The Finance Minister presented the Union Budget on 1st February 2017. This is our analysis of the implications of the budget on the Indian Economy and the Markets. We have also shared the stocks that will be the Budget Winners & Losers. We hope you enjoy going through our analysis.
1. Union Budget FY17-18
Receding fiscal support forecasted on private demand revival
Emkay Global Financial Services Limited
2. Less Reflationary
Union budget
appears less
reflationary than
expected with a
modest 6.7%
spending growth
Bifurcated between 6%
revenue spending (86% of
total spending) and 11.5%
capital spending growth
Rural-agri sector
commands a 12% highercommands a 12% higher
allocation and
infrastructure allocation
rises by 11%.
3. Fiscal spending could exceed Budget
The budget does not give us an impression that the demand stimulus from public spending will
be sufficient for growth revival
With real spending growth of just 2.2%, the budget
assumes that growth revival in real GDP at 6.75-
7.5% in FY18 will come from strong endogenous
growth in private spending and or external sector.
However, given the backdrop of de-globalisationHowever, given the backdrop of de-globalisation
and moribund private investments the assumption
of private consumption revival looks unrealistic.
Hence, we believe that there is a high probability of
actual fiscal spending exceeding the budget.
4. Fair Chance of Fiscal Slippage
Combination of lower transfers to states and tax revenue losses from GST implementation could
worsen the fiscal conditions of state governments
Subsidy budget does not take into account
the possibility of rising commodity prices,
including global crude prices and
depreciation in currency
The allocation to states does not consider
any provision for compensation due to
implementation of GST
Allocation under MNREGA at Rs480bn flat
over FY17, implying lack of indexation for
higher minimum wages and rising need for
rural employment
Disinvestment target of Rs720bn is
enormously optimistic, given the historical
success rate of less than 50%
Capital allocation is overstated, especially
for Railways where there has been
consistent shortfall in the past
Provisioning for banks’ recapitalization at
Rs100bn is a 60% decline from Rs250bn
last year and may require greater fiscal
support in the context of sustained rise in
NPAs of PSU banks
Overall, the fiscal deficit target of Rs5.5tn or 3.2% of GDP for FY18 is premised on understated expenditure budget
and one-off gains in revenues. In our view, achievement of 11.8% nominal GDP growth and Real GDP growth of
6.75-7.5% will require greater fiscal support.
5. Interest rates and INR/USD outlook
Containment in fiscal deficit and market borrowings imply
receding pressure on G-sec yields from G-sec supplies;
however, factors such as absence of OMO purchases by
the RBI in FY18, rising global interest rates and hardening
global commodity prices can induce upside bias for G-sec
yields. We expect 10-year G-sec yields to inch towards
7% over the next 12 months. We do not expect much
Containment in fiscal deficit and market borrowings imply
receding pressure on G-sec yields from G-sec supplies;
however, factors such as absence of OMO purchases by
the RBI in FY18, rising global interest rates and hardening
global commodity prices can induce upside bias for G-sec
yields. We expect 10-year G-sec yields to inch towards
7% over the next 12 months. We do not expect much7% over the next 12 months. We do not expect much
implication for INR/USD from the budget
7% over the next 12 months. We do not expect much
implication for INR/USD from the budget
6. Implications: Equity Markets
Earnings support from reflationary fiscal is milder than our expectation, especially in the context of the
demonetization shock. However, the relatively higher allocations in rural and infrastructure sectors (roads,
railways & defense) and affordable housing provide opportunities. There is little impetus for reviving
investment on an overall basis.
Earnings support from reflationary fiscal is milder than our expectation, especially in the context of the
demonetization shock. However, the relatively higher allocations in rural and infrastructure sectors (roads,
railways & defense) and affordable housing provide opportunities. There is little impetus for reviving
investment on an overall basis.
7. Key Measures & Implications
Digitisation: The govt’s impetus on shift towards a digital economy has led it to announce the following sops in the budget (A). Ban on all cash
transactions above Rs300,000. (B) Exemption of custom/Excise/SAD on m-POS; installation of micro ATMs, Finger Print Readers/Scanners & Iris
Scanners, (C). Launch of new referral bonus schemes for individuals & a cashback scheme for merchants to promote the use of BHIM app, (C).
Launch Aadhar Pay (based on Aadhar Enabled Payment System) to benefit those without debit cards, mobile wallets and mobile phones. Banks to
target additional 2mn new PoS terminals by September 17.
Digitisation: The govt’s impetus on shift towards a digital economy has led it to announce the following sops in the budget (A). Ban on all cash
transactions above Rs300,000. (B) Exemption of custom/Excise/SAD on m-POS; installation of micro ATMs, Finger Print Readers/Scanners & Iris
Scanners, (C). Launch of new referral bonus schemes for individuals & a cashback scheme for merchants to promote the use of BHIM app, (C).
Launch Aadhar Pay (based on Aadhar Enabled Payment System) to benefit those without debit cards, mobile wallets and mobile phones. Banks to
target additional 2mn new PoS terminals by September 17.
Dissolution of FIPB : The Foreign Investment Promotion Board (FIPB) stands dissolved with an alternate mechanism to be articulated in coming
months. This measure follows the dissolution of the Planning Commission. These moves show that the remaining vestiges of a planned economy
continue to be dismantled.
Dissolution of FIPB : The Foreign Investment Promotion Board (FIPB) stands dissolved with an alternate mechanism to be articulated in coming
months. This measure follows the dissolution of the Planning Commission. These moves show that the remaining vestiges of a planned economy
continue to be dismantled.
Labor Reforms : Govt. has indicated intention to undertake simplification/rationalisation & amalgamation of a plethora of existing labour laws under 4
distinct heads (A) wages; (B) industrial relations; (C) social security and welfare; and (D) safety and working conditions. This move could just be the
tip of the much heralded labour reforms though respective states would also have to follow up with similar legislation given that this is a concurrent
subject.
Labor Reforms : Govt. has indicated intention to undertake simplification/rationalisation & amalgamation of a plethora of existing labour laws under 4
distinct heads (A) wages; (B) industrial relations; (C) social security and welfare; and (D) safety and working conditions. This move could just be the
tip of the much heralded labour reforms though respective states would also have to follow up with similar legislation given that this is a concurrent
subject.subject.subject.
Contract Farming: The budget also proposes a move to integrate farmers who grow fruits and vegetables with agro processing units for better
realisation & reduction of post-harvest losses. Towards this the govt. proposes to move a model law on contract farming which would be circulated
among the states for adoption.
Contract Farming: The budget also proposes a move to integrate farmers who grow fruits and vegetables with agro processing units for better
realisation & reduction of post-harvest losses. Towards this the govt. proposes to move a model law on contract farming which would be circulated
among the states for adoption.
Oil & Gas: The govt intends to expand the strategic oil reserves by adding 2 more locations (Rajasthan & Odisha) to the current 3 facilities. This
would take the total reserve capacity to 15.3 mmt. In addition the govt. also intends to merge a number of oil & gas PSUs across the value chain into
a single behemoth which would facilitate economies of scale as well as enhance competitive strengths for claiming assets/reserves etc on a global
basis.
Oil & Gas: The govt intends to expand the strategic oil reserves by adding 2 more locations (Rajasthan & Odisha) to the current 3 facilities. This
would take the total reserve capacity to 15.3 mmt. In addition the govt. also intends to merge a number of oil & gas PSUs across the value chain into
a single behemoth which would facilitate economies of scale as well as enhance competitive strengths for claiming assets/reserves etc on a global
basis.
PSU disinvestment/listing : The Foreign Investment Promotion Board (FIPB) stands dissolved with an alternate mechanism to be articulated in
coming months. This measure follows the dissolution of the Planning Commission. These moves show that the remaining vestiges of a planned
economy continue to be dismantled.
PSU disinvestment/listing : The Foreign Investment Promotion Board (FIPB) stands dissolved with an alternate mechanism to be articulated in
coming months. This measure follows the dissolution of the Planning Commission. These moves show that the remaining vestiges of a planned
economy continue to be dismantled.
8. Other Extracts…
Rural India remains under focus – allocation upped by 12% to Rs1,285.6bn
Low growth in transfer to states despite GST implementation
Food subsidy is likely to increase with likelihood of sharp hike in MSP andFood subsidy is likely to increase with likelihood of sharp hike in MSP and
higher procurement
FY17RE suggests significant growth in capex in Q4
Lower reliance on market borrowing with higher disinvestments and
higher other capital generation
