The FY17 Union Budget was a mixed bag for automobile manufacturers. The higher allocation towards rural and agriculture spend, including highest ever allocation of Rs 38,500 core towards MGNREGA, would definitely bring some much needed good news for rural focussed two-wheeler and auto makers. Measures like higher investments towards irrigation and crop insurance scheme for farmers would help revive rural demand directly benefiting the two-wheeler segment. Decisions like expenditure of Rs 19,000 crore on building roads in the rural corners of the country as part of the Pradhan Mantri Grameek Sadak Yojana in FY17 as well as creation of R15,000 crore worth of interest subvention fund on agricultural loans could both have an indirect impact on the auto demand.
In order to meet funding requirement for infrastructure sector, the Finance Minister proposed a levy of infrastructure cess of 1% on small/CNG cars, 2.5% on diesel cars (with engine size not exceeding 1,500 cc and length lower than 4 m) and 4% on other bigger engine vehicles including SUVs & Sedans. These measures are likely to adversely impact sales of PVs, especially bigger SUVs and sedans with diesel motors in an environment where underlying growth drivers are still weak. Further the implementation of 1% tax at source on purchase of luxury cars of value more than Rs 10 lakh could impact the sales of premium products, including SUVs.
The Commercial Vehicle (CV) sector however will reap benefits of the government’s plans to significantly increase allocation towards development of roads & highways including those in rural areas. The proposal to open up passenger road transport services to private players will attract investments by the latter and in turn support demand for buses. At present, the bus segment accounts for 13% of industry sales.
Measures & Impact
Infrastructure Cess ranging from 1% to 4% on various PVs
The levy is likely to adversely impact passenger car demand
Tax at source of 1% on purchase of cars exceeding R10 lakh in value
To impact sales of premium cars and SUVs
Opening up to the private sector provision of passenger road transport services
Could improve sales of buses
Increase in allocation towards road & highway infrastructure development
Could support the M/HCV segment
Higher allocation for agriculture and rural spending
Likely to give a boost to rural-oriented vehicle producers
he FY17 Union Budget has laid special emphasis on agriculture and farmers’ welfare and announced expenditure of Rs 35,984 crore in FY17 towards the same, with the aim of doubling the income of farmers in the next five years. It has laid increased focus on irrigation and announced a slew of measures in this regard. Under the ‘Pradhan Mantri Krishi Sinchai Yojana’, 28.5 lakh hectares of land would be brought under irrigation. Further, the implementation of 89 irrigation projects under the Accelerated Irrigation Benefits Programme will be fast-tracked, for which an expenditure of Rs 86,500 crore would be incurred in the next five years. In addition, a long term dedicated irrigation fund will be set up under NABARD, having an initial corpus of Rs 20,000 crore. Also, a programme for sustainable management of ground water resources, with an estimated cost of Rs 6,000 crore, has been proposed for multilateral funding.
In order to improve productivity, the soil health card scheme will cover 14 crore farm holdings by March 2017. To increase crop yield in rain-fed areas, GoI has launched the ‘Parmparagat Krishi Vikas Yojana’, which will bring 5 lakh acres of land under organic farming over a three-year period, and ‘Organic Value Chain Development in North East Region’ to promote organic farming.
To improve the condition of farmers and farm economics, GoI has announced a provision of Rs 15,000 crore towards interest subvention for 2016-17. Against the target of Rs 8.5 lakh crore in 2015-16, the target for agricultural credit in 2016-17 has been set at Rs 9 lakh crore. The FM has also allocated Rs 5,500 crore under the Prime Minister Fasal Bima Yojana, which will enable farmers mitigate losses on account of natural calamities through crop insurance. FM has also proposed to impose Krishi Kalyan Cess @ 0.5% on all taxable services, which will improve fund availability for spending on agriculture. In addition, FM has announced a unified marketing e-platform with the aim of creating an online wholesale market to ensure fair remunerative prices for farmers.
Measures & Impact
Implementation of irrigation projects under AIBP
The move will help irrigate an additional 80.6 lakh hectares
Allocation of Rs 5,500 crore under the Prime Minister Fasal Bima Yojana
The move will reduce the insurance premium to be paid by farmers so that more of them can avail of insurance cover and mitigate losses
Target of Rs 9 lakh crore of funding for agriculture during the 2016-17 financial year
The move will support the funding needs of the sector and is favourable to farmers
Banking & Financial Services
Since the launch of Indradhanush in August 2015, the Gross NPAs of PSBs have ballooned by around Rs 1 lakh crore to
Rs 4 lakh crore, as on December 31, 2015. At the same time, PSBs have reported a cumulative loss of Rs 11,000 crore in Q3 FY16 as against net profit of around Rs 10,000 crore in Q1 FY16. Further, there has been significant softening in commodity prices, which has led to a deterioration in the credit profile of corporates.
Despite such stress, FY17 capital allocation by the government for PSBs remains unchanged at Rs 25,000 crore as against the Tier I requirement of Rs 40,000-60,000 crore for FY17. However, the Finance Minister’s assurance on additional capital and finding the means to mobilise the same provides some comfort.
As for stressed asset resolution, ARCs may play a great role as higher sponsors stake and FDI (to 100%) may lead to higher equity flows. Further, permission granted to FPIs to invest in security receipts (SRs) may widen the funding base for ARCs. The FM has also clarified that ARC trusts which issue Security Receipts against purchase of NPAs will have a complete pass through of income tax. Although there are positive developments on ARCs, limited allocation of funds, at Rs 4,000 crore, under the National Investment & Infrastructure Fund (NIIF) is a negative. The government’s decision to exempt withdrawals up to 40% of the National Pension Scheme (NPS) corpus during retirement could make term deposits in banks less attractive.
Given the quantum of stressed assets, ICRA expects considerable management time and attention of PSBs to be expended on stressed asset resolution. Therefore, PSBs’ capacity to provide adequate credit for the revival of the economy is likely to remain constrained. PSBs’ credit growth was low at 5% as on December 31, 2015 (y-o-y).
Measures & Impact
No change in capitalisation plans for PSBs
Negative for PSBs given the stress on their balance sheets and TIER I capital raising requirement. Q3FY16 numbers indicate an increase in dependence of PSBs on govt for capital infusion
Relaxed norms on maximum sponsor ownership
Will strengthen ARCs’ capacity to take over stressed assets from banks; may increase interest of foreign investors operating in distressed assets markets
LIC to set up fund for providing credit enhancement to infra projects
Negative for banks’ credit growth and profitability due to increased competition from the bond market
Last year, the country experienced its worst monsoon season in six years, with the southwest monsoon, affected by the El-Nino phenomenon, ending with a deficiency of 14% from the Long Period Average (LPA). This along with muted growth in minimum support prices (MSPs) of key crops and tepid allocation under MGNREGA has affected rural incomes. Consequently, the disposable income with rural households is under stress, directly affecting rural demand. The industry was expecting a boost in rural investment, which has been addressed in the current Budget.
A dedicated long term irrigation fund of Rs 20,000 crore under NABARD will reduce the dependency on monsoon and improve overall yields of farmland. Also, increasing thrust on organic farming would improve yield in rain-fed areas. Further, government has approved a Crop Insurance Scheme (Rs 5,500 crore), which coupled with increased outlay under NREGA will put more money in the hands of farmers. The government is also exploring on a pilot-basis the option of Direct Benefit Transfer for fertilisers, with a view to stopping leakages in the system. While some of the initiatives will take time to materialise, increased outlay under MGNREGA, higher infrastructure spending and crop insurance scheme should support rural demand in the medium term.
The increase in duty on tobacco products will have an adverse impact on demand in the segment. The Indian FMCG industry is eagerly awaiting the implementation of the GST, which should boost profitability by reducing overall logistic overheads, especially towards warehouse management across various states. While no firm commitment on GST timelines was made, the industry was expecting alignment of the existing central indirect tax regime with the proposed GST framework.
Measures & Impact
Increased outlay on farm and rural sector as well as proposed 7th Pay Commission
Will boost consumption demand, especially from rural pockets
Increase in excise duty from 10% to 15% on various tobacco products other than beedi
Can further impact sales of cigarette makers, especially ITC
Higher allocation towards MGNREGA and creation of long-term irrigation fund under NABARD
To support disposable income and reduce dependency on monsoon
With the objective of reviving the investment cycle, the Budget has increased the outlay on roads and railways to
Rs 2.21 lakh crore. At the same time allocation towards ports Ports and Shipping has been reduced to Rs 2,700 crore in FY17 from Rs 3700 crore in FY16.
The Budget also proposes to revive 160 unserved/underserved airports & airstrips at an estimated cost of Rs 5-100 crore per strip/airport. Further, it proposes to increase the allocation towards the Irrigation sector, so as to fast-track 89 projects, with an estimated outlay of Rs17,000 crore in the next year and Rs 86,500 crore over the next
Other major positive measures include proposals to revive public private partnerships by tackling key impediments like lengthier dispute resolution, lack of provision for renegotiation, and infrastructure project funding related issues.
In this regard, the finance minister has mentioned introducing a Public Utility (Resolution of Disputes) bill, and guidelines for renegotiation of PPP concessions,
besides a more effective credit rating system specifically for infrastructure projects.
Furthermore, a Rs 4000 crore allocation has been set aside for NIIF and a proposal made for LIC setting up a dedicated fund to provide credit enhancement to infrastructure projects.
On the housing construction side, the Budget gives a push to the affordable housing segment through various incentives like exemption of service tax and corporate tax for certain affordable housing projects. Furthermore, the extension of excise duty exemption to Ready Mix Concrete is a positive for construction companies.
Measures & Impact
Increased outlay on roads and railways, which goes up to Rs 2.18 lakh crore
Will boost public sector investment, in turn giving a fillip to private sector investment sentiment
Introduction of public utility bill, guidelines for renegotiation of PPP concessions, new credit rating system for infra projects
These steps will revive and push public private partnerships
Exemption from DDT for income distributed by SPV to InvITS having specified shareholding
A big positive for sector as it will increase funding avenues for infra companies
Oil & gas
With the change in cess levied on crude oil production to 20% ad-valorem ($6-7 /bbl at current prices of crude oil) from the current Rs 4500 /MT ($ ~9 /bbl), upstream crude oil producers would report a moderate increase in profits over the short term. However, the move could be negative over the medium to longer term, if and when crude oil prices increase beyond $45/bbl. Another development which may positively impact sentiment in the upstream sector is the proposal to incentivise natural gas production by providing calibrated marketing freedom and ceiling price benchmarked against alternate fuels to upstream gas projects which are yet to commence natural gas production in challenging fields (deep water, ultra-deep water, high-temperature/high-pressure fields) from new discoveries.
For the downstream oil sector, an allocation of Rs 2,000 crore for new LPG connections to poor families would lead to an increase in LPG penetration, thereby boosting LPG sales volumes. Considering fuel subsidy RE of Rs 30,000 crore for FY16, ICRA notes that there would be almost nil carry-over of fuel subsidy burden for FY16, which is positive considering the past practice of carry-over to the next financial year. ICRA also believes that fuel subsidy at Rs 26,900 crore for FY17 could be adequate up to crude oil price of $40/bbl and would enable OMCs keep short-term debt and interest burden at lower levels.
The Budget also states that any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil there from to any person resident in India shall not be included in the total income of foreign national oil companies and MNCs storing crude oil in India. This step could help attract foreign companies to store crude oil in the caverns built by Indian Strategic Petroleum Reserves Limited (ISPRL), a part of which could be used by India in case of an emergency.
Measures & Impact
Change in cess on crude production to 20% ad-valorem from R4500 /MT
Upstream companies (ONGC, Cairn and Oil India) to benefit in the near term
Allocation of Rs 2,000 cr for new LPG connections to BPL families
To aid sales volumes
Provision of subsidy for sensitive petroleum products of Rs 26,900 crore
Adequate provision for under-recoveries up to crude price of $40/bbl to help OMCs contain short-term debt and interest costs
Incentives for deep-water and high-temperature/high-pressure natural gas fields yet to commence production
Domestic gas production to increase; upstream companies will get higher gas realisations for their new discoveries
The Union Budget 2016-17 did not offer any noteworthy measures or incentives for the real estate sector, much to the dismay of the various stakeholders. The Finance Minister broadened the scope of tax incentive available to REITs by providing exemption on DDT on the income transferred by SPV to REIT. However tax inefficiencies persist in the system, given the presence of capital gains for sponsors in case of transfer of asset in lieu of REIT units, and applicability of stamp duty, which are expected to hinder the introduction/ take-off of REITs in the country.
The Budget, however, offered positive measures for affordable housing projects, in line with the government’s stated intent of providing housing for all by 2020. In a bid to attract greater participation of developers in this segment, affordable housing projects (of specified sizes) have been exempted from income tax, though they would attract MAT. Considering that the incentive can be claimed by projects completed within three years of receipt of approvals, the timeliness of these projects would get a boost. The exemption of service tax for affordable houses of government-promoted schemes would help reduce the final cost for buyers, thereby supporting demand.
The increase in the limit of deduction in respect of rent paid under Section 80GG of the Income Tax Act is expected to positively affect rental demand for affordable housing units. The Budget also included a provision for an increase in tax exemption on home loans of up to Rs 35 lakh for first-time buyers. However, given that the cost of property in such cases is capped at Rs 50 lakh, the impact of this scheme on demand for homes in metros and other tier 1 cities is expected to be limited.
Measures & Impact
Income distribution by SPV to REIT exempted from dividend distribution tax (DDT)
Likely to support the funding needs of real estate players, especially those focused on commercial real estate space
Affordable housing projects that meet various conditions including on unit size exempted from income tax and service tax
Expected to increase the supply of affordable houses in the market
Interest rate exemption on interest payment and deductions under 80GG
Likely to support demand for housing loans