february 01, 2018 budget review...

February 01, 2018

Budget Review2018 19-

Rejuvenating Bharat for inclusive growth while balancing fiscal deficit

2

In the backdrop of growing expectations of a populist Budget coupled with apprehensions on imposition of long term capital gains tax on equities, the Finance

Minister balanced both extremes without straying much from the path of fiscal prudence. Union Budget 2018-19 laid emphasis on “Ease of Living” with due

thrust to uplift the rural masses with emphasis being put on doubling farm income by 2022. Remarkably, amid pressure on existing resources, the Finance

Minister emphasised on increasing expenditure on infrastructure development including roads, airports, railways, etc. On the fiscal side, the deficit figure was

pegged at 3.5% of GDP for 2017-18. We believe this is a calibrated measure balancing the need for infrastructure development, buoyancy on tax inputs and

social welfare.

The government focused on generating employment and reviving the growth engine in the MSME space, with host of incentives, including lowering the

corporate tax rate to 25% for entities with turnover less than | 250 crore coupled with other measures will have multiplier effect on employment generation.

To broaden the equity tax base, a tax rate of 10% was imposed on incremental gains with effect from January 31, 2018 for an equity holding period of greater

than a year on capital gains exceeding | 1 lakh. Most importantly, the apprehension over LTCG was handled in a pragmatic way as it was introduced with

“grandfathering clause”, thereby dispelling the investors’ qualms.

Union Budget, indeed, seems to be a prudent mix of thrust on uplifting rural masses, generation of employment and long term nation building through solid

infrastructure development.

Key highlights of upcoming Budget:

• The revision in fiscal deficit target 3.2% to 3.5% is mainly on account of lower GST collections by ~|35000 crore (revenue accounted for only 11 months due

to spill over impact). This has resulted in additional slippage of 0.2% in the fiscal deficit for FY18RE. With the focus on removing rural distress and

augmenting farm income, the government has revised its fiscal deficit target to 3.3% from earlier target of 3.0% for FY19E. Although, there is a marginal

deviation from the previous FRBM target, the government has stick to its consolation path.

• On the revenue front, we expect government net tax revenues to grow 16.1% YoY to |14.7 lakh crore in FY19E on account of better recovery in indirect taxes

(up 18.5% YoY to |11.2 lakh crore) following better compliance in GST (E-way bill). Additionally, the direct taxes collection continues to remain buoyant

growing 14.8% YoY to |11.5 lakh crore led by improved business environment and better compliance. With a robust disinvestment pipeline in FY18-19E, we

believe the government has under promised and is likely to over deliver. We estimate proceeds of over | 1,00,000 crore in FY19E

• On the expenditure front, government focus remains on removing rural distress, improving infrastructure and ease of living through better development

expenses (Budgetary allocation up by 9.3% to over |5,90,000 crore ). The govt. announced worlds largest government-funded healthcare programme which

will cover 10 crore poor families (with ~50 crore beneficiaries) providing coverage up to | 5 lakh per family per year. In order to make MSME companies more

viable, income tax for companies with annual turnover up to | 250 crore (in FY17) has been reduced to 25% which coupled with other incentives will have

multiplier impact on the employment generation.

• Finally, we also highlight that though government has introduced LTCG in symbolic way (revenues of ~|20,000 crore in FY19E), it could act as key catalyst in

channelizing resources towards ‘ease of living” while managing fiscal deficit in long term as LTCG contributes 0.7-1% in US market.

Deal Team – At Your ServiceBudget 2018-19: Rejuvenating Bharat for inclusive growth while balancing fisc…

3

Deal Team – At Your ServiceGovt’s estimated fiscal position from our view...

Particulars FY15A FY17 FY18RE YoY (%) FY19BE YoY (%) FY19IE YoY (%) Comments

Direct Taxes 849528 1005000 18.3 1150000 14.4 1153669 14.8 Direct tax collections growth to remain buoyant next fiscal led by improved business

environement and better compliance

Indirect Taxes & Others 866294 941119 8.6 1121242 19.1 1115395 18.5 The revenues for FY18RE are lower by |35000 crore as it accounted only for 11

months for FY18RE due to spill over of GST revenues. We expect the monthly GST

collections to rampup to over |50000 crore FY19IE

Gross Tax Revenues 1715822 1946119 13.4 2271242 16.7 2269064 16.6

Less: State Shares 614450 676665 10.1 790593 16.8 795000 17.5

Net Tax revenue 1101372 1269454 15.3 1480649 16.6 1474064 16.1 Non Tax Revenues

Dividend 123017 106433 (13.5) 107312 0.8 107312 0.8 We believe the government’s dividend estimates for FY19E seem conservative and

leaves scope for positive surprise in terms of total dividend receipt for FY19E

Economic services 101697 88813 (12.7) 89583 0.9 85000 (4.3)

Others 48117 40728 (15.4) 48194 18.3 54500 33.8

Total Revenue Receipts 1374203 1505428 9.5 1725738 14.6 1720876 14.3

Capital Receipts

Recovery of Loans 17630 17473 (0.9) 12199 (30.2) 11000 (37.0)

Disinvestments 47743 100000 109.5 80000 (20.0) 100000 - With a robust pipeline in FY18-19E, we believe the government would again exceed

its disinvestment target set fo FY19BE

Total 65373 117473 79.7 92199 (21.5) 111000 (5.5)

Total Receipts 1439576 1622901 12.7 1817937 12.0 1831876 12.9

Scheme Expenditure: 830766 919900 10.7 1014451 10.3 1014451 10.3

On Revenue Account 589471 675805 14.6 746252 10.4 746252 10.4

On Capital Account 241296 244094 1.2 268199 9.9 268199 9.9

Exp other than Schemes: 663714 767007 15.6 851967 11.1 863967 12.6

On Revenue Account 620399 737657 18.9 819725 11.1 831725 12.8

On Capital Account 43315 29350 (32.2) 32242 9.9 32242 9.9

Interest payments 480714 530843 10.4 575795 8.5 575795 8.5

Total Expenditure 1975194 2217750 12.3 2442213 10.1 2454213 10.7 We believe that oil subsidy number could increase by | 10-15,000 crore from

budgeted target of |24,933 crore assuming oil prices at US$ 65 per barrel. Hence, we

build in additional expenditure of |12,000 crore

Fiscal deficit 535618 594849 11.1 624276 4.9 622337 4.6

Primary Deficit 54904 64006 16.6 48481 (24.3) 46542 (27.3)

GDP estimates 15251028 16784679 10.1 18722392 11.5 18798840 12.0

Fiscal deficit as % of GDP 3.5% 3.5% 3.3% 3.3% Despite lower indirect tax collections, the govt has continued to focus on fiscal

consolidation path (from 3.5% to 3.3%) alongwith removing rural distress

Government Revenue & Expenditure

4

Maintaining fiscal prudence with improved quality of spending…

Source: Budget Documents, MoF, ICICIdirect.com Research

50

3

51

1

53

5

53

6

59

5

62

4

4.5 4.1 3.9 3.5

3.5 3.3

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

0

100

200

300

400

500

600

700

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8RE

FY1

9BE

Fiscal deficit trend (%)

Fiscal deficit (Rs. '000 cr) - LS Fiscal Deficit as % of GDP - RS

10.1 10.0 10.611.3 11.6 12.1

5.6 5.5 5.4 5.6 6.0 6.1

4.4 4.45.2 5.7 5.6 6.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY14 FY15 FY16 FY17 FY18RE FY19BE

(%)

Trends in tax receipts (as % of GDP)

Gross Tax Receipts Direct Tax Indirect Tax

40

42

41

42

41

60

58

59

58

59

0 20 40 60 80 100

FY16

FY17

FY18RE

FY19BE

FY19IE

Share of expenditure

Scheme Exp Other Exp

11

38

77

10

22

00

72

01

6

50

18

4

39

00

5

36

94

6

31

81

2

21

36

413

56

04

10

70

92

81

86

9

56

58

9

53

19

8

40

75

4

38

62

4

26

31

013

80

97

13

45

72

85

01

0

63

83

6

54

66

7

41

76

5

44

22

0

27

95

6

0

40000

80000

120000

160000

Ru

ral D

evel

opm

ent

Tran

spo

rt

Edu

cati

on

Ag

ricu

ltu

re

Hea

lth

Urb

an

Dev

elo

pme

nt

Soci

al W

elfa

re

Com

mer

ce &

Indu

stry

Major items of expenditure (| Crore)

FY17 FY18RE FY19BE

5

Aiming to double farm income by 2022; emphasis on income insurance

Source: Ministry of Agriculture , ICICIdirect.com Research

• Union Budget 2018-19 is pro-farmer in nature and well aligned to double farm income by 2022. Apart from the increase in allocation towards risk mitigation

(crop insurance) and efficiency (irrigation including micro-irrigation) schemes, it lays special emphasis on augmenting farm income through remunerative

farm gate prices thereby targeting “income insurance”

• Emphasis has also been placed on fixing MSP prices at a mark up of 50% above the cost of production while at the same time bringing more crops under

the MSP net. It also aims at procurement of all major farm produce at MSP price through the calibrated coordination between the central government, Niti

Aayog and state government

• To augment farm income, it also aims to promote allied activities like aquaculture, animal husbandry, etc, while at the same time save crop wastages

through requisite storage and agro-processing units

Union Budget also emphasises on expansion of the e-Nam network with all

585 mandis set to integrate by FY18E and upgradation of 22,000 rural haats

into Garmin Agriculture Markets (GrAMs) (corpus allocation at | 2,000 crore).

With the aim of promoting allied activities namely aquaculture, dairy, animal

husbandry, fisheries etc., government has proposed creating a separate fund

amounting to | 10,500 crore (capital investment and working capital limits).

On the risk mitigation front, in its flagship insurance scheme i.e. PMFBY,

allocation has been increased to | 13,000 crore with the aim of increasing

coverage to ~50% of the total crop area domestically by FY19E.

On the efficiency front, in the irrigation space, total allocation under PMKSY

is being increased to | 9,429 crore, up 28% YoY, with specific allocation to

MIS at | 4,000 crore, up 18% YoY.

Institutional credit for the agriculture sector has been modestly increased to

| 11 lakh crore, up 10% YoY. Allocation under the mechanisation scheme

has more than doubled to | 1,200 crore

Government has given big boost to food processing sector with allocation

to Pradhan Mantri Krishi Sampada Yojana at | 1,400 crore, up 96% YoY

65 65 64 62 60

22 23 23 24 26

8 8 8 8 95 5 5 5 5

0

10

20

30

40

50

60

70

FY12 FY13 FY14 FY15 FY16%

Agriculture & Allied Services GVA break up

Crops (Foodgrains and Horticulture) Livestock

Forestry and Lodging Fishing and aquaculture

Thus, Union Budget 2018-19 has presented a holistic approach towards

upliftment of rural masses and doubling of farm income with special

emphasis laid on risk mitigation measures, efficiency matrix as well as

pricing support. Additionally, it promotes allied services & food processing

sector thereby providing the right impetus to increase overall farm income.

Schemes Units FY16 FY17 FY18RE FY19BE

Insurance Scheme (PMFBY) | crore 3,100 11,050 10,700 13,000

Increase YoY % 32 256 -3 21

Irrigation (PMKSY) | crore 5,300 5,134 7,392 9,429

Increase YoY % -3 44 28

Micro-Irrigation (MIS) | crore 1,800 2,340 3,400 4,000

Increase YoY % 61 30 45 18Sub-Mission on Agri

Mechanization | crore 139 358 525 1,200

Increase YoY % 158 47 129

Institutional Credit Target | lakh crore 8.5 9.0 10.0 11.0

Increase YoY % 6 6 11 10

Allocation to various agriculture schemes (Union Budget 2018-19)

Higher allocation towards key development schemes to improve ease of living!!!

6

The government has taken effective steps to improve the ease of living mainly led by increased budgetary allocation towards the Ministry of Road, Transport &

Highways (up 16.3% YoY to | 70,544 crore), railways (up 32.7% YoY to | 53,060 crore) and urban development (up 11.2% YoY to | 50,868 crore). Consequently,

the government has increased allocation for key development related schemes by 14.1% YoY to | 2,43,052 crore.

Source: Budget documents, ICICIdirect.com Research

Government's allocation to development schemes (| crore)

FY15 FY16 FY17 FY18RE FY19BE YoY growth

Road 49719 61203 69886 77571 89544 15.4%

Pradhan Mantri Gram Sadak Yojana (Rural roads) 14391 14291 17923 16900 19000 12.4%

Ministry of Roads, Transport and Highways 35328 46912 51963 60671 70544 16.3%

Urban development 20878 29291 42487 45764 50868 11.2%

Railways 30121 35008 45232 40000 53060 32.7%

Housing 16000 11603 20952 29043 27505 -5.3%

Pradhan Mantri Awas Yojana - Gramin 16000 10116 16071 23000 21000 -8.7%

Pradhan Mantri Awas Yojana - Urban 0 1487 4881 6043 6505 7.7%

Others (Shipping & Power) 14750 9285 16168 20563 22075 7.4%

Total 131468 146390 194725 212941 243052 14.1%

Sector Other key Infrastructure announcements

Real Estate

1) To establish a dedicated Affordable Housing Fund (AHF) in National Housing Bank, funded from priority sector lending shortfall and fully serviced bonds authorised by the

government

2) To construct 51 lakh houses (51 lakh in FY18 as well) for rural areas under Pradhan Mantri Awas Yojana - Gramin, the government has made a budgetary allocation of |

21000 crore. For urban areas, the assistance has been sanctioned to construct 37 lakh houses

Road

The government is planning to construct 57000 km (59150 km in FY18) of rural roads under PMGSY, and award 35000 km of roads under Bharatmala worth | 5.35 lakh crore

under Bharatmala Pariyojana. To raise equity from market for its mature road assets, NHAI will consider organising its road assets into a special purpose vehicles and use

innovative monetising structures like toll, operate and transfer (TOT) and infrastructure investment funds (InvITs)

Infrastructure

Using the online monitoring system 'PRAGATI', the Prime Minister is personally reviewing the targets and achievements in infrastructure sectors on a regular basis.

Consequently, projects worth | 9.46 lakh crore have so far been facilitated and fast tracked

Power Under Saubhagya Yojana, 4 crore poor households are being provided with electricity connection free of charge

Urban Infrastructure 1) The government is looking to expand airport capacity by more than five times to handle a billion trips a year under a new initiative - NABH Nirman

(Civil aviation) 2) Regional connectivity scheme of Ude Desh ka Aam Nagrik (UDAN ) initiated by the government last year shall connect 50 unserved airports and 31 unserved helipads

across the countryPublic The government would initiate monetising select central public sector enterprise (CPSE) assets using InvITs from next year

Railways 1) To increase electrification of railways by 50% YoY to 6000 km

2) Procurement of electrical locomotive increased 72% YoY to 573 units for FY19E

Rail capital expenditure outlay – Focus on modernisation


Railways – Investment tempo sustained…

Focus on alternative source of funding, reduced GBS dependency

Despite merger with the Central Budget, investments in Railways continues

to remain an important agenda. The central government has increased its

capital expenditure outlay for FY18-19 by 22% YoY to | 146500 compared to

FY17-18 revised estimate of | 120000 crore

Key theme - Capacity augmentation and safety…!!!

Approximately 69% of the capital outlay for FY19 has been earmarked under

major heads of capital expenditure. Augmentation of capacity with

construction of new lines and higher doubling are the mainstay. Moreover,

higher electrification would lead the way for lower fuel expenses resulting in

improvement of 320 bps in operating ratio from 96% in FY18 (RE) to 92.8% in

FY19 (BE). The focus of commissioning/addition of new lines (1000 km)

would remain on enhancing the capacity in suburban cities like Mumbai and

Bengaluru. Following the FDI in railways for construction of locomotives at

Bihar, the budgeted estimates reflect IR commitments to procure the same

53108

64769

93520

109935

131000

120000

146500

0

20000

40000

60000

80000

100000

120000

140000

160000

2013-14 2014-15 2015-16 2016-17 2017-18 (BE) 2017-18 (RE) 2018-19 (BE)

| C

rore

Total Capital Outlay

28174

31624

37608

45232

55000

40000

530609709

1535016845

12125

14000

10900

1150015225

17795

39066

52579 6

2000

69100

81940

0

20000

40000

60000

80000

100000

120000

140000

160000

2013-14 2014-15 2015-16 2016-17 2017-18 (BE) 2017-18 (RE) 2018-19 (BE)

| C

rore

Gross Budgetary Support Internal Generation Extra Budgetary Resources

Shift of focus

from GBS to EBR

2017-18 2018-19

Rolling stock 25194 32007 27%

New Lines (Construction) 22986 28490 24%

Track renewals 8310 11450 38%

Doubling 17957 17359 -3%

Electricfication 3452 6302 83%

Gauge conversion 3674 4016 9%

Signalling & other 2330 2025 -13%

2017-18 2018-19

Rolling stock

Diesel locos (in nos.) 290 122 -58%

Electrical locos (in nos.) 334 573 72%

Coaches (in nos.) 4495 5160 15%

Track machines (in nos.) 76 52 -32%

New Lines (kms) 800 1000 25%

Track renewals (kms) 3600 3900 8%

Doubling (kms) 1800 2100 17%

Electricfication (kms) 4000 6000 50%

Gauge conversion (kms) 900 1000 11%

Capital Augmentation outlay (in crore)

Financial outlay

Output/Deliverables

Capital Augmentation outlay (in quantity)

% change

% change

Efficient Railways - Execution at the forefront…


Commitment vs. Execution

A Rashtriya Rail Sanraksha Kosh will be created with a corpus of ₹1 lakh crore over a period of

5 years.

Allocated a corpus of ₹ 20,000 crore each over FY18 and FY19. Elimination of unmanned level

crossings by 2020 is on track

Throughput is proposed to be enhanced by 10% in next three years. Focus on modernisation

and upgradation of identified corridors. Railway lines of 3500 km will be commissioned in

2017-18 against 2,800 km in 2016-17

In the first phase, South Eastern Railway, South East Central Railway and East Coast Railway

are identified for 25T axle load running. Long haul trains will run across congested sections to

increase throughput

At least 25 stations are expected to be awarded during 2017-18 for station redevelopment. 500

stations will be made differently abled friendly by providing lifts and escalators

Redevelopment of Habibganj and Gandhinagar started. Formulating attractive revised scheme

for station redevelopment to fast track the programme. So far, 430 escalators at 167 stations

and 279 lifts at 122 stations have been provided

Proposed to feed about 7,000 stations with solar power in the medium term. A beginning has

already been made in 300 stations. Works will be taken up for 2,000 railway stations as part of

1000 MW solar mission

Total 28.75 megawatt (MW) solar roof top capacity has been installed on 350 stations

including major stations like New Delhi, Old Delhi, Jaipur, Secunderabad and Kolkata. Order

has been placed for 37 MW solar roof top capacity by Zonal Railways/PUs (covering 250

stations)Focus is on Swachh rail. Post initiating SMS based Clean My Coach Service propose to

introduce ‘Coach Mitra’ facility, a single window interface, to register all coach related

complaints and requirements

The facility shall be extended to all on-board housekeeping service (OBHS) trains (1000) in

2017-18. ‘Coach Mitra’ facility has been extended to 670 trains over 13 zonal railways

By 2019, all coaches of Indian Railways will be fitted with bio toilets. Pilot plants for

environment friendly disposal of solid waste and conversion of biodegradable waste to energy

are being set up at New Delhi and Jaipur railway stations. Five more such solid waste

management plants are now being taken up

Target for 2017-18 is installation of 40,000 biotoilets. In November 2017, 5417 biotoilets have

been installed in coaches. On a cumulative basis, 33856 bio-toilets have been installed. Pilot

plant at Jaipur Railway Station has been installed with a target of five solid waste management

plants by FY18

90.0%

96.5%

94.6%

96.0%

92.8%

84%

86%

88%

90%

92%

94%

96%

98%

100%

2015-16 2016-17 2017-18(BE) 2017-18(RE) 2018-19(BE)

Operating Ratio

Declining trend in

operating ratio from

En-route sustainable model – Sharpened focus on earnings and profitability …!!!

109,208

104,339

118,157

117,500

121,950

44,283

46,280

50,125

50,125

52,000

5,929

10,368

14,123

14,000

20,790

4,371

4,312

6,494

5,500

6,000

0

20000

40000

60000

80000

100000

120000

140000

2015-16 2016-17 2017-18(BE) 2017-18(RE) 2018-19(BE)

| c

rore

Receipts from Freight Receipts from Passengers Sundry other earnings Other coaching receipts

9

GST collections provides hope!!

Source: Union Budget 2019, Economic Survey 2018, Finance Ministry, ICICIdirect.com research

Union Budget 2019 provided a greater degree of clarity on GST collections. Revised estimates for FY18

pencil in the Centre’s share of collections (CGST + IGST) at ~₹ 3.8 lakh crore. We think these collections

are for eight months from July 2017-February 2018, with the March 2018 collections to be accounted for

in FY19. This implies a monthly run rate of ~₹ 47000 crore. FY19 collections have been budgeted at ~₹

6.5 lakh crore, (i.e. ~₹ 54000 crore per month), implying a budgeted growth of 14.9%.

Against this, actual collections for the six months from July-December imply average ~₹ 44000 crore

being added to the Centre’s kitty on a monthly basis. Thus, on comparing actual collections thus far to

FY19 BE, the Centre seems to be estimating ~22.7% growth.

94063

9066992150

8334680808

86703

70000

75000

80000

85000

90000

95000

100000

Jul-

17

Au

g-17

Sep

-17

Oct

-17

No

v-17

Dec

-17

₹ c

rore

GST collections

States 4.4 SGST 2.5

Centre 5.3 CGST 1.7

Excise 1.4 IGST 5.4

Service 2.5 Cesses 0.9

CVD/SAD 1.4

Total 9.7 10.5

Estimated Growth of GST

2.5

2.5

4.9

0.9

10.9

12%

Monthly Average of

July-Nov (annualized)

Estimated Annual Steady

State revenues

2017-18

Annual

2016-17

No. millions

New 3.40

Old

Excise 0.01

Services 0.60

VAT 5.80 6.40

9.80

GST Registrants

Total

2017-18 RE* 2018-19 BE

GST

Central GST (CGST) 221,400 603,900

Integrated GST (IGST) 161,900 50,000

GST Compensation Cess 61,331 90,000

Total GST 444,631 743,900

GST collections (₹ crore)

In our opinion, this is a reasonable assumption because of the following factors –

• Increased compliance brought on by a significantly wider tax net: As per the recent Economic Survey, the number

of registrants under GST is 9.8 million. Of this, 35% registrants are new, i.e. those that were not covered by earlier

indirect tax regimes of Excise, Service Tax and VAT. This represents a much broader tax base for the new system

and should result in a boost to tax compliance and eventually tax revenue

• E-way implementation: Interstate e-way bill system on goods valued above ₹ 50000 come into effect. E-way bill

implementation in states under the previous system (pre-GST) had helped boost revenues. E-way bills on intrastate

goods movement will be rolled out from June 1, 2018 and places stringent compliance burden on assesses,

restricting scope for evasion

• Additionally, the impact of composition scheme taxpayers required to file returns on a quarterly basis is yet to

accrue

*For eight months from July 2017-February 2018

10

Deal Team – At Your ServiceDisinvestment: Under promised and over delivered; dividends to revive in FY19E

• For FY18-19E, disinvestment receipts have been budgeted at | 80,000 crore. For previous year (FY17-18), estimates have been revised to | 1,00,000 crore

vs. the Budget estimate of | 72,500 crore. This was primarily on account of the strong disinvestment programme lined up by the government. With a robust

pipeline in FY18-19E, we believe the government has under promised and is likely to over deliver. We estimate proceeds of over | 1,00,000 crore in FY19E.

• The government has budgeted dividend income for FY18-19E at | 107,312 crore. The revised estimate for FY17-18 have been pegged at | 106,433 crore vs.

budgeted estimate of | 142,430 crore. This gap is mainly on account of lower dividends from RBI (lower by ~| 23,000 crore). We believe the government’s

dividend estimates for FY19E seem conservative and leaves scope for positive surprise in terms of total dividend receipt for FY19E


Disinvestment proceeds for FY19E at | 80,000 crore

72,500

100,000

80,000

20,000

40,000

60,000

80,000

100,000

120,000

Budgeted Estimates (BE) Revised Estimates (RE)

|cr

ore

FY17-18 FY18-19E

Disinvestments receipts

budgeted at | 80,000 crore

for FY19E

Dividend income for FY19E estimated at | 107,312 crore

142,430

106,433107,312

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Budgeted Estimates (BE) Revised Estimates (RE)

| cr

ore

FY17-18 FY18-19

Dividend for FY19 to remain inline as RE for FY18

• The government has approved listing of 14 CPSEs, including two

insurance companies, on the stock exchanges

• They have also initiated the process of strategic disinvestment in 24

CPSEs. This includes strategic privatisation of Air India

• DIPAM will come up with more ETF offers such as Bharat-22 including

debt ETF

• PSEs are expected to contribute | 52,494 crore in FY19 while RBI

dividends are budgeted at lower than anticipated | 54,817 crore

• Total dividend income estimated for FY19 at | 107,312 crore

11

Grandfathering capital gains till January 31, 2018, government goes ahead with LTCG

Source: RBI, Government of India, News articles ICICIdirect.com Research

As per the government, the total exempted capital gains

from listed shares and units is around | 3,67,000 crore as

per returns filed for A.Y.17-18. Major part of this gain has

accrued to corporates and LLPs. Accordingly, @10%

LTCG tax revenue could have been | 36700 crore in FY18,

which is a loss of almost 0.22% of GDP as market returns

were high. Hence, government estimates of | 20000 crore

seem achievable in FY19 and form 0.11% of GDP

Developed countries like the US reported long term

capital gains (all assets) to the tune of 0.7-1% of GDP. UK

reported total capital gains at 0.4% of GDP. Therefore,

steps towards imposition of LTCG taxation on equities

seem to be a step in the right direction

Example of LTCG tax calculation as per new rules

Long term capital gains (LTCG) on equities will be taxed @ 10% if gains exceed | 1 lakh

(without the benefit of any indexation). The holding period continues to be one year and

above for LTCG. For calculations, all gains till January 31, 2018 will be grandfathered (exempt

from tax). The LTCG rate of 10% is applicable from financial year 2018-19.

Views

• Since gains to be considered for taxation are prospective, the impact is largely neutral

from a market perspective. Against the fear of a deep sell-off, this seems to have been

executed quite modestly

• Equity oriented funds of MF are huge in size at | 10 lakh crore (December 2017) and have

already risen 79% in a year. Charging LTCG tax on gains from this base can also raise

substantial tax revenues not factored in above calculations

• Unit linked investment plans (ULIPs) are excluded from capital gains as not specifically

mentioned. This will favour premium growth of life insurance companies as returns from

Ulip funds become tax exempt

• Hence, on a growing base of GDP and wider long term capital gains tax net, reaching 0.7-

1% of GDP on LTCG tax collection, can add significantly to the government’s tax kitty over

the years

For investors, sale made after January 31 as depicted in exhibit 2, in case of long term

capital gains made is | 2 lakh and | 50000 is before January 31. Then balance | 150000

gains are made post January 31 of which | 1 lakh is exempt. Finally, | 50000 will be taxable

@10% while | 5000 will be tax payable plus any surcharges if any applicable.

LTCG calculation (|) Investor 1 Investor 2 Investor 3

a

LTCG due to sale of equity held > 1yr

(sale from Feb 1st 2018) 80000 140000 200000

b Gains till 31st Jan 30000 40000 50000

c Gains post 31st Jan a-b 50000 100000 150000

d LTCG Exempt upto | 100000 100000 100000 100000

e Taxable portion for LTCG c-d 0 0 50000

f Tax @10% e*10% 0 0 5000

| lakh crore FY18E FY19E FY20E

GDP 167.0 183.7 202.1

BSE Mcap 160.0 176.0 193.6

BSE Mcap gain 38.5 16.0 26.1

LTCG on equity * 3.67 2.08 2.61

Applicable tax rate 10% 10% 10%

Absolute LTCG tax on equity (| cr) 36700# 20800 26095

as a % of GDP 0.22%#% 0.11% 0.13%

#FY18E - LTCG not taxed but possible amount of LTCG on equity would

have been high

LTCG to add to the tax kitty

12

Personal income tax: No major change… senior citizens in focus

Source: Union Budget 2018-19, ICICIdirect.com Research

The Finance Minister has refrained from effecting any major change in the

personal income tax for individuals assesses. Income tax rates and slabs

remain unchanged

Senior citizens are the most benefitted class from the Budget

announcement.

Tax exemption on interest income from savings bank account

has been increased from | 10,000 to | 50,000 and now include

interest income from fixed deposits and post offices deposits

Deduction limit for health insurance premium or medical

expenditure increased from | 30,000 to | 50,000 under section

80D

Increase in deduction limit for medical expenditure for certain

critical illness from | 60,000 (in case of senior citizens) and from

| 80,000 (in case of very senior citizens) to | 1 lakh for all senior

citizens, under section 80DDB

Pradhan Mantri Vaya Vandana Yojana, under which an assured

return of 8% is given by LIC, extended up to March, 2020. The

existing limit on investment of ₹ 7.5 lakh per senior citizen under

this scheme has also been enhanced to ₹ 15 lakh

The Finance Minister has reintroduced standard deduction for salaries

class individuals to the extent of | 40000 but removed the existing annual

transport allowance of | 19,200 and medical reimbursement of | 15000.

This has resulted in net additional deduction of | 5800. The maximum tax

benefit for the highest tax slab individual comes to just | 1740 excluding

cess. Standard deduction is now also applicable to pensioners. The move

is expected to benefit 2.5 crore employees and would result in the

revenue loss of | 8000 crore to the exchequer

Education cess has been increased to 4% from current 3% for all

assesses and been renamed as “Health and Education Cess”. Additional

revenue from this move is estimated at around ₹ 11,000 crore

Dividend distribution tax (DDT) at 10% has been introduced on

distributions by equity and equity oriented mutual funds with effect from

April 1, 2018

Tax benefit on 40% of withdrawals from NPS, which was till now available

only to employee subscribers (i.e. salaried class) is now extended to non-

employee subscribers as well with effect from April 1, 2019

Section 54EC has been made more stringent. From now on only

immovable property (land or building or both) shall be eligible for the

benefit. Additionally, the specified bonds would now need to be held for a

minimum period of five years against three years earlier

Tax treatment of fund of funds (FoFs) investing only in domestic equity

ETFs brought on par with taxation of equity oriented funds

The government would make further use of ETF route for disinvestments.

DIPAM will come up with more ETF offers including debt ETF

To ensure compliance, it has been proposed that Chapter VI-A deductions

shall not be allowed if income tax return is not filed by the due date

13

Other key highlights

Source:Ministry of finance, ICICIdirect.com research

• Flagship National Healthcare protection scheme will be launched to cover 10 crore poor families (with ~50 crore beneficiaries) providing coverage up to | 5

lakh per family per year for secondary and tertiary care hospitalisation. This will be the world's largest government-funded healthcare programme

• In order to make MSME companies more viable, income tax for companies with annual turnover up to | 250 crore (in FY17) has been reduced to 25%

• The government will contribute 12% of wages of new employees in EPF in all sectors for the next three years

• Allocation to Digital India scheme doubled to | 3073 crore

• Total | 1 lakh crore will be allocated over the next four years towards an initiative named Revitalising Infrastructure and Systems in Education (RISE) by

2022. This will be done to step up investment & related infrastructure in in premier educational institutions

• The government has allocated | 9,975 crore for social security schemes for the next fiscal year

• Under Ujjwala Scheme, eight crore (five crore last year) poor women will be given free gas connection

• The government has earmarked allocation of | 56619 crore for SCs (| 52719 crore in FY18E) & | 39135 crore for STs (| 32508 in FY18E) in FY19E

• The government proposes to set up five lakh Wi-Fi hotspots, which will provide broadband access to five crore rural citizens. Total | 10000 crore in 2018-19

has been provided for creation and augmentation of telecom infrastructure

• Total 3% primary & secondary education cess on personal income tax & corporation tax has been increased to 4% & renamed as “Health & education cess

• To develop 10 prominent tourist sites into iconic tourism destinations, the government has increased fund allocation under Swadesh Darshan by 14.7% YoY

to | 1,100 crore

• Capital outlay on space research increased substantially by 40% to | 5287 crore (up from | 3777 crore)

• To encourage domestic manufacturing under "Make in India", the government has hiked BCD in mobile phones (from 10% to 20%), LCD/LED/OLED panels

(from 7.5% to 15%) and lamps/ lighting fittings (from 10% to 20%)

14

Sectoral Impact

Measures Sectors Impacted Impact Key stocks

The Budget focused more on rural area- 1) higher allocation of funds towards agriculture & allied

activities (up 20% YoY to | 239,882 crore), 2) MSP for majority of Rabi crop will be 1.5x its cost

involved. Higher focus on rural will increase farmer income, which will have a positive impact on tractor

and 2-W demand

Auto Positive Mahindra & Mahindra, Hero MotoCorp

Allocation of funds for faster adoption and manufacturing of (hybrid and) electric vehicle in India -

(FAME - India) up 48.6% YoY to | 260 crore. This will be positive for major OEM players (2W + 3W

+ PV)

Auto Positive Maruti Suzuki, Hero MotoCorp, Bajaj Auto, M&M,

Tata Motors, Ashok Leyland

Higher focus on infrastructure development. An outlay of | 70,544 crore towards National Highways

Authority of India including roadworks

Auto Positive Tata Motors and Ashok Leyland

Rate of custom duty on import of truck and bus radial (TBR) tyres has been increased from 10% to

15%. The duty will make import of tyres costlier. This will be positive for domestic TBR players as

higher demand for Indian manufactured tyres will lead to market share gain for domestic tyre

manufacturers

Tyre Positive JK Tyre and Apollo Tyre

The reduction of corporate tax to 25% from 30% for companies with a turnover of | 250 crore. We

believe there would be >60 auto ancillary companies (MSME), which would benefit from lower

corporate taxation

Auto Ancillary Positive Small ancillary companies having turnover of <|250

crore

Setting up of MSP prices at a mark up of 50% above cost of production and bringing more crops under

MSP domain thereby resulting in better farm realisations and consequent increase in farm income

All agri-inputs Positive Rallis India, Swaraj Engines, KSB Pumps

Increase in institutional credit flow to agriculture sector amounting to | 11 lakh crore, up 10% YoY All agri-inputs Positive Rallis India, Swaraj Engines, KSB Pumps

Increase in allocation in key productivity schemes like Pradhan Mantri Krishi Sinchaye Yojana (| 9429

crore, up 28% YoY) and Pradhan Mantri Fasal Bima Yojana (| 13,000 crore, up 21% YoY)

All agri-inputs Positive Rallis India, Swaraj Engines, KSB Pumps

Increase in Centre's share of subsidy towards micro-irrigation to | 4000 crore in FY19E vs. | 3400

crore in FY18E

Micro-irrigation

system (MIS)

Positive EPC Industrie, Emmbi Industrie

Increase in allocation to sub-mission on agriculture mechanisation to | 1200 crore in FY19E vs. | 525

crore in FY18E

Farm mechanisation Positive VST Tillers & Tractors

Subsidy for fertiliser sector maintained at | 70,000 crore for FY19E amid declining raw material prices.

It will aid in payment of arrears in system

Fertilisers Positive NA

Creation of separate fund amounting to | 10,500 crore promoting allied activities viz. aquaculture,

dairy, animal husbandry, fisheries, etc, to augment farm income

Aquaculture Positive Godrej Industries (Godrej Agrovet)

Clarity over adjustment of carry forward of losses of a company under IBC & against book profit for

computation of MAT

PSU and coprorate

based private banks

Positive SBI, PNB, BoB, Axis bank

15

Sectoral Impact


Allocation in Pradhan Mantri Fasal Bima Yojna increased to | 13000 crore. On health insurance,

exemption limit under section 80D has been increased from | 30000 crore to | 50000 crore for senior

citizens

General insurance

companies

Positive New India Assurance, Bajaj Finserv

Introduction of Section 80 TTB providing senior citizen's tax exemption limit for interest from deposit

to | 50000 from | 10000 currently

Banks Positive All Banks

Increase in allocation to Digital India programme to | 3073 crore in 2018-19 and focus on adoption of

newer technology like blockchain

Private Banks Positive HDFC Bank, Indusind Bank, Axis Bank etc

Increasing support to MSME sector through higher credit allocation through Mudra at | 3 lakh crore

and interest subsidy. Review of refinancing policy and eligibility criteria by MUDRA for better terms to

NBFCs

Banks and NBFC Positive Kotak Bank, Indusind Bank, SBI, PNB, BOB, Capital

First, Bajaj Finance etc

Focus on affordable housing continues further. The government proposes establishment of dedicated

Affordable Housing Fund (AHF) under National Housing Bank, funded from priority sector lending and

fully shortfall from serviced bonds

Housing Finance

Companies and

Banks

Positive HDFC Ltd, Repco Home Finance, Gruh Finance, SBI etc

ULIPs investment exempted from long term capital gain tax Life insurance

companies

Positive SBI Life, HDFC Life

Higher allocation to construction of new lines (24% YoY), electrification works (82% YoY) and track

renewals (38% YoY) in railways

EPC companies Positive L&T, KEC, Siemens, Kalpataru Power

Defence capital outlay increased 8.7% YoY to | 93,982 crore ( up from | 86,488 crore) DPSUs and Private

defence companies

Positive Bharat Electronics, L&T, Cochin Shipyard

Increased allocation towards construction of roads and highways (up 16.3% YoY) to positively impact

North, Central, Eastern and AP & Telangana regions that have low road density

Cement Positive Ultratech Cement, JK Lakshmi, Sagar Cement, NCL

Industries and Ramco Cement Total rural outlay of | 2.36 lakh crore, up 26% YoY coupled with ‘Housing for All’ would help drive

volumes for FMCG and consumer discretionary companies with higher proportion of rural revenue

contribution

FMCG, Consumer

Discretionery

Positive HUL, Kansai Nerolac, Dabur, Symphony, Supreme

Industries, Astral poly

Hike of MSP prices by 1.5x production cost to boost rural disposable income FMCG, Consumer

Discretionery

Positive HUL, Dabur, Colgate, Jyothy Lab, Bajaj Electricals,

Havells India

Government increases BCD on fruit/vegetable juices from 30% to 50% and BCD on perfumes and

toiletry preparations 10% to 20%

FMCG Positive Vaurn Beverages, HUL, Dabur, Marico, Colgate

No change in indirect tax on cigarettes as any hike in taxation would require GST Council consent. We

believe this has brought relief for cigarettes companies and, in turn, can propel volume growth. The

industry has seen an incessant and sharp increase in indirect tax in last five years

FMCG, cigarettes Positive ITC, VST Industries

16

Sectoral Impact


Budgetary allocation for highways, Pradhan Mantri Gram Sadak Yojana has been hiked by ~16.3% and

12.4% to | 70544 crore and | 19000 crore, respectively. This could result in higher awarding

opportunities for EPC & BOT players, going forward

Road Positive L&T, NCC Ltd, Simplex Infrastructure. PNC Infratech,

NBCC, Sadbhav Engineering, Ashoka Buildcon, IRB

Infrastructure

The government has increased its overall budgetary allocation for infrastructure sector by 20.9% YoY to

~| 5.97 lakh crore and Smart Cities at | 12169 crore, up 41% YoY

Infrastructure Positive L&T, NCC Ltd, Simplex Infrastructure. PNC Infratech,

Sadbhav Engineering, Ashoka Buildcon, IRB

Infrastructure

The Budget has focused on reducing post harvest wastage with the launch of ‘‘Operation Greens’’. The

outlay of | 500 crore would focus on agri logistics, processing facilities and professional management

training

Cold storage

logistics

Positive Gati, Transport corporation of India

The government has proposed a capital outlay of | 5.97 lakh crore towards infrastructure sector in

Budget 2018-19. The capital outlay is 21% higher than the outlay of | 4.94 lakh crore as per revised

estimates for 2017-18. The increased expenditure on infrastructure sector bodes well for metals sector

Metals Positive JSW Steel, Vedanta, Hindalco

Reduction in excise duty by | 2 per litre on both petrol (| 6.48/litre to | 4.48/litre) and diesel (|

8.33/litre to | 6.33/litre). Also, the additional excise duty of | 6 per litre has been abolished. However,

the impact has been neutralised by introduction of road & infrastructure cess of | 8 per litre

Downstream oil

sector (refining &

marketing)

Neutral All oil marketing companies

Government will establish a dedicated affordable housing fund (AHF) in National Housing Bank, funded

from priority sector lending shortfall and fully serviced bonds authorised by government

Real Estate Positive Mahindra Lifespace, Sunteck Realty, Oberoi Realty,

Arihant Superstructures

The proposal to allow 5% variation between transaction value and ready reckoner or circle value for

computation of capital gains tax for property transactions may not offer a significant tax relief or affect

real estate deals

Real Estate Neutral All real estate developers

Gold monetisation scheme to be revamped to enable people to open hassle-free gold deposit account.

This would increase domestic availability of gold for the jewellery industry

Jewellery Positive Titan, TBZ, PC Jewellers

To incentivise the domestic industry, the government has proposed to increase custom duty on various

categories such as footwear, watches and sunglasses (from 10% to 20%)

Retail Positive Bata, Relaxo, Liberty, Titan

Allocation for Bharat Net increased from | 7000 crore (RE in FY18) to | 10,000 crore in FY19E OF/OFC players Positive Sterlite Technologies

Allocation for Network for Spectrum increased from | 3755 crore (RE in FY18) to | 4000 crore in FY19E OF/OFC players Positive Sterlite Technologies

Increased allocation for textile sector from | 6000 crore to | 7148 crore for FY18-19 Textiles & Apparel Positive Vardhman Textiles, Siyaram Silk Mills

To support garment export growth, the government has increased allocation towards Remission of

State Levies (ROSL) to | 1855 crore in FY18E and | 2164 crore for FY19E

Textiles & Apparel Positive KPR Mills, SP Apparels

17

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC

Andheri (East)

Mumbai – 400 093

[email protected]

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