A reasonably good rabi output followed by a healthy South West Monsoon and resultant good kharif crop brought in recovery in farm sentiments in the current fiscal, which to some extent was dented by the demonetisation initiative of the government that adversely impacted the liquidity position. However, the current Budget with more than 24% allocation of R1.87 lakh crore towards rural, agricultural and allied sectors and the reinforcement of the government commitment to double farm income over next five years bodes well for the farm community. Higher credit target enhances the access to funds for the farm community. Additionally, increased allocations towards irrigation programmes would have an impact over long term with creation of such infrastructure reducing dependence on monsoons. Moreover, enhanced focus on crop insurance in the Budget as well as directional increase in next fiscal augurs well as the same would hedge farmers’ cash flows against various natural calamities that can affect their crop. Stating that dairy is an important source of additional income for farmers, the FM said the government will set up a dairy processing fund of R8,000 crore over three years with an initial corpus of R2,000 crore. The government provides short-term crop loans up to R3 lakh at subsidised interest rate of 7% p.a. An additional incentive of 3% is provided to farmers for prompt repayment of loans within due date, making an effective interest rate for them at 4%. FM also said the allocation for new crop insurance scheme ‘Pradhan Mantri Fasal Bima Yojana’, which was launched in 2016, has been increased to R13,240 crore this fiscal from budgeted R5,500 crore.
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The focus of the government on rural development and farmer welfare would be a positive for the tractor and the two-wheeler sector as entry level motorcycle sales have a sizeable dependence on the rural segment. The entry level passenger vehicle segment also derives ~30% of its demand from the rural market and would stand to gain. The increased construction of rural roads would act as a further demand-side positive for two-wheelers, especially gearless scooters, in the rural areas. In addition to the budgetary allocations for the agricultural and rural sectors, the proposed income tax cut for the tax slab of R2.5-5 lakh is a positive by virtue of improving the disposable income of the middle income group, augmenting demand for two wheelers. However, the ban on cash transactions above R3 lakh would increase the financing requirement for higher-ticket premium bikes and luxury cars and may have a marginally negative impact on these segments.
The CV sector will benefit from the government’s plans to increase the allocation towards the infrastructure sector, especially development of roads & highways, including those in rural areas. These investments will not only support sales of vehicles used for providing last mile connectivity but also be positive for tipper sales that constitute approximately 25% of M&HCV truck sales in India and have registered healthy growth (~35-40%) during the current fiscal. However, in absence of any clarity on the implementation of vehicle fleet modernisation programme (for older vehicles) and greater incentives to promote usage of electric/hybrid vehicles, the announcements made in Budget would overall be neutral for the sector.
Impact: Two-wheelers and Tractors
Banking & Financial Services
The capital infusion of R10,000 crore in PSBs during FY 2017-18 is significantly lower than ICRA’s estimates of a capital requirement of R50,000 crore. While PSBs may be able to raise equity capital from markets, given the weak profitability and hence low valuation multiples, their ability to raise the entire capital from markets will remain constrained. The other proposal of higher interest on deposits for senior citizens may restrict the ability of banks to significantly cut deposit rates from current levels. At the same time, the proposed introduction of the Bill to curtail illicit deposit schemes will support deposit inflows into the banking system. On a positive note, the proposal to increase the allowable provisions against NPAs from 7.5% to 8.5% while calculating tax liability can partly support net profitability. FM also proposed to tax interest receivable on actual receipt instead of accrual basis in respect of NPA accounts of all non-scheduled cooperative banks also at par with scheduled banks. This will remove the hardship of having to pay tax even when interest income is not realised.
Also, with infrastructure status for the housing sector and consequent increase in expected supply of affordable houses, credit demand will get a boost. Further, the proposal to increase area coverage under crop insurance to 50% by FY2018-19 will aid in improving the asset quality in agri sector as the adverse impact of crop failures on loan servicing abilities of farmers can be reduced. PSBs require R1.8 lakh crore of capital by FY19 and the government, under Indradhanush, had announced R70,000 crore of infusion in tranches till FY19. Interestingly, of the R25,000 crore promised in FY17, the government has decided to infuse R22,915 crore in 13 PSBs, of which only 75% has been released.
Increased outlay for the farm and rural sector will boost consumption demand, especially in the rural segment which was facing pressure after two consecutive years of deficient monsoon. Additional focus on dairy processing and infrastructure development fund under NABARD will also alleviate funding constraint for the dairy sector, and should provide indirect support to rural income. Proposal to reduce the existing rate of tax for individuals with income between R2.5 and R5 lakh to 5% will result in incremental cash inflow of R12,500 for the tax payer, which should support consumption story, especially in the mid-income group. In order to discourage tobacco consumption, additional duties on filter and non-filter cigarettes have been raised by a steep 45%-48%. Excise duty on tobacco products including cigarettes and paper rolled biris has also been raised, which will be eventually passed to the end consumer by manufacturers.
The skill development initiative for the rural populace would help promote entrepreneurship in the hinterland. These initiatives would not just strengthen the hands of the rural poor, but also help put more disposable income in the pockets of the rural consumer, improve their standards of living and ensure continued rural demand for branded consumer goods.
The only disappointment was the absence of any cut in the Corporate Tax Rate for larger firms, which most people had expected. However, the selective reduction of the Corporate Tax Rate for companies below R50 crore turnover would surely encourage higher compliance at the lower level of the corporate pyramid.
The Budget has allocated R3,96 lakh crore to the infrastructure sector as a whole to spur economic activity and create more job opportunities.
With the objective of reviving the investment cycle, the Budget has laid emphasis on rural roads and affordable housing segments. The allocation to affordable housing has been increased by 39% to R29,043 crore, which is expected to bolster the order-book of medium-sized construction companies over the next two years. Further, with affordable housing getting infrastructure status, funding availability to the segment will improve manifold with access to ECBs, EPFO and insurance funds. The railway and road sectors together witnessed a meagre increase in allocation of 7.9% to R2,22,000 crore, as against the more than 20% increase last year. Progress towards 100% rural electrification target by May 2018, as announced in the Budget for the previous fiscal, is on track and this coupled with funding support under the Deen Dayal Upadhyaya Gram Jyoti Yojana is likely to gradually improve energy demand. For private developers, operation and maintenance of airports in tier-II cities and redevelopment of 25 railway stations would provide new opportunities. Further, the enactment of a new Metro rail Act with focus on innovative models of implementation and financing could result in more private sector participation. The finance minister has also proposed amending the Airport Authority of India Act to enable effective monetisation of land assets. The thrust on improvement in port connectivity and logistics will reduce transit time and overall costs for exporters/ importers. Ports would benefit by way of faster evacuation of cargo and increased trade volumes.
Oil & Gas
A reduction in custom duty on LNG leading to marginal fall in R-LNG prices would boost R-LNG demand prospects and benefit end-consumers and gas utilities. Allocation of
R1,200 crore for FY2018 for GAIL’s Phulpur-Dhamra-Haldia Pipeline Project provides clarity on VGF disbursement. Thrust for new LPG connections to poor families would increase LPG penetration resulting in higher LPG sales volumes and marketing profits for Oil Marketing Companies (OMCs). Fuel subsidy at R22,400 crore for FY2018 could be adequate upto crude oil price of ~US$58- 60/bbl.
Increased allocation for oil reserves would improve energy security. Setting up Integrated Oil & Gas PSU could lead to several benefits like improved economies of scale, increased ability of overseas acquisition and better bargaining power for crude oil and LNG import, although HR challenges will remain for the merger.
In order to securing country’s energy needs the FM stated the government plans to set-up an additional two strategic crude oil reserves in Chandikhole in Odisha and Bikaner in Rajasthan that would take the country’s strategic oil reserve capacity to 15.33 million tonne.
“Uncertainty around commodity prices especially that of crude oil, has implications for the fiscal situation in emerging economies. It is however expected to be tempered by a quick response from producers of shale oil and gas. This would have a sobering impact on prices of crude and petroleum,” the FM said. Considering the wide range of use of LNG as fuel as well as feed stock for petro-chemicals sector, he also announced a reduction in the basic customs duty on LNG from 5% to 2.5%.
Impact: Marginally Positive
The capital and development expenditure of the railways has been increased from R1,21,000 crore in FY2017 to R1,31,000 crore in FY2018. The increase of 8% in FY2018 is lower than the 23% in FY2017, and will make it challenging to meet the total targeted capex of R8,56,000 crore during the2015-19
five-year plan period. The Budget has also emphasised setting higher execution targets with commissioning of 3,500 km of railway lines in FY2018 as compared to 2,800 km during FY2017. Furthermore, under the station redevelopment plan, the Budget proposes to award at least 25 more stations, which will provide a fillip to the Public Private Partnership (PPP) model in the sector. Other major announcements in the Budget include setting up of a fund by the name of the Rashtriya Rail Sanraksha Kosh (RRSK) for passenger safety. RRSK will build a corpus of R1 lakh crore over a period of 5 years and is expected to take up capex related to railway security. To move towards clean energy, over 7,000 railway stations are proposed to get solar power. The plan to list railway PSEs will provide funding sources for the organisation. The Budget also lays emphasis on improving throughput by 10% over the next 3 years, through modernisation and upgrade of certain identified corridors. The Budget also mentions that tariff would be fixed on the basis of consideration costs, quality of service, and competition from other forms of transport. Although not explicitly mentioned, this could over time pave the way for an increase in rail tariff and improvement in the Indian Railways’ operating ratio.
The Union Budget 2017-18 has maintained its focus on the agenda for ‘Housing for All’ by 2022. The allocation of R29,043 crore under the Pradhan Mantri Awas Yojana (PMAY) makes for a 39% increase in the new fiscal. More specifically, an increase of 53% has been witnessed towards the allocation for PMAY-Gramin with a stipulated target of constructing one crore houses by 2019 for people living in kutcha houses. More important, affordable housing has been accorded infrastructure status which will help in participation of the wider investor community henceforth, improving access to funding avenues like insurance funds, EPFO etc and resulting in access to long term funds and helping reduce the cost of funding. This will further boost supply and help achieve the housing for all objective of the government over the medium to long term. In addition, the proposal to consider the carpet area rather than built up area and application of a limit of 30 sq mt in case of municipal limits of 4 metropolitan cities and 60 sq mt otherwise will further boost private participation in the affordable segment. Marginal benefits have been granted to real estate developers with inventory of stock in completed projects, with tax based on notional rental income not being applicable for one year from completion. Further, clarity on incidence of capital gain tax in case of Joint Development Agreements would help reduce litigation and facilitate ease of doing business. Steps taken with regard to long term capital gains tax eligibility and calculation method will enhance the appeal of immovable property as an asset class and boost demand for real estate.