Budget arithmetic
In ` cr FY16RE FY17RE FY18E FY19E Comments
Direct Tax 7,52,021 8,25,429 8,99,718 9,71,695 Direct taxes to increase with widening tax base and
higher tax compliance
Indirect Tax 7,07,590 8,83,943 10,16,534 11,69,015 GST implementation and digitization to boost
indirect taxes
Total 14,59,611 17,09,372 19,16,252 21,40,710
States 5,12,103 6,08,000 6,78,353 7,57,811 In-line with historical trend
Tax Revenue 9,47,508 11,01,372 12,37,899 13,82,898
Non Tax Revenue 2,58,576 2,74,584 2,90,070 3,08,483 Dividend from RBI may be upped
Disinvestment Revenue 25,312 56,500 60,000 60,000 Rationalization of disinvestment target
Other Capital Receipts (Ex-
borrowings) 18,905 19,040 22,105 24,735 In-line with historical trend
Total Revenue 12,50,301 14,51,496 16,10,073 17,76,116
Revenue Expenditure 15,47,673 16,92,286 18,82,941 20,65,325 Higher interest payment would offset effect of lower
subsidies
Capital Expenditure 2,37,718 2,86,282 3,06,063 3,42,484 Capex to increase, in-line with economy
Total Expenditure 17,85,391 19,78,568 21,89,004 24,07,809
Fiscal Deficit 5,35,090 5,37,799 5,78,931 6,31,693
% of GDP 3.9 3.5 3.4 3.3
Govt. likely to miss FY18 fiscal deficit target of
3.2%, may marginally increase FY19E pre-set fiscal
deficit target from 3%
Source: Budget Documents, Angel Research
Key Fiscal Indicators (% of GDP)
FY14 FY15RE FY16RE FY17RE FY18E FY19E
Gross Tax Revenue 10.0 9.9 10.8 11.2 11.3 11.3
Devolution to State 2.8 2.7 3.8 4.0 4.0 4.0
Net Tax to Centre 7.2 7.2 7.0 7.2 7.3 7.3
Direct Tax 5.6 5.6 5.5 5.4 5.3 5.1
Indirect Tax 4.4 4.3 5.2 5.8 6.0 6.1
Capital Receipt (ex borrowing) 0.4 0.3 0.3 0.5 0.5 0.4
Plan Expenditure 4.0 3.7 3.5 3.7 3.4 3.4
Non-Plan Expenditure 9.7 9.6 9.6 9.3 9.5 9.3
Subsidies 2.2 2.1 1.9 1.7 1.6 1.5
Total Capital Expenditure 1.7 1.5 1.8 1.9 1.8 1.8
Total Expenditure 13.7 13.3 13.2 13.0 12.9 12.7
Revenue Deficit 3.1 2.9 2.5 2.1 2.1 2.0
Fiscal Deficit 4.4 4.1 3.9 3.5 3.4 3.3
Primary Deficit 1.1 0.8 0.7 0.4 0.1 0.1
Source: Budget Documents, Angel Research
3
Union Budget 2018-19 Preview
Please refer to important disclosures at the end of this report (22 January 2018)
3
Exhibit 2: Bond Yields have started firming up
Source: RBI
Exhibit 3: CPI inflation has increased in recent times
Source: Bloomberg
Exhibit 4: Subsidies have been kept under check
Subsidy Break-down (`cr) FY14 FY15 FY16RE FY17RE FY18E FY19E
Major Subsidies 2,44,717 2,49,016 2,41,857 2,32,705 2,40,339 2,49,526
Fertilizer Subsidy 67,339 71,076 72,438 70,000 70,000 70,000
yoy growth (%) 3% 6% 1.9% -4.0% 4.0% 4.0%
Food Subsidy 92,000 1,17,671 1,39,419 1,35,173 1,45,339 1,48,246
yoy growth (%) 8% 28% 18.5% 1.0% 2.0% 2.0%
Petroleum Subsidy 85,378 60,269 30,000 27,532 25,000 31,280
yoy growth (%) -12% -29% -50.2% -8% -9% 25%
Interest Subsidy 8,137 7,632 13,808 18865 23,204 23,204
yoy growth (%) 12% -6% 80.9% 4% 23% 23%
Other Subsidy 1,778 1,610 2,136 3,128 4,066 4,066
yoy growth (%) -23% -9% 32.7% 46% 30% 30%
Total Subsidy 2,54,632 2,58,258 2,57,801 2,54,698 2,67,609 2,76,796
yoy growth (%) -1% 1% -0.2% -1% 5% 3%
% to GDP 2.2% 2.0% 1.8% 1.68% 1.57% 1.45%
Source: Budget Documents, Angel Research
Exhibit 5: GST collections have tapered but likely to pick up in FY19
Source: FINMIN
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
Jan-1
2
Apr-12
Jul-1
2
Oct-…
Jan-1
3
Apr-13
Jul-1
3
Oct-…
Jan-1
4
Apr-14
Jul-1
4
Oct-…
Jan-1
5
Apr-15
Jul-1
5
Oct-…
Jan-1
6
Apr-16
Jul-1
6
Oct-…
Jan-1
7
Apr-17
Jul-1
7
Oct-…
Jan-1
8
0
2
4
6
8
10
12
14
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
94,063
90,669
92,150
83,384
80,808
70,000
75,000
80,000
85,000
90,000
95,000
1,00,000
Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
4
Union Budget 2018-19 Preview
Please refer to important disclosures at the end of this report (22 January 2018)
4
Exhibit 6: Sectoral budget expectations
Head Current Status Expected Change Potential Impact
Agro chemicals / fertilizers
Allocation to fertilizer and other
reforms like soil health card
Adequate allocation of `70,000cr
in last budget
Increase in allocation/ focus to
marquee programs
Positive for the entire agri input
and fertilizer companies
Automobile
Commercial vehicles; Incentives on
scrapping of old vehicles that are
more than 10-15 years old. No Incentive
Incentives to the tune of 8-10% of
vehicle cost
It would encourage replacement of
older vehicles, thereby boosting
demand for CVs. Positive for CV
manufacturers like Ashok Leyland,
Tata Motors, Eicher Motors, etc.
GST rate on electric vehicles Current rate is 12% Expected to reduce to 5% Positive for M&M and Tata Motors
BFSI
Final roadmap for recapitalisation
of public sector banks
The plan is worth `2.11 Lakh cr
out of which `1.35 cr will be in the
form of front-loaded
recapitalisation bonds
Details on the types of bonds or the
interest rates on these bonds
Positive for PSU banks, as it would
improve credit growth
Budgetary allocation to the core
sectors, including metals, which
account for large part of the stress
and faster resolution under NCLT.
Govt. spending has improved
metal demand and total `1.23
Lac Cr worth of cases have been
referred to NCLT
Increased spending on infrastructure
and focus on capex revival (both Govt
and Pvt)
Lower slippages, provision and
consequent improvement in
bottom-line
Affordable housing credit Last year, incentives like interest
subvention were introduced
Increase in tax exemption limit for
home loan
Housing finance companies to
benefit
Strengthening Banking Board
Bureau
Implemented from 1st
April, 2016
& appointing industry veterans on
board
Measures to bring in more
accountability on PSU Banks and
further guidelines on consolidation
Ability of PSU banks to raise funds
would increase and reduce stress
Capital Goods
Allocation towards Defence /
Railways/Metro
Last 2-3 years spending toward
these sectors are stagnant Allocation is expected to increase
Positive for Defence players like,
BEML, BEL, etc. and railway players
like BEML, Titagarh Wagons, etc.
5
Union Budget 2018-19 Preview
Please refer to important disclosures at the end of this report (22 January 2018)
5
Head Current Status Expected Change Potential Impact
FMCG
Increase in rural spending Relatively lower allocation in last
budget
Increase in allocation to
marquee programs
.Positive for the entire FMCG sector, which
has significant rural exposure
Increase in income tax exemption Basic exemption limit is `2.5 lakh Increase up to `3 lakh Higher disposable income would boost
demand for FMCG companies
IT
TDS rate
Last year, TDS was reduced from
10% to 2% for payments made to
call centres.
To be reduced to 2% for all
software transactions
Will improve the margins of the small IT
companies
Cascading effect of Dividend
Distribution Tax on dividend
At present, the dividend received by
Indian company is taxed at 15%.
There is subsequent dual levy of
dividend distribution tax on this,
when distributed to its shareholders
of parent company in India
Tax already paid on the
dividend is expected to be
allowed to be set off against
tax liability from dividend
distribution tax of the parent
company in India.
Will benefit MNC companies
Infrastructure
Increased allocation for infrastructure
sectors like Roads, Railways, Housing
and Urban Development
Total capital outlay of
`2.41Lakh Cr
Increase in budgetary
allocation
Positive for infrastructure & capital goods
companies
Metal
Import duty on Aluminum 7.5% currently Increase to 10% Positive for Hindalco & Vedanta
Customs duty on coking coal 2.5% currently Reduce to Nil Positive for domestic steel players
Oil & Gas
Inclusion of natural gas in GST 20-25% tax currently 5% Positive for City Gas Distribution
companies
Reduction of Basic custom duty on
Liquefied Natural Gas Currently 2.5% Reduce to Nil
Positive for City Gas Distribution
companies
Pharma
GST Refund Rates Currently 20-25% lower than the
previous excise duty refund rates. Expected to reduce Will benefit all pharma companies
R&D Sunset clause Only till 2020 Extension is expected Will benefit all pharma companies
Source: Company
6
Union Budget 2018-19 Preview
Please refer to important disclosures at the end of this report (22 January 2018)
6
Head Current Status Expected Change Potential Impact
Real Estate
GST rates Under-construction properties are
levied a GST of 12% Expected to reduce Revival in subdued demand
Deduction limit on interest and
principal on housing loan
Deduction
Interest – `2,00,000
Principle -`1,50,000
Expected to increase
Improved housing demand positive for
housing finance and real estate
developers
Single-window clearance Multiple agency approval
required at different stages
Expect to reduce clearance
time for projects Positive for real estate developers
Increased allocation toward
‘Housing for All’ 2022 scheme and
other housing schemes
Allocation to Affordable Housing by
24.8% to `38,043cr
Expected to increase
allocation Positive for affordable housing developers
Retail
Import duty on gold Custom duty was increased from 2%
to 10% in FY2013 Expected to reduce
Positive for jewellery companies like Titan,
PC Jeweller, TBZ, etc.
Source: Angel research
Please refer to important disclosures at the end of this report