Union Budget – 2017 : Good on Macro, Not Populist

Union Budget – 2017

Good on Macro, Not Populist

The Finance Minister presented the Union Budget for 2017-18 in what is a period of transition for the economy. On the one hand, the economy is recovering from the effects of demonetization. On the other hand, there is the impending rollout of the GST which promises to completely transform the indirect tax regime in the country.

In this context, the choice for the FM was to either stay true to the reform and fiscal consolidation path or to play for populism as was the demand by a section of the media.

It is a great positive that the FM has chosen to stay away from the populist path. All the optical announcements in the budget aside, the single most important variable of the budget from a macro-economic stability perspective is the fiscal deficit target. By committing to bring down the deficit on a steady basis, the government has made it easier for the RBI to look at further rate cuts in the cycle. 

Over the course of time, the government has sharply reduced inefficient subsidies making way for more targeted allocation and focus on the farmer’s income and housing sector reforms. All in all the government’s thought process in today’s budget was largely consistent with its long standing agenda emphasizing fiscal discipline, boosting growth and spending and what it called ‘tectonic policy initiatives’ i.e. GST implementation and demonetization.

Key Highlights of the Budget are as below:

Fiscal Front

  • Fiscal deficit target set at 3.2% for FY 18 and 3.0% for the subsequent two years
  • Net  borrowing announced at 3.48 lakh crores

Taxes

  • Corporate tax rate for SMEs with turnover of less than 50 crores lowered to 25%
  • Personal Income tax rate for the 2.5 – 5 lakh slab reduced to 5% from 10%
  • Not many changes to excise duties and service tax since GST will be implemented soon
  • Minimum Alternative Tax (MAT) can be carried forward for 20 years
  • Surcharge on income bracket Rs 50 lakh and 1 crore

Foreign Investors

  • Foreign Investment Promotion Board (FIPB) to be abolished
  • Concessional withholding tax rate will be extended to 30 June 2020

Real estate & Housing

  • Real estate sector long term capital gains tax is applicable at 2 years holdings in place of 3
  • Affordable housing to be given infrastructure status

Push from Cash to Digital transactions, widening tax net

  • Limit of 3 lacs on cash transactions
  • Additional push for digital transactions
  • Clean-up of funding for political parties
  • Demonetisation data to be used to expand tax base

Impact on Fixed Income Markets

Largely in line with market expectations the government kept the borrowing programme in check which was a positive. There was a more structural change however, to bring down the debt to GDP ratio to 60% over the next few years.

The budget was largely a non-event for the FI markets as the gross borrowing number at 5.8 lakh crore was in line with expectations. Bonds rallied marginally post the Finance Minister’s statement on adhering to the path of fiscal consolidation. Inflation within comfort zone and a tight fiscal target spell good news as the RBI can deliver more rate cuts going forward.

Last but not least, the announcement on buy back of approx. 75000 crore of securities maturing over the next 2-3 years is a positive for the short end of the curve. Not to mention abundant liquidity post demonetization is already helping shorter term bonds.

Impact on Equity Markets

Contrary to market expectation of a Long Term Capital Gains tax on Equities, there were no such negative news for equity markets. The Budget was positive for foreign investors owing to the FIPB becoming defunct and withholding tax extension. 

The Budget is seen as being largely positive for sectors directly or indirectly dependent on housing and real estate such as cement, building materials, and lenders in housing finance. Further, listed companies have been able to navigate the demonetization aftermath smoothly and earnings growth can bounce back as a result. Organized players will benefit disproportionately due to level playing field against erstwhile pure cash players.

 

 

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