Union Budget and the Stock Markets: Basics over big-ticket measures

Jul 11 2014, 12:48 IST
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A section of the Street, however, found the adherence to the FY15 fiscal deficit target at 4.1% of the GDP aggressive. A section of the Street, however, found the adherence to the FY15 fiscal deficit target at 4.1% of the GDP aggressive.
SummaryWhile it lacked big bang reforms that could have excited the market, Budget...

While it lacked big bang reforms that could have excited the market and taken it to new highs, finance Minister Arun Jaitley’s maiden budget nevertheless paid out broad policy measures, including a sharper focus on infrastructure.

Although the Street’s expectations of a clear road-map for the implementation of GST and changes in the retrospective tax framework were not met, the FM's acceptance of a daunting fiscal deficit target as well as the proposed increase in the foreign direct investments in the defence and the insurance sectors were considered big positives.

A section of the Street, however, found the adherence to the FY15 fiscal deficit target at 4.1% of the GDP aggressive given that the budget did not provide any clarity on managing the oil & gas subsidies. The proposed 17.7% growth in gross tax collections too appear challenging, analysts felt. The fiscal deficits targets of 3.6% for FY16 and 3% for FY17 were also seen to be ambitious amidst the the carrying forward of expenditure.

Such concerns notwithstanding, clear emphasis on the infrastructure and real estate sectors were welcome by the Street. The clarity on taxes for Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust (InvITs) with a pass through tax treatment were seen as major positives. Further, the FM’s move to incentivise banks with exemption in CRR, SLR and priority sector lending (PSL) requirements for long term infrastructure lending was welcomed. However, industry experts said that lack of provisions to attract foreign funding at lower cost by offering incentives as well as creation of a single window for land and environment clearances were missing.

Increased personal tax exemption limit from R2 lakh to R2.5 lakh and enhanced deduction limit on housing loan interest payment could support consumer demand with more disposable income. Focus on development of smart cities and low-cost affordable housing are also seen boosting the earnings growth of real estate and linked industries like cement. Absence of clarity on subsidy sharing for the upstream companies and details of measures to meet Basel III capital requirement of PSU banks (R2.4 lakh crore) by FY18 were clear disappointments. Not surprisingly, Stocks from banking as well as oil and gas sector reflected the discontent amongst traders and the equity market witnessed higher volatility in Thursday’s trading session.

Automobiles

While the Finance Minister did not spell out any direct benefits for the domestic automobile industry, he announced steps that could indirectly create demand and revive the sector. The FM had earlier extended the excise duty concessions beyond June 30 for a period of six months up to 31st December 2014. Industry believes that the emphasis on infrastructure, mining and agriculture in today's Budget will indirectly boost demand for the auto sector. Further, the direct tax reduction will put as much as `30,000 in the hands of middle income families, which is expected to give a good push to 2-wheeler sales. Focus on agriculture and mining is expected to revive commercial vehicle sales. The proposed increase in the composite cap on FDI in defence manufacturing to 49% could also help auto companies like Mahindra & Mahindra and Bharat Forge. Automobiles: Check Graph

Banking & Financial Services

The Budget, without giving a clear picture on capital infusion into public sector banks, said these banks will be allowed to raise capital by increasing retail shareholding in a phased manner while the government will retain its majority shareholding. The interim Budget in February this year had announced `11,200 crore capital infusion in FY15. The FM's move to incentivise banks with exemption in cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending (PSL) requirements for long-term borrowing for infrastructure lending was welcomed by bankers as it would provide public sector banks with greater liquidity. Jaitley said the government will examine a proposal to give greater autonomy to PSU banks. The FM also announced six new debt recovery tribunals (DRTs), and added that effective means for revival of other stressed assets will be worked out. Banking: Check Graph

Capital Goods

Although there were no key announcements that directly impact capital goods companies, some companies are likely to see a positive fallout of the increase in FDI caps and higher planned capex expenditure for PSUs. The FM proposed raising the composite cap on foreign direct investment in defence manufacturing to 49% from the existing 26% with complete Indian management control, through the FIPB route. The rationale behind the move was the considerable outflow of foreign exchange in a sector where India is currently the largest buyer in the world. L&T is likely to benefit from the relaxation of defence FDI norms. Jaitley also said that public sector units (PSUs) will make a capital investment of `2,47,941 crore in the current financial year which spells opportunity for listed PSUs including BHEL which is struggling with a weak order book and earnings. Banking: Check Graph

Cement

AS WAS expected, the cement industry did not see any change in excise duties. Moreover, there was no benefit in terms of excise duty cuts on inputs like coal. However, the increased thrust towards infrastructure projects— whether in the form of building new airports via the public-private partnership route, warehousing infrastructure, higher focus on rural and urban housing or allocating `7,060 crore towards 100 smart cities—is expected to indirectly lead to better demand growth for the industry. Providing incentives to corporates to set up manufacturing plants is likely to boost demand for cement. However, the increased royalty payout by mining companies to state governments will adversely impact the input cost for cement players which is slight negative. Cement: Check Graph

Fertiliser

The fertiliser sector is set to get an indirect boost from a number of agri-cultural policies that the FM has announced. The Budget has provided an additional `5,000 crore for fertiliser (indigenous urea) subsidy while stating that a new urea policy will soon be formulated. Stressing the need to sustain an agricultural growth rate of 4% through higher productivity and better irrigation, the FM proposed setting aside `1,000 crore towards the “Pradhan Mantri Krishi Sinchayee Yojana” scheme. Indirectly, agri companies may benefit by the extension of interest subvention scheme to farmers for short-term crop loans. Under this scheme, banks can extend loans to farmers at a concessional rate of 7%. `100 crore has been set aside to set up an “Agri-Tech Infrastructure Fund” to promote agro-technology development, and to create and modernise existing agri-business infrastructure. Fertiliser: Check Graph

FMCG

The Budget has evoked a mixed reaction from the FMCG industry. Soap companies like HUL and Godrej Consumer Products cheered the proposed reduction in customs duty on oils for soaps from 7.5% to nil. But the increase in excise duty on cigarettes in the 11 to 72% range is a big negative for ITC. The government has reduced excise duty on machinery used in the manufacture of fruit juices and on packaging machinery from 10% to 6%, a positive for Dabur, Parle Agro and PepsiCo India. The proposed increase in excise duty on carbonated drinks will impact soft drinks majors in the country. The new government may move ahead with the introduction of the long-pending Goods & Services Tax (GST). While the FM’s speech had a mention of the GST implementation, no mention of the timeline or roadmap disappointed industry. FMCG: Check Graph

Infrastructure

The infrastructure sector was the biggest direct beneficiary of the Budget, with proposed investment of `37,880 crore in National Highways Authority of India (NHAI) and state roads and a target of 8,500 km of national highway construction for the current fiscal. FM proposed kick-starting work on select expressways parallel to the development of industrial corridors and an institution to support mainstreaming of PPPs called 3P India with a corpus of `500 crore. To address the sector’s financing needs, the FM has allowed long-term loans with flexible structuring. Banks have been permitted to lend to the sector with minimum regulatory pre-emption such as CRR, SLR. For the first time, a modified REITs type structure for infrastructure projects called Infrastructure Investment Trusts (InvITs) has been introduced with tax efficient pass through status. 16 new port projects are also on the cards. Infrastructure: Check Graph

Jewellery makers

The industry which has been facing the negative impact of restrictive policy measures for nearly a year was expecting a reduction in the customs duty on gold from 10% to 8% given the moderation in current account deficit in the recent past. After the Budget failed to give any indication of relaxation in duty, the MCX spot price immediately rallied 2% and closed the session above `28,700 per 10 gm. Against an expected elimination in the customs duty, the rationalisation of duty on imported semi-processed, half cut or broken diamonds, cut and polished diamonds and coloured gemstones may add to raw material cost of jewellery makers. However, to encourage exports, pre-forms of precious and

semi-precious stones have been fully exempted from basic customs duty.

Metals & Mining

The aluminium manufacturing industry has been grappling with a shortage of bauxite. In order to conserve natural resources mined domestically, the export duty on bauxite (a key raw material for aluminium) has been doubled to 20%. The mining sector has been impacted by instances of illegal mining practices and the government aims to resolve the current impasse expeditiously. Changes, if necessary, to the MMDR (Mines and Minerals Development and Regulation) Act, 1957, will be made to facilitate this. The government intends to revise the rate of royalty that miners need to pay state governments to ensure greater revenues for the latter. This will increase mining expenses for companies. Customs duties on raw materials for the steel sector like limestone and dolomite have been reduced. Customs duty on imported flat-rolled stainless steel products have been hiked to boost demand and production. Metals & Mining: Check Graph

Oil & Gas

The Budget did not indicate any broad roadmap for the oil and gas sector. Contrary to street expectations, the finance minister made no mention of any measures to reduce oil subsidies including elimination of diesel subsidies or reduction of LPG or kerosene subsidies. Lack of any announcement on subsidy sharing indicates that upstream oil companies like ONGC will continue to bear the same subsidy burden as last fiscal. Jaitley proposed the development of an additional 15,000 km of gas pipelines using PPP model which is likely to be positive for gas transmission companies. The FM also announced that the government will accelerate exploitation from coal bed methane reserves and evaluate old and closed wells to maximise production. Proposal to cut basic customs duty on some petrochem products to encourage capacity addition in chemicals and petrochemicals is positive for the sector. Oil & Gas: Check Graph

Real Estate

In real estate, the Real Estate Investment Trusts (REITs) will finally become a reality. Complete pass-through will be given to REITs to avoid triple taxation. To encourage affordable housing, `8,000 crore has been allocated to the National Housing Bank (NHB) for rural housing. `4,000 crore has been allotted for cheap credit to the urban poor/EWS/LIG segments. Deduction limit on account of interest on loan has been increased from `1.5 lakh to

`2 lakh. Requirement of built-up area and capital conditions for FDI has been reduced from 50,000 square metres to 20,000 square metres and from $10 million to $5 million in value respectively. `7,060 crore has been provided in the current fiscal to develop 100 smart cities. Master planning of three new smart cities will be done around the Chennai-Bengaluru industrial corridor region. Real Estate: Check Graph

Utilities/ Power Generation

The Finance Minister announced several budgetary allocations and tax exemptions for the power sector. Power utility companies will benefit from an extended 10-year-tax holiday for projects commenced by FY17. Aiming to unlock dead investments, he proposed provision of coal to power plants already commissioned or to be commissioned by March 2015. `500 crore has been allocated for a scheme proposing feeder separation to help uninterrupted power supply to the rural areas. New and renewable energy got a shot in the arm with excise or basic customs duty either reduced or waived off on a range of components used for manufacture of solar or wind operated generators. The FM allocated `500 crore to set up Ultra Mega Solar Power Projects and proposed a `400 crore scheme to finance solar power driven agricultural pump sets and water pumping stations. Utilities: Check Graph

Textiles

The debt ridden industry is provided with several tax benefits. To boost domestic manufacturing and address the issue of inverted duties, FM proposed reduction of basic customs duty on specified inputs for manufacture of spandex yarn from 5% to nil. To encourage exports of ready-made garments FM proposed increasing the duty free entitlement for import of trimmings, embellishments and other items from 3% to 5% of the value of their exports. Another positive is the announcement of service tax exemption on loading, unloading, storage, warehousing and transportation of cotton. Certain man-made fibres PSF and PFY are exempted from excise duty for two years ending May 2012. It has been proposed to levy prospectively 2% without Cenvat benefit and 6% with Cenvat benefit. An outlay of `500 crore is planned towards developing a textile mega-cluster at Varanasi and six other places.

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