Prudent Budget leaves lot to cheer for markets

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New Delhi/mumbai | Published: March 1, 2015 12:15:08 AM

With its strong thrust on infrastructure, both in terms of making it easier for promoters and in its innovative...

With its strong thrust on infrastructure, both in terms of making it easier for promoters and in its innovative ways to attract funds, the FY16 Union Budget should have been a more enthusiastic response from the market. If Saturday’s move was somewhat muted, it was probably because the fineprint is yet to be decoded.  After all, the finance minister has made fairly generous allocations to sectors such as roads, while remaining fiscally prudent and at the same time promising corporate India he will gradually reduce the corporation tax rate.

While the market may have missed some big bang announcements, the Street welcomed the announcement of a comprehensive bankruptcy code in FY16. Fund managers must also be happy that farm incomes are likely to go up on the back of spends on MGNREGA and rural infrastructure. Indeed, the financial services, Infrastructure and agriculture spaces have been the most prominent gainers from the Union Budget.

The bankruptcy law  has been a long pending demand of the financial services industry and is seen overhauling the debt recovery for the banking system which  faces a daunting R3 lakh crore of NPAs as of the Q3 of FY15. Not surprisingly, the banking space witnessed strong buying interest with the sectoral index ending Saturday’s trading session up 3.3% whereas the benchmark Sensex closed just 0.5% higher following major swings.

The government postponed its fiscal prudence aim by one year—the FM guided for a fiscal deficit target of 3% of GDP by FY18 and set out a target of 3.5% for FY17 as against an expectation of 3.6% for FY16.  The definite time-line, at a time when the economy is at an early stage of recovery, was considered to be a reasonable move.  Experts however seem divided on what impact this postponement will have on the RBI’s interest rate action—a few  believe that the pace of interest rate cuts in FY16 may just moderate.

The increased focus on the infrastructure space where the planned investment for FY16 was raised by R70,000 crore was celebrated. Proposal to revitalise the PPP model and roll out the ‘plug & play’ model for power projects such as roads, ports, rail lines, airports is also seen reducing the project completion timelines.

The emphasis on funding requirement for the sector is reflected by allocation of R25,000 crore to the Rural Infrastructure Development Fund (RIFD).  Particularly, the launch of  National Investment and Infrastructure Fund (NIIF), in which the government will arrange for an initial investment of R20,000 crore is considered an interesting positive move.

On the direct tax side, the decision to reduce the corporate tax rate from 30% to 25% over the next four fiscal years is considered adding to the bottom-line of companies that pay higher taxes. Amidst most positives, the increase rates of indirect taxes—the excise duty and service tax rates were revised from 12.36% to 12.5% and 14% are considered as mild negatives that could impact the consumer spending at a time when consumption driven sectors are facing low volume momentum.


The FY16 Union Budget did not have any pleasant surprises for the auto sector although an increased allocation of R70,000 crore in the road infrastructure may help better utilisation of commercial vehicles, in turn supporting the sales growth. At present, the capacity utilisation of fleets stands around 60-65% and according to analysts it could go up to 85-90% once the mining, infrastructure and manufacturing activities pick up. The government’s continuous thrust towards rural development schemes, particularly to MGNREGA for which it has allotted R34,699 crore, is seen helping growth in tractor sales in the long term.

As an effort to push the ‘Make in India’ initiative, the FM increased the import duty on commercial vehicle with capacity to carry more than 10 passengers, from 10 to 20%. Even as this move may not be a significant one as the number of imported foreign commercial vehicles is extremely low, the shares of CV makers like Tata Motors and Ashok Leyland rallied 3% to 4% in Saturday’s trading session. On the other hand, Eicher Motors may be adversely impacted since it imports commercial vehicles manufactured by Volvo.

The FM allocated R75 crore for the development of electric cars. Though the corpus is not big, the industry believes the measure will give some fillip to R&D in the segment.

Given that in December 2014, the government rolled back the excise duty break enjoyed by the sector for nearly 11 months the moderate hike in the general excise duty from 12.36% to 12.5% is not seen impacting the passenger car segment substantially.

Measures & Impact:
* Increase in allocated funds for roads and infrastructure
This will help increase capacity utilisation of existing truck fleets and increase commercial vehicle sales
* Increase in funds for MGNREGA
Tractor demands may increase in the long term
* 40% increase in import dutyof commercial vehicles
Major players may not be impacted as import of commercial vehicles in India is minuscule. Eicher is the only player to feel the heat.
* Allocation for electric vehicles
Rs 75 crore is a very little amount but it will help boost research and development initiatives from the manufacturers


The FY16 Union Budget announced a slew of measures that could help the growth of the agriculture sector. Besides reinforcing the government’s support to the agriculture ministry’s organic farming scheme—“Paramparagat Krishi Vikas Yojana”, the FM also announced a target of R8.5 lakh crore of agriculture credit. R5,300 crore were allotted to support micro-irrigation, watershed development and the Pradhan Mantri Krishi Sinchai Yojana, which is aimed at irrigating the field of every farmer.

Aiming for better productivity, the Budget also launched the programme for Soil Health Cards that can help improve soil fertility on a sustainable basis, in turn increasing the farm yields. While aiming to improve the quality and effectiveness of activities under MGNREGA, the FM made an initial allocation of R34,699 crore for the programme for FY16. He also proposed to create a national agriculture market, which can have the incidental benefit of moderating price rises. He also plans to work with the states, in NITI, for the creation of a Unified National Agriculture Market this year.

To support the agriculture sector with the help of hassle-free agriculture credit and with a focus on small and marginal farmers, the FM proposed to allocate R25,000 crore and R5,000 crore  to the corpus of Rural Infrastructure Development Fund (RIDF) set up in Nabard and Long Term Rural Credit Fund. A corpus of R45,000 crore was made available for Short Term Cooperative Rural Credit Refinance Fund and R15,000 crore as assigned for Short Term RRB Refinance Fund. He has indicated apportioning additional resources to MGNREGA by R5,000 crore, and the Pradhan Mantri Krishi Sinchai Yojana by R3,000 crore.

Measures & Impact:

* Target of R8.5 lakh crore of agricultural credit during 2015-16
The move will support the funding need of the sector and is favourable to farmers
* R5,300 crore to support micro-irrigation, watershed development and the ‘Pradhan Mantri Krishi Sinchai Yojana’
The move is aimed at ensuring irrigation for every field and improving the water usage efficiency
* Launched the programme for Soil Health Cards
To help improve soil fertility on a sustainable basis

Banking & Financial Services

Not only did the Finance Minister give a breather to banks by promising a bankruptcy law, he also gave NBFCs the status of a financial institution and access to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.
Bankers welcomed the move and said that bankruptcy law was one of their long pending demands as the current methods of the Sick Industrial Companies Act and the winding up process for companies under the Companies Act have hardly been effective. Taking a legal recourse against defaulting promoters, lenders said, have not been very fruitful owing to the overburdened debt recovery tribunals (DRTs). Reserve Bank of India (RBI) data shows loans worth more than R2 lakh crore were pending in 33 DRTs, till FY14, up from R1.43 lakh crore in FY13.  The total non-performing assets in the banking system are R3.03 lakh crore at the end of the third quarter of fiscal 2015, an increase of 11% sequentially.

Another measure was to strengthen NBFCs with a loan book of more than R500 crore to initiate recovery proceedings under the SARFAESI Act—a law which also empowers banks to initiate recovery proceedings against defaulting borrowers by auctioning the latter’s properties.

The government has also said it will infuse R7,940 crore into public sector banks (PSBs) in FY16. Though lower than R11,200 crore earmarked for FY15, it will help capital-starved PSBs. However, since only nine banks received capital in this fiscal based of return on assets (RoA) and return on equity (RoE), it is uncertain how much it will help the ones that were left out.

Measures & Impact:

* Comprehensive bankruptcy code on a par with global standards to be introduced in FY16
It will enable banks to recover fair value of the leveraged assets
* NBFCs to be included under the SARFAESI Act
It will be easier for lenders to recover dues from defaulting borrowers
* Capital infusion for FY16 to be R7,940 crore
Positive for PSU banks which have been unable to raise money from capital markets


The new government’s first  full year Budget has brought a mixed bag of reactions from the R2,25 lakh core Indian FMCG industry. While the finance minster Arun Jaitley has allocated R34,699  crore for MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act ), he has also proposed a hike in  the general excise duty and service tax rates from 12.36% to R12.5% and 14%, respectively.

The higher allocation towards MGNREGA—FM has also proposed an incremental corpus of R5,000 crore in case the tax mop-up is buoyant—is seen supporting the rural demand that is demonstrating a better performance than urban demand in the recent quarters. However, the higher indirect taxes may limit FMCG companies’ recent measures to pass through the benefit of lower commodity prices to bolster volumes.

Further, specific hikes on excise duty on tobacco, cigarettes and aerated drink will adversely impact FMCG companies—ITC Ltd, Coca-Cola India and PepsiCo India. It is not surprising then that shares of ITC, the listed major amongst these, plunged more than 8% in Saturday’s trading session.

The widely expected relaxation in the basic exemption limit on income tax for individuals from R1,50,000 to R2,00,000 did not materialise which could have supported the consumption of FMCG and consumer durable products. At the same time, the focus on uplifting of rural economy with allocation of funds in irrigation and rural development schemes, and higher farm credit are expected to have a bullish effect on the rural market for FMCG products.

Measures & Impact:

* Excise duty increased by 25 % for cigarettes of length not exceeding 65 mm and by 15% for cigarettes of other lengths
This move will impact sales of cigarette manufactures
* Excise duty on cut tobacco is increased to R70 per kg from Rs 60 per kg earlier
Smoking and use of tobacco products will become more expensive, cigarette sales to be impacted
* Marginal increase in excise duty for aerated drinks from 17.5% to 18%
Soft drink prices will increase


ABOost to the infrastructure sector defined the Budget 2015-2016 as the finance minster Arun Jaitley addressed the key concern of availability of finance for the sector. Measures like permitting of tax free infrastructure bonds, establishing of National Investment and Infrastructure Fund (NIIF) with an annual flow of R20,000 crore, allocation of R25,000 crore to the corpus of Rural Infrastructure Development Fund (RIDF) set up in Nabard, along with rationalisation of taxation structure in Infrastructure Investment Trusts (InvITs) are expected to give a much needed philip to the sector.

Infrastructure players welcomed the proposed addition of one lakh lane kilometres to the road network, proposal to revitalise the PPP model and consider extension of ‘plug & play’ model to other infrastructure projects such as roads, ports, rail lines, airports etc, along with 5 UMPPs announced on Saturday. However, the industry is now eagerly awaiting the implementation of these measures.

In order to capitalise on the vast land resource of 12 public ports and to attract investments in them, the government will encourage corporatisation of public sector ports so that they become companies under the Companies Act.

The FM also said that good progress has been made on the DMIC corridors, starting with the Ahmedabad-Dhaulera Investment Region in Gujarat, and the Shendra–Bidkin Industrial Park near Aurangabad, in Maharashtra, and earmarked an initial sum of R1,200 crore for the $90 billion project, as the pace of expenditure picks up, the government will provide the project additional funds. Outlays of roads and railways have been raised by R14,031 crore and R10,050 crore.

Measures & Impact:

* Proposed addition of one lakh lane km of road
More bidding opportunity under the build operate transfer model
* Corporatisation of 12 public sector ports
Attract investment as well as leverage the huge unutilised land resources
* Setting up of (NIIF) with an annual flow of R20,000 crore and introduction of tax free infrastructure bond
Broaden the investor base and availability of finance for the sector
* Revisit and revitalise the PPP model
Risk to be balanced between the government and private players


The Budget provided much awaited clarity on how Real Estate Investment Trusts (REITs)  will be taxed. In-line with industry expectations, the finance minister scrapped capital gains tax for sponsors of REITs and awarded pass-through status to the rental income earned by a REIT. STT or securities transaction tax will replace the DDT or dividend distribution tax. The tax exemptions will enhance attractiveness of India as a REIT market and make it competitive with international markets, according to experts.

A slew of measures were announced to invigorate alternative investment funds or AIFs. The government has now given a pass-through status to AIFs, which was earlier limited to domestic venture capital funds. Additionally foreign investment are now permitted in AIFs. This means, offshore funds can be investors in domestic corpuses now.

To mark the 75th year of India’s independence, the FM announced the government’s plan for  for ‘Housing for all’ by 2022. Under this plan, the states under the guidance of the central government to compete two crore houses in urban areas and four crore houses in rural areas. However the Budget did nothing to improve consumers affordability; expectations that there will be a relief in income tax deduction limit or on repayment of home loans were not met.

In an attempt to reduce the play of black money in real estate, the finance minister proposed amendments in the Income Tax Act, prohibiting acceptance or repayment of advance in cash of R20,000 or more for any transaction in immovable property. This measure is expected to arrest speculative transactions, specially in land deals.

Measures & Impact:

* Capital Gains Tax Rationalised
A relief for the real estate industry as companies are gearing up to launch India’s maiden REIT.
* Pass-Through Status On Rental Income For REITs
The entire income generated by the REIT will be passed on to unit holders, who will pay the tax
* AIFs to have foreign investors
Offshore funds can be an investors in a domestic PE fund, easing the capital raising process for domestic corpuses
* Prohibited Acceptance of Cash Advance Exceeding R20,000 for Immovable Property
Speculative transactions in the real estate business will be impacted, especially pertaining to land deals

Power Generation & Utilities

In the FY16 union budget, the finance minister proposed the creation of five ultra mega power projects (UMPPs), each with a capacity of 4000 MW. With the last round of UMPP bidding failing to yield any bidders other than state-owned NTPC, the government has sweetened the proposal by stating that the plants will be operated under the “plug-and-play” mode. The move is seen as a positive for companies like Tata Power, Adani Power and Reliance Power.

One of the major grouses of power producers is the red tape involved to get a project off the ground, usually amounting to a delay of several years—which increases project costs. The government is now proposing that all regulatory clearances and fuel linkages will be granted before a project is auctioned, which would address the significant problems faced by power utilities. Jaitley added in his speech that the proposal would unlock investments to the extent of R1 lakh crore.

Continuing in its actions to empower the renewable energy sector, the FM has increased clean energy cess levied on coal to R200 per metric tonne, doubling it from the previous levy, for the second time in a row since the Narendra Modi government was sworn in. This will go to fund the goal of reaching renewable energy capacity target of 175 GW by 2022. The announcement will benefit Suzlon Energy.

Amongst the tax provisions in the sector, the government is reducing the customs duty on bituminous coal to 10% from 55% while it increased to 5% from 2.5% for metallurgical coke.

Measures & Impact:

* Introduction of plug & play model for UMPPs
This will stir private sector interest to bid for these projects
* To set up 175 GW of renewable energy capacity by 2020
Focus will shift from coal and other polluting power generation sources
* Clean energy cess to double to R200/MT
Higher interest from private players to participate in a nascent sector spurring growth in renewable energy production

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