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.

Please refer to important disclosures at the end of this report (22 January 2018) 1
 Union Budget 2018-19 Preview

Exhibit 1: Budget arithmetic

In ` cr FY16RE FY17RE FY18E FY19E Comments
Direct taxes to increase with widening tax base and
Direct Tax 7,52,021 8,25,429 8,99,718 9,71,695
higher tax compliance
GST implementation and digitization to boost
Indirect Tax 7,07,590 8,83,943 10,16,534 11,69,015
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-
18,905 19,040 22,105 24,735 In-line with historical trend
borrowings)
Total Revenue 12,50,301 14,51,496 16,10,073 17,76,116

Higher interest payment would offset effect of lower

Revenue Expenditure 15,47,673 16,92,286 18,82,941 20,65,325
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

Govt. likely to miss FY18 fiscal deficit target of
% of GDP 3.9 3.5 3.4 3.3 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

Please refer to important disclosures at the end of this report (22 January 2018) 2
 Union Budget 2018-19 Preview

Exhibit 2: Bond Yields have started firming up Exhibit 3: CPI inflation has increased in recent times
9.5 14
9 12
8.5
10
8
7.5 8

7 6
6.5
4
6
2
5.5
5 0
Oct-…

Oct-…

Oct-…
Oct-…

Oct-…

Oct-…
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Apr-12

Apr-13

Apr-17
Jul-12

Apr-14

Apr-15
Jul-15

Apr-16
Jul-16

Jul-17
Jul-13

Jul-14

Jan-13

Jan-14

Jan-15

Jan-16
Jan-12

Jan-17
Apr-12

Apr-13

Apr-14

Apr-17
Apr-15

Apr-16
Oct-13

Oct-14

Oct-15

Oct-16

Oct-17
Oct-12
Jul-12

Jul-13

Jul-15

Jul-16

Jul-17
Jul-14
Source: RBI
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

1,00,000

94,063
95,000
92,150
90,669
90,000

85,000 83,384
80,808
80,000

75,000

70,000
Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

Source: FINMIN

Please refer to important disclosures at the end of this report (22 January 2018) 3
 Union Budget 2018-19 Preview

Exhibit 6: Sectoral budget expectations

Head Current Status Expected Change Potential Impact
Agro chemicals / fertilizers
Allocation to fertilizer and other Adequate allocation of `70,000cr Increase in allocation/ focus to Positive for the entire agri input
reforms like soil health card in last budget marquee programs and fertilizer companies

Commercial vehicles; Incentives on
scrapping of old vehicles that are
more than 10-15 years old.
Automobile
It would encourage replacement of
older vehicles, thereby boosting
Incentives to the tune of 8-10% of demand for CVs. Positive for CV
No Incentive manufacturers like Ashok Leyland,
vehicle cost
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

Final roadmap for recapitalisation The plan is worth `2.11 Lakh cr
of public sector banks out of which `1.35 cr will be in the
form of front-loaded
recapitalisation bonds
Budgetary allocation to the core Govt. spending has improved
sectors, including metals, which metal demand and total `1.23
account for large part of the stress Lac Cr worth of cases have been
and faster resolution under NCLT. referred to NCLT
Affordable housing credit Last year, incentives like interest
subvention were introduced
Strengthening Banking Board Implemented from 1st April, 2016
Bureau & appointing industry veterans on
board
BFSI
Details on the types of bonds or the Positive for PSU banks, as it would
interest rates on these bonds improve credit growth
Increased spending on infrastructure Lower slippages, provision and
and focus on capex revival (both Govt consequent improvement in
and Pvt) bottom-line
Increase in tax exemption limit for Housing finance companies to
home loan benefit
Measures to bring in more Ability of PSU banks to raise funds
accountability on PSU Banks and would increase and reduce stress
further guidelines on consolidation

Allocation towards Defence /
Railways/Metro
Capital Goods
Positive for Defence players like,
Last 2-3 years spending toward
Allocation is expected to increase BEML, BEL, etc. and railway players
these sectors are stagnant
like BEML, Titagarh Wagons, etc.

Please refer to important disclosures at the end of this report (22 January 2018) 4

Head
Increase in rural spending
Increase in income tax exemption
TDS rate
Cascading effect of Dividend
Distribution Tax on dividend
Increased allocation for infrastructure
sectors like Roads, Railways, Housing
and Urban Development
Import duty on Aluminum
Customs duty on coking coal
Inclusion of natural gas in GST
Reduction of Basic custom duty on
Liquefied Natural Gas
GST Refund Rates
R&D Sunset clause
Source: Company
Please refer to important disclosures at the end of this report (22 January 2018)
Union Budget 2018-19 Preview
Current Status Expected Change Potential Impact
FMCG
Relatively lower allocation in last Increase in allocation to .Positive for the entire FMCG sector, which
budget marquee programs has significant rural exposure
Higher disposable income would boost
Basic exemption limit is `2.5 lakh Increase up to `3 lakh
demand for FMCG companies
IT
Last year, TDS was reduced from
To be reduced to 2% for all Will improve the margins of the small IT
10% to 2% for payments made to
software transactions companies
call centres.
At present, the dividend received by Tax already paid on the
Indian company is taxed at 15%. dividend is expected to be
There is subsequent dual levy of allowed to be set off against
Will benefit MNC companies
dividend distribution tax on this, tax liability from dividend
when distributed to its shareholders distribution tax of the parent
of parent company in India company in India.
Infrastructure
Total capital outlay of Increase in budgetary Positive for infrastructure & capital goods
`2.41Lakh Cr allocation companies
Metal
7.5% currently Increase to 10% Positive for Hindalco & Vedanta
2.5% currently Reduce to Nil Positive for domestic steel players
Oil & Gas
Positive for City Gas Distribution
20-25% tax currently 5%
companies
Positive for City Gas Distribution
Currently 2.5% Reduce to Nil
companies
Pharma
Currently 20-25% lower than the
Expected to reduce Will benefit all pharma companies
previous excise duty refund rates.
Only till 2020 Extension is expected Will benefit all pharma companies
5
 Union Budget 2018-19 Preview

Head Current Status Expected Change Potential Impact

Real Estate
Under-construction properties are
GST rates Expected to reduce Revival in subdued demand
levied a GST of 12%
Deduction Improved housing demand positive for
Deduction limit on interest and
Interest – `2,00,000 Expected to increase housing finance and real estate
principal on housing loan
Principle -`1,50,000 developers
Multiple agency approval Expect to reduce clearance
Single-window clearance Positive for real estate developers
required at different stages time for projects
Increased allocation toward
Allocation to Affordable Housing by Expected to increase
‘Housing for All’ 2022 scheme and Positive for affordable housing developers
24.8% to `38,043cr allocation
other housing schemes

Retail
Custom duty was increased from 2% Positive for jewellery companies like Titan,
Import duty on gold Expected to reduce
to 10% in FY2013 PC Jeweller, TBZ, etc.
Source: Angel research

Please refer to important disclosures at the end of this report (22 January 2018) 6
Please refer to important disclosures at the end of this report