The Union Budget of 2017-18 had introduced three important structural changes i.e. a) the Budget was preponed to February from March; b) the railway and Union Budgets were merged; and c) expenditure was reclassified as capital and revenue spending instead of plan and non-plan.
Union Budget 2018-19 as well is expected to have some element of surprise. Given the fact that this budget is going to be the last budget of the ruling government before the 2019 general election, expectations of the market are varying from populist to surprise to stringent measures that the government is likely to take (especially, since this government has followed this approach in past).
We expect the budget to be not so populist. The government has been making a serious attempt to bring the Budget closer to what it essentially is – a mere accounting and allocation exercise and it would continue to do so this year as well.
We expect the government to initiate measures and allocate funds effectively to revive investments and alleviate rural distress which would create the much needed jobs and drive the growth momentum. We also look forward to see what the government does to remain on the glide path of fiscal consolidation.
The government has built fiscal credibility during the last three years by achieving the targeted levels. This year, the structural changes led by demonetisation and GST have exerted challenges to the government to achieve the current year’s target. Concerns are thus high about how the government will manoeuvre public expenditure towards rural and infrastructure segments.
Therefore, the Union Budget of 2018-19 is likely to thrust on the following major areas:
A slip on fiscal deficit target
We believe the slippage in the fiscal deficit target to be modest. Given the structural change in the indirect taxation system, a deviation in the fiscal deficit, if small, should not impact the rating of the government’s performance. Given that GST is eventually expected to broaden the tax base and generate more revenue, the initial shortfall should be overlooked unless a major deficit is recorded.
We believe the gap in fiscal deficit to be supported by higher-than-budgeted small savings collections as the government has cut the interest rate on small savings deposits including PPF for the last quarter of FY18. The government has been able to meet the disinvestment target this year and the target has been revised upwards to cover the shortfall in non-tax revenue. On the other hand, a shortfall in non-tax revenue is anticipated as revenue realisation from telecom spectrum sale may not materialise.
We believe that the government will stick to its earlier fiscal deficit target of 3.0% for FY19. There are, however, concerns regarding high food subsidy, interest outgo owing to affordable housing, high fuel subsidy and expected higher capex allocation for rural development which is likely to increase the expenditure budget of the government. However, we believe that once the GST process normalises, increase in GST returns will be higher than FY18. This coupled with increase in direct tax collections as the economy is expected to clock in a higher growth rate which will help the government to stay put on path of fiscal consolidation.
1. Agriculture and Rural Development
Agriculture and rural development is likely to get greater focus in terms of allocation of funds and direction of measures. Resources need to be redirected towards more structural reforms required in place of short term measures like farm loan waivers.
We believe increase in net irrigated area (percentage of Gross Irrigated Area over Gross Cropped Area is little more than 45%), effective implementation of crop insurance, expansion of agricultural marketing under National Agriculture Market (e-NAM) and improving post-harvest infrastructure such as warehouses and cold storage would ensure effective price realisation and address the issue of commodity price volatility. We expect the government to direct its funds in the above areas.
The government has already set up a committee to chart out initiatives to double the farmers’ income by 2022. The model contract farming act to counter price risks has also been drafted by the centre. We hope that the measures the government adopts should achieve the following i.e. ensuring fair price realisation of agricultural products, establishing a strong agri-logistic infrastructure, wider coverage of irrigation network along with providing the farmers a risk cover against price volatility. We believe that rural development would get a major leap if the interconnectivity is enhanced. Connectivity for greater market access for commercial activities, connectivity for access to health and education and connectivity to financial network of institutions and market has been a long standing need. In this context, the concept of rurbanisation introduced by the government in its 2014 budget needs to be reinvigorated. While the process of identification and approval of Rurban clusters in various states is in progress, the action plan should be accelerated.
While the government has taken infrastructure related initiatives outside the preview of the Union Budget, it is the capital expenditure which is likely to get special attention during this year’s budget. Reviving investments will continue to remain the focus area, especially as the sentiment of private players remains subdued. The government has continued its thrust towards infrastructure during the course of the year and we expect higher allocation in the next year as well. While the government reports the state of implementation of its budget announcements every year, it is difficult to estimate the extent and nature of spending in the overall infrastructure sector. A reporting of the aggregate spending will be quite useful in this regard. Rural infrastructure, urban transportation, solar power, inland waterways and overall green infrastructure is expected to receive impetus during the budget.
The government has initiated many projects such as Bharatmala, Sagarmala, UDAN, etc. to overhaul the logistic sector and has placed an emphasis on green infrastructure. These commendable initiatives need to be followed through to completion to ensure that these are executed in target timelines. The thrust on creating green infrastructure is expected to continue while there could be higher allocation for the transport sector considering the need for improvising public transport. Thrust on the big ticket projects, Bharatmala and Sagarmala, will eventually benefit this sector. There should be an increased thrust to create multimodal logistics parks since logistics cost remains very high.
b) Affordable housing
Increase in deduction limit on principal repayment and on interest payment for housing loans is expected.
Providing land for solar manufacturers on a long term lease, higher allocation for development of grid infrastructure and incentive schemes for R&D are expected.
d) Infrastructure finance
Significant surge in the infrastructure financing can be challenging for the government given risk on fiscal deficit. Hence, measures to attract private funds and foreign funds could be expected. Announcement of measures to revive public-private partnerships and creation of an asset recycling strategy or monetisation of government assets to ensure flow of funds for stepping-up public expenditure is expected. Provisions for deepening the infrastructure finance ecosystem such as channelising of insurance and pension funds for infrastructure projects could be announced.
3. Manufacturing Sector
The expectations of continued thrust on the overall infrastructure sector and renewed focus on the agriculture sector are likely to provide derived demand to multiple manufacturing sectors like Cement, Steel, Aluminium, Plastics, Automotive etc. In order to provide a boost to the Government’s ‘Make in India’ Programme, some products that go as raw materials in certain finished products would see customs duty relaxation.
At the same time, upward revision in customs duty on certain finished products is expected, so as to encourage domestic manufacturing. As part of the Government’s ease of doing business initiatives, the Budget is expected to see measures aimed at relaxing the customs regime for companies, including release of imported items without any upfront duty payment.
Although we do not expect a significant cut in corporate tax rate, considering the wide gap between estimated and actual realisation of GST revenues, we expect Indian businesses to get marginal relief on the corporate tax front.
SOME KEY SECTORAL EXPECTATIONS:
• Automobiles: The sector can expect increased demand if the Government announces financial incentives to replace vehicles older than 10-15 years. We expect the Budget to announce certain incentives for electric vehicle (EV) manufacturing companies and on EV charging infrastructure and duty rationalization on certain imported parts for EVs. Higher bus orders are expected under the JNNURM scheme. Measures for the agriculture sector to push income levels also augur well for the automobiles sector, particularly two-wheelers and trucks.
• Capital goods and engineering: A higher budgetary allocation to the infrastructure sector would drive order books of capital goods and engineering companies. We also expect increased budgetary allocation to the defence sector, which augurs well for the capital goods sector and commercial vehicle manufacturers.
• BFSI sector: The Union Budget is expected to provide some relief to insurance sector by changing the tax incentives structure. The insurance businesses are impacted by higher GST rate. Hence, an increase in the tax deduction limit might provide some relief to insurance holders. We expect the Union Budget to provide more clarity on recapitalisation bonds for PSU banks and a roadmap on consolidation of PSU banks. The government could allow 100% FDI in private sector banks. Further, few measures to incentivise flow of credit to affordable housing and MSMEs are expected.
The thrust on digital transactions is likely to strengthen as the Union Budget could provide incentives on digital transactions up to a certain limit for small businesses. There could also be a push for e-Sign and e-KYC.
• Consumer Goods: The Budget is expected to announce incentives for setting up warehouses and cold chain facilities and measures to increase foreign investments in the sector.
• Gems & Jewellery: To revive demand for gold in the country and boost exports of jewellery, the Union Budget is expected to announce reduction in import duty on gold.
• Textiles & Garments: To boost exports of textiles & garments, the Government may increase the duty drawback rates from the existing 2%.
The author is Lead Economist - Dun & Bradstreet India