Budget Special

Union Budget Preview (2017-18)

Sharekhan January 17, 2017

Union Budget Preview (2017-18)

Awaiting a booster dose
Amid the tough structural reforms, the government could look to ease the growth pangs in the economy

The Union Budget assumes greater importance this year
given the growth concerns caused by the disruptive nature
of the two major economic reforms: demonetisation and
the forthcoming implementation of the Goods & Services
Tax (GST; scheduled to be rolled out in July 2017). Both
the policy measures are structurally positive but will have
an adverse impact on consumption demand in the near
term and require businesses to readjust to the changing
business dynamics and policy environment.
High expectations = Higher spending
Consequently, we expect the government to take
substantive measures to boost the economy through
higher spending on rural India and infrastructure (roads,
railways and power). Along with it, the government
would have to spare resources for recapitalisation of
the public sector banks and higher outgo due to the full
impact of the salary hikes recommended by the Seventh
Pay Commission. If that weren’t enough, the poor and
weaker sections of the society expect some proposal/
policy measure on the lines of redistribution of wealth –
possibly in the form of a national income scheme (like the
social security scheme in many countries).
Additional revenues not enough; risk of deviation from
fiscal consolidation roadmap
Along with the expectations of buoyancy in tax collections,
the government is thankfully expected to get additional
revenues to the tune of Rs1,50,000 crore from the Income
Disclosure Scheme (IDS-2) and possible Reserve Bank
of India (RBI) dividend. Also, there would be revenues
from arrear payments related to spectrum auction from
telecommunication operators adding to the government
kitty in the financial year 2017-18. Despite the additional
revenues, the government could compromise on the
fiscal consolidation roadmap in the next fiscal with a
fiscal deficit target of 3.5% as against 3.2% as per the
Fiscal Responsibility and Budget Management Act, 2003
(FRBM Act). In such a scenario, the government’s market
borrowings could be much higher than the Rs5 trillion
mark, thereby not only hurting fixed income (firming of
bond yields and a consequent decline in bond prices) but
also be perceived negatively by foreign equity investors.
Union Budget 2017-18: 5 big themes
In this note we look at five key themes expected in the
budget and the sectors (and companies) that are likely to
benefit from the same. We also highlight the gainers of
the implementation of the much awaited tax reform, GST,
where the leading players in highly fragmented industries
would benefit significantly in the long run and should be
accumulated over the next few months.
These key five themes of the budget are:
1. Higher allocation to rural India: Higher allocation
for Mahatma Gandhi National Rural Employment
Gurantee Act (NREGA), rural housing/infrastructure
and other welfare schemes
2. Higher spending on infrastructure: Roads and
railways; affordable housing
3. Agriculture income: Irrigation projects, crop
procurement and insurance allocation
4. Redistribution of wealth: rationalisation of tax slabs,
possible introduction of social security scheme (to be
known as Universal Basic Income Scheme).
5. Readjustment of indirect tax rates: Recalibrate
indirect taxes in line with the GST rates

Key budget theme Sector to benefits Companies to watch out for

Infra push
Agriculture
Rural spending push/Housing for all
Redistribution of wealth – higher alloca-
tion for NREGA; social security scheme,
lower tax rates and incentives for financial
savings
Roads construction, power, cement L&T, Asoka Buildcon, NBCC, IRB Infra,
UltraTech, KNR Constructions, Kalpataru
Power, KEC, PowerGrid
Agro-chemicals, fertilisers, irrigation, pipes Dhanuka Agritech, Insecticide India, UPL,
Chambal Fertilizer, RCF, Coromandel, Jain
Irrigation, Supreme Industries, Astral Poly
Housing, pipes, FMCG, consumer durables, HUL, Dabur, Emami, Hero Moto, M&M,
two-wheelers, tractors housing finance companies
Entire consumption pack, entire auto pack Maruti, Arvind, V-Guard, Havells

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Budget Special Union Budget Preview (2017-18)

Budget summary (Rs ‘00 crore)

Particulars FY13 FY14 FY15 FY16RE FY17BE
Gross tax revenues 10,362.4 11,387.3 12,448.9 14,596.1 16,308.9
% change YoY 16.5% -7.9% -9.7% 0.7% 11.7%
Net tax revenues 7,402.6 8,158.5 9,036.2 9,475.1 10,541.0
% change YoY 17.5% -7.7% -8.4% 3.0% 11.2%
Non tax revenues 1,373.6 1,988.7 1,978.6 2,585.8 3,229.2
Total expenditure 14,103.7 15,594.5 16,636.7 17,853.9 19,780.6
% change YoY 8.1% -6.4% -5.6% 0.4% 10.8%
Plan exp. 4,136.3 4,533.3 4,626.4 4,772.0 5,500.1
% change YoY 0.3% -18.4% -16.7% 2.6% 15.3%
Non plan exp 9,967.4 11,061.2 12,010.3 13,081.9 14,280.5
% change YoY 11.7% -0.3% -0.6% -0.3% 9.2%
Fiscal deficit 4,906.0 5,028.6 5,107.2 5,350.9 5,339.0
as % of GDP 4.9% 4.4% 4.1% 3.9% 3.5%
Revenue deficit 3,659.0 3,570.5 3,655.2 3,415.9 3,540.1
as % of GDP 3.6% 3.2% 2.9% 2.5% 2.3%
Primary deficit 1,774.3 1,286.0 1,082.8 924.7 412.3
as % of GDP 1.8% 1.1% 0.9% 0.7% 0.3%

Fiscal deficit as % to GDP Gross tax revenue & tax/GDP ratio

6,000 21,000 13.0
6.4

17,000 12.0
5.4
13,000 11.0
5,000 4.4
9,000 10.0

3.4
5,000 9.0

4,000 2.4 1,000 8.0

FY12 FY13 FY14 FY15 FY16RE FY17BE FY12 FY13 FY14 FY15 FY16RE FY17BE

Fiscal Deficit FD/GDP ratio (RHS,%) Gross Tax Revenue Tax/GDP ratio (%)

Capital expenditure as % of GDP Government borrowings ((Rs ‘00 crore))

2.0% 6,200

6,000

5,800

5,600
1.5%
5,400

5,200

5,000

1.0% 4,800
FY14 FY15 FY16RE FY17BE 4,600

Capital Expenditure to GDP (%) FY12 FY13 FY14 FY15 FY16RE FY17BE

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Budget Special Union Budget Preview (2017-18)

Annexure

Budget 2018 Expectations

Automobile and auto ancillary sector

• Incentive for scrapping old heavy commercial vehicles: The industry has asked for an incentive based scheme
for scrapping of old heavy commercial vehicles plying for more than 10 to 15 years. Introduction of such a scheme
will have a positive impact on the sector as it will boost the demand for new vehicles and aid in curbing the
pollution levels. It will be beneficial for CV players like Ashok Leyland, Eicher Motors and Tata Motors.
• Extension of incentives for electric / hybrid vehicle manufacturers under FAME scheme: Electric and hybrid
vehicle manufacturers expect incentives (two-wheelers – Rs29,000; four-wheelers Rs1.38 lakh) in the form of
extension of the FAME scheme, as the government has an ambitious target of putting 6 to 7 million electric and
hybrid vehicles per year on the road by 2020 under the National Electric Mobility Mission Plan. It will be positive
for Mahindra and Mahindra (M&M; electric car – Reva).
• Imposing anti-dumping duty and increase in customs duty on radial tyres from China: The domestic tyre
manufacturers have called for imposing anti-dumping duty and increasing the customs duty on cheap bus and
truck radials from China (Chinese imports account for around 35% of the truck replacement market) so as to
reduce the imports of cheap Chinese tyres. This will be positive for domestic tyre manufacturers like Apollo Tyres,
MRF, JK Tyres and Ceat.

Agri-chemicals
• Reduction of excise duty on pesticides: Excise duty rates on pesticides (including bio-pesticides) to be reduced
from the present level of 12% to 4% (there is no excise duty on seeds, fertilisers and farm equipment), which will
be economical for farmers and increase the use of pesticides to safeguard their crops from pest and diseases. This
will ultimately increase the productivity.
• Exemption of customs duty of 5% on imported LNG: The customs duty on imported liquefied natural gas (LNG),
which is one of the key inputs for fertiliser manufacturing, to be fully abolished as in the case of crude oil. It will
be beneficial for fertiliser companies like Chambal Fertilizers and GSFC.
• Government initiatives encouraging farmers to adopt new technologies to improve yield, including proper irrigation
facilities, to reduce dependence on the monsoon.
• Simplification of the inverted tax structure for the chemical industry.
• Special banking arrangement for the fertiliser sector, which is reeling under heavy subsidy arrears to the tune of
Rs35,000 crore.
• DBT scheme to be implemented for farmers: Implementation of the direct cash transfer schemes for farmers for
buying farm inputs as against the current structure where the amount is transferred to companies, which, in turn,
provides credit to the farmers. It will be positive for the agri-input companies like Dhanuka Agritech and Chambal
Fertilizers, as their working capital cycle could improve substantially.

Banking and NBFC: Positive for public and private banks, rural focused NBFCs and SME lenders
• Affordable housing across India: Positive for housing finance companies (HFCs) and banks, especially Repco Home
Finance, Gruh Finance, LIC Housing Finance and HDFC.
• Rural employment creation and income security / life security – Positive for rural facing non-banking finance
companies (NBFCs) as rural cash flow improves like M&M Financials, L&T Finance Holdings etc.
• Sops to farmers and rural India (in line with the interest subvention): Positive for public banks as credit offtake
will rise; may promote recoveries and better loan discipline among borrowers.
• Budgetary support / incentives likely to promote investments in power & transmission sector: Positive for
large public and private banks, energy financing NBFCs like PFC, REC and PFS.
• Budget 2017 may support measures to facilitate lower interest rates on system basis (credit guarantee
schemes / institutions etc): Beneficial to all banks and NBFCs

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Budget Special Union Budget Preview (2017-18)

• Facilitating easier and cheaper credit schemes for SME and MSMEs (MUDRA loans may be further expanded):
Positive for banks like Indusind Bank, RBL Bank and Capital First
• Push for digital payment: Positive in the long term but in the short term banks may lose on ATM charges etc.
Positive for: SBI, HDFC, Repco Home Finance, LIC Housing, RBL Bank, Bank of Baroda, Indusind Bank

Oil & Gas

• Lowering the cess rate on oil production to 10% as compared to the effective cess rate of 16.67% currently
• Removal of 5% import duty on LNG
• Extension of deduction under Section 80-IB to fields that commence production of mineral oil or natural gas on or
after April 1, 2017.
• Higher fuel subsidy provision for 2017-18 as compared to the current Government of India share of Rs12/litre for
kerosene and Rs15/kg for liquefied petroleum gas (LPG).
Positive for: ONGC, Oil India, Petronet LNG, IGL and Gujarat Gas

Real estate
Relaxation of income tax slab (minimum taxable income limit to go up from Rs2.5 lakh to at least Rs3 lakh); raising of
house rent allowance (current limit of Rs2 lakh to be increased by Rs1 lakh); deduction of principal repayment should
be considered separately from section 80C of the Income Tax Act; interest subvention for first-time home buyers;
higher allocation for affordable housing; single-window clearance; infrastructure status for integrated township
developments; and promoting Real Estate Investment Trust
Positive for: DLF, Godrej Properties, Puravankara Projects, Prestige Estates and Mahindra Lifespace Developers among
others

Cement
Reduce excise duty rate from current 12.5% plus specific duty to 6-8% without additional duty, increase excise duty
abatement from 30% to 55%, levy basic customs duty on cement imports in India, allow CENVAT credit on clean energy
cess, withdraw excise duty on fly ash, make higher allocation for the infrastructure sector especially roads, ports etc.
Positive for: UltraTech Cement, ACC, Ambuja Cements, Shree Cement, The Ramco Cements, JK Lakshmi Cement and
Mangalam Cement among others

Infrastructure
Higher allocation for the infrastructure sector, policies for promoting Infrastructure Investment Trust (InvITs),
consolidated tax filing of special purpose vehicles (SPVs) rather than individual SPV filing, abolition of MAT on
infrastructure companies, restoration of deduction of investments made by individuals in long-term infrastructure
bonds under section 80CCF.
Positive for: Larsen & Toubro, IRB Infrastructure, IL&FS Transportation, NBCC, Ashoka Buildcon and Gayatri Projects
among others

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FMCG
• Cigarette and other tobacco products: With the implementation of GST nearing, the government might opt for
a modest increase in the excise duty (of about 8-10%) on cigarettes and other tobacco products in the upcoming
union budget.
• Neutral for ITC if the excise duty hike is in the range of 8-10%, as the rate hike will be passed on to consumers
through selective price hikes in key brands.
• However if excise duty increase is more than 10%, then it is negative for ITC and other cigarette manufacturers
as they will have to take subsequent price hikes in all the brands, which will affect the sales volume.
• Reduction in import duty on crude palm kernel oil: In the wake of rising palm oil prices, the industry has
demanded an exemption/reduction of import duty (currently levied at 17.39%) on crude palm kernel oil. A
moderation in the import duty will provide a huge relief to the soap manufactures in the current environment of
rising raw material prices and muted sales volume. A reduction in import duty will be positive for companies such
as HUL and GCPL, and other soap manufacturers.
• Reduction in customs duty of titanium di-oxide: The paint companies have proposed a reduction in customs
duty on titanium di-oxide (the key input for making paints) to 7.5% from the current level of 10%. A reduction in
customs duty will be positive for the paint manufacturing companies like Asian Paints, Berger Paints and Kansai
Nerolac Paints.
• Reduction in excise duty on items of textile machinery: The industry is proposing a reduction in the excise duty
of all items of textile machinery to 8% from the current level of 12.5% to boost the capacity utilisation in the
coming years. If reduced it will be positive for textile companies such as Trident, Arvind etc.

Capital goods
• Increase in basic customs duty on copper products from 5% to 10%, removal of customs duty on copper cathode
and copper scrap (currently 5%), exemption of basic customs duty on parts to manufacture Energy Efficient Rating
(EER) products. Positive for companies like Finolex Cables, Havells, Crompton Consumer, V-Guard, Blue Star, IFB,
Symphony and Voltas
• Uniform tax structure (sales tax/octroi, cost of finance, duties on imported goods) for capital goods manufacturers,
reduction in basic customs duty on iron and steel (major inputs in the capital goods sector). Positive for all capital
goods manufactures like BHEL, L&T, ABB, Alstom T&D, Skipper, KPTL and Thermax.
• Higher investment in infrastructure development of the railways. Positive for companies like KPTL, KEC, Crompton
Greaves, L&T, Blue Star and Voltas.
• Interest subvention and tax holiday for affordable housing projects. Positive for companies like Finolex Cables,
Havells, Crompton Greaves Consumer Electricals, V-Guard, IFB and all construction companies

Power
• Reduction of Clean Environment Cess (CES) from Rs400/MT to Rs200/MT, extension of tax holiday (from current
March 31, 2017 to March 31, 2020) to power companies. Positive for companies like Coal India and all power
producing companies like NTPC, Adani Power and JSW Energy.

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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