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    India Strategy Overhauling the rural growth engine


    29 January 2018

    This is the last budget in the current BJP governments term (ending in 2019), and it is burdened with heavy expectations. The number-one agenda for the government will continue to be job creation and rural growth. However, while the markets expect the budget to be populist, considering economic challenges, we believe the government is more likely to present a well-balanced budget. In recent media interactions, the finance minister indicated that additional rationalisation of GST tax slabs is likely this implies that the government is becoming more confident about tax collections and that widening of the tax base takes precedence.

    What we foresee:

    Doubling of farm income and focus on the rural economy to continue.

    Housing for all by 2022 to gain further traction.

    While tax cuts are expected by all sections of society, the government has limited room to effect major cuts. While some rationalisation is possible/likely, we do not expect any major change in the governments course.

    Key expectations and plays for the upcoming budget:

    Rural economy and affordable housing are likely to get top priority: The doubling of farm income on a sustainable basis is an ambitious project to say the least. Not surprisingly, the budget is likely to focus on agri productivity initiatives (such as irrigation), but we would keep a watch on a major overhaul of the MSP mechanism (this should address the income side of the equation). It will also be interesting to see the governments initiatives in allied agriculture sectors (such as dairy), which are becoming key sources of income in rural India. The rising labour force in rural India and the need for jobs will mean that the government will be very focussed on kicking off as many infrastructure projects as possible. Affordable housing is another ambitious project by the government. While the growth numbers for the scheme look impressive, considering the size of the Indian economy, absolute numbers are not very significant. The scheme needs (1) a much bigger push and (2) some changes in the policy framework (as our channel checks across the Indian states indicate). A big boost to this scheme is quite likely, as it has the potential of generating huge employment. Executed well, its political mileage can be significant. Overall, we expect higher allocation towards NREGA, Pradhan Mantri Awas Yojna (PMAY) and crop insurance. Our picks based on this theme Escorts, Mahindra & Mahindra, Parag Milk, cement companies, Sintex Plastic, Mahindra & Mahindra Finance & Shriram Transport Finance.

    Infrastructure spending will remain in focus: We believe that higher allocation will continue in infrastructure categories such as road, railways, ports, and affordable housing, which can lead to job creation. Consistent infrastructure spending should see improvement in private capex, which is seeing some green shoots. Our preferred plays from this space L&T, NCC, Ahluwalia Contracts, Ashoka Buildcon.

    MSME and SME will receive priority lending: After bank recapitalization, the focus of banks has shifted towards MSME and SME lending. In order to encourage the sector, we would expect some incentive from the government, and also more focus towards the availability of financing for SMEs. Our key plays are - Bank of Baroda and Indian Bank Tobacco, electric vehicles, others: The increase in taxation on cigarettes should be benign, considering the sharp rise last year, which led to more erosion in the legal cigarettes markets. An extra push for electric vehicles (EVs) is likely. Incentivising replacement of old commercial vehicles, a push for rural electrification, and some increase in income-tax slabs could be other likely measures.

    Naveen Kulkarni (+ 9122 6246 4122) Anjali Verma (+ 9122 6246 4115) Neeraj Chadawar (+ 9122 6246 4116) India Research Team



    Economists view Its time for the last budget of the BJP government. Since its the last one, the street expects it to be populist. However, giveaways can only come from either excessive fiscal slippage or higher revenues we see limitations on both. Fiscal deficit is expected to slip to 3.5% in FY18 and 3.3-3.4% in FY19; FY18 government capex has stayed on course we view this as a positive in times of fiscal stress. While space is limited for any surge in government spending, trend growth pace is expected to persist with focus on roads, metros, housing, irrigation, and defense. Also, we do not see the government going overboard in making this budget populist; but rural focus will continue. Bond yields are discounting higher government borrowings and fiscal slippage, thus incremental rise from current levels is limited. Overall, we see fewer negatives from this budget. We expect GST gains to start flowing in 2HFY19; full impact likely in FY20. Uptick in economic activity should be positive for tax revenues. Public capital expenditure growth will be muted in FY19; should pick-up in FY20. We have been of the view that public capex will be muted in FY18-19, both by centre and states (click here). That said, we are positive on green shoots in private capex by way of government orders in the last few years. Thus, we remain positive on the Indian capex cycle. Private consumption, on the other hand, is expected to stay strong; 2018 monsoon could be a concern. Job situation seems to be gradually improving PMI data has shown pick-up in employment index of both manufacturing and services. Contribution of government spending to GDP will be muted in FY19. We expect government spend to remain strong in schemes like MNREGA (jobs), PMAY (housing), PMKSY (irrigation), SBM (clean India), NHM (health), NEM (education), and the crop insurance scheme. Tax rebates are unlikely due to revenue constraints. Fiscal deficit slippage is well discounted: Fiscal deficit for FY18 is estimated at 3.5% (vs. budgeted 3.2%) and 3.3-3.4% for FY19. Due to this, and rising inflation, the 10-year bond yield has rallied to 7.44% (up 1% since August 2017). Slippage in fiscal deficit is largely led by lower non-tax revenue collection and higher expenditure. We expect GST collections to improve in 2HFY19, once tax return filing normalizes, as against current legal suspension, and as compliance improves. Additionally, RBI dividend should normalize in FY19. Policy continuity is expected in government spending as well as revenues. Bond yields are expected to range between 7.0-7.5% until FY19; our earlier forecasted range was 6.90-7.25%. Rise in international crude oil prices and poor monsoon are the key risks to our estimates. FY19 Budget Higher revenue receipts, muted capital expenditure: Revenue receipts are estimated to rise by 7-8% vs. 5% in FY18; improvement is expected across categories direct tax, indirect tax, and non-tax revenue (not positive on telecom auction, RBI dividend will be higher than FY18). Disinvestment assumed at FY18 level of Rs 725bn. Government spending to rise by 6.7% vs. 7.6% in FY18. Capex spend growth will likely drop to 6% vs. 11% in FY18. Gross borrowing in FY18 (after the supplementary demand) stands at Rs 6.3tn, for FY19 it is estimated at Rs 6.4tn and net borrowing at Rs 4.8tn. Some sort of populist measures can possibly be routed through states as room for slippage in the central governments finances has an upside. FY18 expenditure on course, to rise in coming months; revenues falling short: FYTD (April-November) receipts stood at 53% of budgeted vs. 58% in FY17, dented by lower non-tax revenue (at 36.5% of BE) led by lower dividends by the RBI (total dividends at Rs 470bn, 33% of BE) and telecom auction (other non-tax revenue at Rs 500bn 40% of BE). Gross tax revenue growth is higher than budgeted at 16.5% vs. 12.2% (budgeted). Shortfall is expected on income tax. Its early days for GST. Its tepid, but expected to improve in FY19. Government recently cleared the second



    batch of supplementary grants, totaling Rs 770bn. FYTD expenditure is higher than its trend (at 69% of BE vs. 64.5% in the last two years). FYTD capex is higher at 59.5% of BE vs. 57.5% last year. Sectors where spending is strong are agriculture, metros, roads, housing, defense, rural development, and education. Railways spending surged in November 2017 (at 58% of BE vs. 42% last month).

    Gross tax revenue and its components

    ____________Rs bn____________ ______________YoY______________ ______________% of GDP______________

    FY16 FY17 FY18BE FY18RE FY19PC FY16 FY17 FY18BE FY18RE FY19PC FY16 FY17 FY18BE FY18RE FY19PC

    Gross Tax Revenue 14556 17032 19116 18774 20374 16.9% 17.0% 12.2% 10.2% 8.5% 10.6% 11.2% 11.3% 11.1% 12.0%

    Direct Tax 7419 8471 9800 9343 10329 6.7% 14.2% 15.7% 10.3% 10.6% 5.4% 5.6% 5.8% 5.6% 5.5%

    Personal Income Tax 2876 3532 4413 3956 4430 8.2% 22.8% 24.9% 12.0% 12.0% 2.1% 2.3% 2.6% 2.4% 2.4%

    Corporation Tax 4532 4939 5387 5387 5899 5.7% 9.0% 9.1% 9.1% 9.5% 3.3% 3.3% 3.2% 3.2% 3.2%

    Indirect tax 7098 8519 9269 9431 10045 30.0% 20.0% 8.8% 1.7% 6.5% 5.2% 5.6% 5.5% 5.7% 5.4%


    4700 6600

    2.8% 3.5%

    Excise Duty 2881 3874 4069 2476 2225 51.7% 34.5% 5.0% -39.1% -10.1% 2.1% 2.6% 2.4% 1.5% 1.2%

    Customs Duty 2103 2170 2450 1380 1020 11.9%


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