Union Budget 2015-16 Preview

Great Expectations: ‘Pro-Growth’ as well as ‘Fiscal Prudence’ expected from the Budget

The Union Budget 2015_-16 is expected to lay out a medium term plan to achieve sustainable growth_. One

of the key hopes from the Budget is clarity on structural reforms and a roadmap for investment revival. The government is also expected to continue to adhere to fiscal prudence to attain macroeconomic balance and provide headroom for monetary easing.

The quality of fiscal consolidation is the key to macroeconomic stability amid expectation of spending pattern shifting in favour of capital expenditure, away from subsidies, to kick start the investment cycle which is seen as a bottleneck in moving to a high growth trajectory. On the tax front, we expect focus to shift to widening of tax base, clarity on implementation of GST and a stable tax regime through postponement of GAAR and dropping of retrospective taxation.

We have a positive outlook for the capital goods, cement, infrastructure, real estate and banking stocks amid expectation of higher budgetary allocations for capital expenditure and push for manufacturing. Tax incentives for metal and mining, power and tyres support positive outlook of these sectors. We expect the Budget to have a neutral impact on automobile, FMCG, IT and telecom sectors.

Sector-wise Key expectations from the budget and expected overall impact

	Sector	Key expectation from the budget	Expected Overall Impact
	Automobile	Status quo on excise duty, higher disposable income in the hands of consumers to boost demand	Neutral
	Banking	Fiscal consolidation, measures to encourage financial savings and capital infusion in PSUs.	Positive
	Capital Goods	Expect Government to revive the capital expenditure cycle and encourage investment in	Positive
		manufacturing sector.
	Cement	Status quo on excise duty, boost from higher infrastructure spending	Positive
	FMCG	Reduction in rural spending, Excise duty on cigarettes and GST Implementation	Neutral
	Infrastructure	Higher budgetary allocation, channelizing low-cost, long-term funding for projects and introducing	Positive
		measures to remove bottlenecks
	IT	Incremental allocation under schemes to digitize various departments	Neutral
		Exemption of import duty on Set Top Boxes, Provide tax holiday of 5 years for new capital
	Media	investment in Phase III radio auction and Reduction in customs duty on capital equipment for Radio	Positve
		broadcasting
	Metals & Mining	Increase in Import duty on steel, lower export duty on low-grade iron ore fines	Positive
	Oil & Gas	Clarity on subsidy sharing formula, customs duty on import of crude oil	Positive
	Pharmaceuticals	Higher budgetary allocation for healthcare	Positive
	Power	Tax exemptions for renewable energy sector, possible exemption of BCD and CVD on imported coal	Positive
	Real Estate	More clarit on REITs tax strcture lowering tax rates on SEZs enhancing tax breaks for potential	Neutral
		home buyers
	Telecom	Rationalization of multiple levies	Neutral
	Tyres	Rise in custom duty on tyre imports, insertion of tyres in negative list	Positive

Performance on Fiscal Balance in FY2015 – Running behind targets

§              Fiscal deficit for April – December 2014-15 accounted for 100.2% of the Budget Estimates for FY2015, vis-à-vis 95.2% in the previous fiscal due to lower than expected revenues.

§              Tax collections for Apr-Dec FY2015 increased only 7%, compared to FY2015BE of 19.8%. While direct tax collections have increased by 7.3%, indirect taxes have risen by 6.2%. Within indirect taxes, services and customs collections have increased by 8.5% and 9.4% respectively.

§              Government spending rose by just 6.2% in Apr-Dec FY2015, attributed to 8.8% jump in non-Plan spending. Plan spending grew by just 0.4%. In 3QFY2015, government spend increased by 5.5%, compared with 6.6% in 1HFY2015.

But government likely to achieve fiscal deficit of 4.1% through:

§              Improved tax buoyancy in 4QFY2015 as witnessed in previous years coupled with higher indirect taxes from increase in excise on petrol (~`20,000cr) and withdrawal of excise benefits to the automotive sector.

§                Collection of non-tax revenue from dividends, telecom auctions and coal auctions.

§                Disinvestment receipts kicking in post successful Coal India OFS (~`22,000cr).

§                10% cut in plan expenditure as already indicated by the government.

Fiscal Performance: April 2014 - December 2014

		2015 Budget Estimates			Apr-Dec'14		2015 Estimates
		` Crore	(% YoY)	` Crore	% of Budget	(% YoY)	` Crore	(% YoY)
	Gross Tax Revenue	1,364,524	19.8	795,686	58.3	7.0	1,292,975	13.5
	Non Tax Revenue	212,505	6.7	148,059	69.7	27.3	206,742	3.8
	Recovery of Loans	10,527	(15.8)	8282	78.7	3.0	10,527	(15.8)
	Disinvestment	63,425	130.2	1952	3.1	(64.1)	50,000	81.5
	Non Plan Expenditure	1,219,892	9.9	883,757	72.4	8.8	1,205,770	8.6
	Plan Expenditure	575,000	26.9	352,631	61.3	0.4	517,500	14.2
	Total Expenditure	1,794,892	14.8	1,236,388	68.9	6.2	1,723,270	10.2
	Fiscal Deficit	531,177	4.5	532,381	100.2	3.1	529,986	4.3
	% GDP	4.1					4.1

FY2016 Fiscal deficit target expected at 3.6% with higher capital expenditure

§              We expect the government to adhere to the fiscal deficit of 3.6% for FY2016 with revenue deficit target coming down to 2% from 2.9%.

§              Gross tax revenue is expected to increase from 10.1% of GDP to 10.6% of GDP, largely on account of higher indirect tax collection (petrol excise, auto excise) and greater tax buoyancy on higher growth.

§              Non-tax revenue is expected to improve to 1.9% from 1.6% of GDP through auction receipts and dividend from PSUs and RBI.

§              Disinvestment receipts are expected to be maintained at `50,000cr.

We expect expenditure to be maintained at 13.5% of GDP with shift to capital expenditure which is expected to rise to 2% of GDP from 1.7% of GDP while subsidy may fall to 1.7% of GDP from 1.9% on account of lower petroleum and fertilizer subsidy

Budget Expectations FY16: Adherence to fiscal deficit target of 3.6% of GDP

		` Crore			% GDP
	FY15BE	FY15E	FY16E	FY15BE	FY15E	FY16E
Gross Tax Revenue	1,364,524	1,292,975	1,535,373	10.6	10.1	10.6
Non Tax Revenue	212,505	206,742	275,208	1.7	1.6	1.9
Recovery of Loans	10,527	10,527	10,000	0.1	0.1	0.1
Disinvestment	63,425	50,000	50,000	0.5	0.4	0.3
Non Plan Expenditure	1,219,892	1,205,770	1,333,619	9.5	9.4	9.2
Revenue Expenditure	1,114,609	1,100,487	1,203,257	8.7	8.6	8.3
Capital Expenditure	105,283	105,283	130,362	0.8	0.8	0.9
Plan Expenditure	575,000	517,500	622,840	4.5	4.0	4.3
Revenue-Expenditure	453,503	408,153	463,509	3.5	3.2	3.2
Capital-Expenditure	121,497	109,347	159,331	0.9	0.9	1.1
Total Expenditure	1,794,892	1,723,270	1,956,459	14.0	13.5	13.5
Fiscal Deficit	531,177	529,986	521,632	4.1	4.1	3.6
Revenue Deficit	378,349	375,882	291,939	2.9	2.9	2.0

 

 Tax revenue expected to increase to 10.6% of GDP

Non-tax revenue to rise to 1.9% of GDP as dividends and profits expected to rise to 0.8% of GDP

Lower    subsidy   outgo   for  petroleum and fertilizer to bring down non-plan revenue expenditure to 8.3% of GDP

Capital expenses to get larger allocations – may rise to 2% of GDP

Capital Expenditure expected to rise:

The government is expected to move towards improving quality of spending, taking a shift away from subsidy based spending to propelling the investment cycle by increasing capital allocations. The government is expected to raise the target spend on capital expenditure to 2% of GDP in FY2016 vis-à-vis an estimated 1.7% of GDP in FY2015 in an attempt to crowd in private investment. Capital expenditure remained at an average of sub-2% of GDP in the last decade.

The government may attempt to boost growth multiplier by increasing allocations to national highways, roads, railways, rural and urban housing apart from likely push towards building smart cities.

Trends in Government Expenditure (% of GDP) – Capital Expenditure expected to rise

		Avg (FY07-14)	FY15BE	FY15E	FY16E
	Non Plan Expenditure	9.8	9.5	9.4	9.2
	Revenue Expenditure	8.8	8.7	8.6	8.3
	Interest Payments	3.3	3.3	3.3	3.4
	Subsidies	2.1	2.0	1.9	1.7
	Others	3.1	3.3	3.3	3.2
	Capital Expenditure	1.0	0.8	0.8	0.9
	Plan Expenditure	4.4	4.5	4.0	4.3
	Revenue Expenditure	3.6	3.5	3.2	3.2
	Capital Expenditure	0.8	0.9	0.9	1.1
	Total Expenditure	14.2	14.0	13.5	13.5

Under-recovery for oil companies had totaled `67,091 crore of which the government shared `24,270 crore in the 

three quarters ended December 2014. We estimate petroleum subsidy to total `39,000cr in the current fiscal and 

drop further to `25_,000cr in FY2016 (0_.2% of GDP)_. Accordingly_, petroleum subsidy  is expected to decline to 

16% of total subsidy and 0.3% of GDP in FY2015 mainly on account of diesel deregulation.

Food subsidy, estimated at 1% of GDP (provisioning for National Food Security), is expected to account for more than half of the total subsidy burden. Fertilser subsidy is expected to come off the highs on account of gas price moderation, DBT and rationalization of urea based subsidy.

Total subsidy is expected to dip below 2% of GDP.

The government is expected to attain disinvestment amounting to `50,000cr in the current fiscal and maintain disinvestment of at least `50,000cr in FY2016. Our analysis suggests that government has ample headroom for achieving these disinvestment targets. Offloading 10% stake in listed PSUs (excluding banks) with current market cap of more than `1,000cr and government holding in excess of 65% can generate `93,630cr providing ample headroom for achieving the target in current and next fiscal. In the medium term, the government can opt for phased disinvestment in PSUs to bring their shareholding down to 51% and subsequently raise `2,66,631cr. Disinvestment in PSUs where public shareholding is less than 25% have a potential to generate `25,344cr per current market cap.

  

Structural Reforms expected in the Budget

Good and Services Tax (GST) – Implementation roadmap for April 2016

The government is expected to lay more specifics regarding the roadmap for GST implementation. The impending legislation is aimed at creating a unified market for goods and services by replacing all indirect taxes at central (like excise and service tax) and state level (like octroi and sales tax). The implementation of GST is likely to broaden the tax base, simplify tax structure and increase the tax to GDP ratio. The central government has to tackle opposition from states amid concerns about revenue sharing and loss of fiscal autonomy.

Progress so far

GST Bill which was tabled in Lok Sabha in December 2014 proposes to rollout the unified levy by April 2016 on all goods and services, with exception of alcohol. The Bill proposes to include petroleum under

GST but has left the decision of when to start levying GST on the GST council — a body to be formed with

one-third representation from the centre and two-third from the states. Approvals would require three-fourth majority within the council. The Bill proposes to compensate 100% of state losses in the first three years, followed by 75% in the fourth year and 50% in the fifth year. In addition, states will be allowed to levy an additional 1% tax on inter-state supply of goods for the initial two years (levied and retained by producing states). The legislation will need to be approved by a two-thirds majority in both houses of Parliament and will need to be ratified by 50% of state legislative assemblies before coming into effect.

General Anti-Avoidance Rules (GAAR) – Adding a ‘Prospective’ clause

Implementation of GAAR, proposed to be levied on companies and investors routing money through tax havens, was deferred to April 2016 from April 2014. Market is seeking a new timeline for GAAR (postponement by 2 years) and applying the tax prospectively, and not since 2010 amid expectation of investor friendly measures. The government may also look at exempting transactions under tax-treaties which have built in checks against tax avoidance.

‘Make in India’ to get a boost

The government is expected to roll out incentives to boost manufacturing in an effort to support the government’s ‘Make in India’ campaign. We see the government opting for a stable tax regime through no retrospective taxation and transparent resolution of tax disputes, apart from addressing inverted duty structure on certain domestic manufactured goods. Differential rates of Minimum Alternate Tax for SEZ and MSMEs may be possible. (MAT was introduced to ensure no profit-making company is exempted from tax liability_. The current rate for MAT is 18_.5%_.)

Banking Reforms

The government may opt for setting up of holding company to improve operational efficiency in management of the state run entities and also allocate funds towards further capitalization of banks_.

Earlier this month, the government allocated `6,990cr towards capital infusion in nine PSBs which were found efficient in recent years, in a move viewed as a major shift in approach towards performance based capital infusion.

Aggressive rollout of Direct Benefit Transfer (DBT) and Jan Dhan Yojana

The vision of the DBT is to transfer cash or benefits directly to the beneficiaries  accounts primarily

targeting Aadhar linked accounts, in order to achieve timely and leakage free payments to intended beneficiaries. The government is expected to continue with progress in expansion of Direct Benefit Transfer (DBT) for kerosene, LPG, fertiliser and other welfare schemes in conjunction with deepening of financial inclusion under the Pradhan Mantri Jan Dhan Yojana (PMJDY).

The government is expected to leverage and expand the PMJDY as a platform for DBT to avoid leakages in subsidies and provide savings to the exchequer. A record number of 11.50cr bank accounts were opened under PMJDY as on 17th January 2015 against the original target of 7.5cr by 26th January, 2015.