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Key messages Economy 

Realistic fiscal targets, but slippage possible in disinvestment: The government has stuck to a realistic target of fiscal deficit at 3.9% of GDP for 2015-16 as opposed to the Finance Commission’s recommendation of 3.6%. It has managed to increase allocation for capital expenditure (to go up by 25.5% to Rs. 2,414 billion) because of the headroom created from savings in oil subsidies and hike in excise duties on petrol and diesel. As a share of GDP, capital expenditure will increase from 1.5% in 2014-15 to 1.7% in 2015-16. Even though tax collection targets look achievable, there are chances of slippage in capital (disinvestment) receipts, which might bloat the fiscal deficit to 4.2% in the absence of any expenditure cut.



Getting public sector to revive investments: The budget lays focus on public investments, which will have large spillovers on growth if implemented effectively. Despite pressure on fiscal consolidation, enough room has been created for infrastructure spending through the government’s own resources and by nudging PSUs to invest more. Focus clearly is on four sectors -- roads, railways, power and rural development. This emphasis on strengthening transportation infrastructure will also boost manufacturing. Overall, the budget is growth-enhancing as it supports a mild pick-up in public investments, which can draw in private investments over time.



Fiscal federalism is an enabler: The government has raised states’ share in total divisible pool of tax revenues to 42% from 32% as per the recommendation of the 14th Finance Commission, recording the biggest-ever increase in vertical tax devolution. This not only increases the pool of resources available to the states but also raises flexibility to help states design, implement and finance programmes according to their specific needs. Total transfers from the centre to the states have increased from 4.5% of GDP in 2013-14, 5.5% in 2014-15 to 6.0% in 2015-16.

Industry 

Financial sector reforms – a structural positive: Inclusion of NBFCs under the SARFAESI Act and new bankruptcy code will provide a boost to recovery efforts and help rein in asset quality problems over the long run. The setting up of autonomous bank board bureau for public sector banks is a step in the right direction. It is expected to provide greater functional autonomy and pave way for bank holding company structure which will optimise government’s capital contribution.



Greater public funding and innovative financing schemes to support infrastructure: Higher government allocations coupled with increase in funding availability for the infrastructure sector through National Infrastructure Investment Fund, higher fuel cess for roads and rationalisation of tax on Infrastructure Investment Trusts will provide significant opportunity for construction and capital goods companies.



Minor changes in tax rates, but glide path to lower rates and simplification: True to its promise, the finance minister has avoided undertaking many sector/product specific changes in duties or exemptions. On the direct tax front, too, in line with the Finance Minister’s stated philosophy, the budget has provided a path towards lowering of corporate tax rate and simultaneously doing away with multiple exemptions to simplify the tax administration and reduce disputes.

1

CRISIL Budget Analysis

Capital Markets 

Incentivising financial savings and social security: The Budget includes measures to promote financial savings and enhancing coverage of pension and health insurance. Gold bond scheme is also intended to encourage shift from non-productive to productive saving. However, the efficacy of the schemes needs to be watched - given the country’s penchant for physical gold holdings.



Little to cheer for the bond markets: Tax-free infrastructure bonds, encouragement for insurance and pension products, clarity of taxation for Alternative Investment Funds etc. will help channel more investment to the bond markets. Also, given the ambitious plans for improving infrastructure, debt markets need to play a vital role. However, measures to catalyse the bond markets continue to remain elusive.

2

Economy analysis Indian Economy Outlook 2013-14

2014-15F

2015-16F

GDP (y-o-y %)

6.9

7.4*

7.9

CPI inflation (%, average)

9.5

6.5

5.8

Budget Impact The budget supports a mild pick-up in public investments which can crowd in private investments over time Despite shifting the fiscal target by a year, commitment to stick to fiscal consolidation is a plus for the downward trending inflation and augurs well for further rate cuts by RBI

Fiscal Deficit (% of GDP)

4.5

4.1**

3.9

Headroom created by savings on fuel subsidy bill and increased income from duty hikes has allowed the government to tread the fiscal consolidation path with ease

10 year G-sec yield (%, March-end)

8.8

7.7

7.5

Rate cuts and a restrained market borrowing programme of the government would make yields go further south

Note: F=CRISIL Forecast, *CSO advance estimate, ** Budget estimate Source: RBI, CSO, Ministry of Finance, Ministry of Commerce and Industry, CRISIL Research

Is the fiscal arithmetic credible? 

The fiscal arithmetic laid out in the budget for 2015-16 is a standout when compared with the previous ones for the following reasons: o

The government continues to follow the path of fiscal consolidation by aiming to bring down fiscal deficit to 3.9% of GDP in 2015-16 from 4.1% of GDP in 2014-15. There is, however, a relaxation of 30 basis points when compared with the 3.6% target set by the 14th Finance Commission (FFC). This is justified because: 

Greater devolution to states will constrain central government finances.



Thrust on capital spending means additional money generated by relaxing the fiscal deficit target will be used to improve the productive potential of the economy

o

Nominal GDP growth target is realistic at 11.5% for 2015-16, same as for 2014-15.

o

Revenue targets look achievable though scope of slippage remains on the disinvestment front.

o

Rationalisation of the overall subsidy bill is still not adequate, though the trend of carrying forward arrears has been reduced substantially.

Do the numbers add up? 

The government has stuck to a more realistic fiscal deficit target of 3.9% of GDP for 2015-16 compared with the Finance Commission’s recommendation of 3.6% so as to provide an impetus to investments.



Allocation to capex is made possible by savings in oil subsidies and hike in excise duties on petrol and diesel. Capex in 2015-16 is budgeted to increase 25.5% to Rs 2,414 billion. As a share of GDP, it is slated to rise from 1.5% in 2014-15 to 1.7% in 2015-16.



We estimate that the extra revenue generated on account of excise duty hikes on petrol and diesel will be Rs 780 billion and savings in petroleum subsidies over last year account for another Rs 267 billion. Together, the headroom created is of Rs 1,047 billion or close to 0.74% of GDP in 2015-16.

3


Figure 1 & 2 : Headroom created on different accounts in FY16 Item

(% of GDP)

0.60

Revenue accrued

0.55

(Rs. Bn.)

0.50

Hike in excise duty on petrol & diesel 0.40

Lower fuel subsidy bill due to fall in oil prices

780 267

0.30 0.19

0.20

0.10

0.00 Petrol and Diesel Excise Hike

Lower oil Subsidies

Source: Budget documents, CRISIL Research

What could upset the applecart? Tax collection targets are achievable, risk is on the divestment front 

The overall tax collection target assumed in the budget appears manageable. Gross tax to GDP ratio increases marginally from 9.9% in 2014-15 to 10.2% in 2015-16. The budget assumes a tax buoyancy of 1.4% for 2015-16 compared with 0.9% achieved in 2014-15 but this is largely due to structural changes such as higher excise on petrol and diesel and increase in the service tax rate 12.36% to 14%

Figure 3: Tax buoyancy 1.8 1.6 1.6 1.4 1.4

1.3

1.3

1.2 1

0.9 0.8

0.8

0.7

0.6 0.4 0.2

0.2

FY09

FY10

0.2 0 FY08

FY11

FY12


4

FY13

FY14

FY15 RE

FY16 BE

Figure 4: Tax collection targets Rs billion

FY13

FY14

FY15RE

FY16BE

Average

Growth

growth

assumption for

during FY12-

FY16

FY15 Gross Tax Revenue

10,362

11,387

12,514

14,495

12.1

15.8

Corporation Tax

3,563

3,947

4,261

4,706

9.7

10.5

Income tax

1,965

2,429

2,786

3,274

19.3

17.5

Customs

1,653

1,721

1,887

2,083

8.2

10.4

Union Excise Duties

1,758

1,702

1,855

2,298

9.0

23.9

Service Tax

1,326

1,548

1,681

2,098

20.4

24.8


Non-tax revenue collections are projected to rise from Rs.2,178 billion in 2014-15 to Rs.2,217 billion in 2015-16, growing by 1.8% compared with 9.5% in the last fiscal. The slowdown in non-tax revenue growth has been on a high base because government revenues were boosted by spectrum auctions. Non-tax revenue gains are a one-off.

For

sustainable increase in revenues, it is critical to adhere to the timeline for the roll out of Goods & Services Tax. This apart, government has an ambitious target of Rs.695 billion through disinvestments. But past trend suggests that government has always fallen short. The learning from this is that the government needs to frontload efforts and capitalise on the current market buoyancy. If disinvestment proceeds are similar to last year, fiscal deficit would shoot up to 4.2% of GDP. Figure 5: Disinvestment proceeds (Rs billion) have mostly trailed targets 800 695 700

634

600

558

500 400

400

400 300 300 200 100 0 2010-11

2011-12

2012-13

Disinvestment Budgeted

2013-14

2014-15

2015-16

Disinvestment Actual


5


What is the quality of fiscal consolidation? While expenditure on subsidies in 2014-15 at 2.1% of GDP was only marginally lower than 2.2% of GDP in 2013-14, it is budgeted to reduce significantly to 1.7% of GDP in 2015-16 benefiting from lower fuel subsidy bill. At the same time, capex would rise from 1.5% to 1.7% even though it remains below levels of the high-growth years – such as 2.4% in 2007-08. Since the quantum of revenue slippage is expected to be much lower in 2015-16, the budgetary objective of improving the expenditure mix, might well succeed, unlike in the last few years. 

The government has managed to achieve its fiscal deficit target of 4.1% of GDP for 2014-15 by mostly cutting productive expenditure (capex plus part of revenue expenditure that creates capital assets) because of lower revenues. Government’s receipts in 2014-15 fell short by Rs 952 billion out of which the cut in productive expenditure was Rs 706 billion. Majority of shortfall was due to lower tax collections, which stood at Rs 9,085 billion compared with budgeted Rs 9,773 billion. Rest of the shortfall was in capital receipts because of lower divestments. Non-tax revenues, on the other hand, were a tad higher at Rs 2,178 billion compared with a budgeted Rs 2,125 billion. Over the years, shortfall in revenue collections have led to huge cuts in productive spending. Between 201112 and 2014-15, Rs 2,555 billion was cut in productive spending because of shortfall in revenues and persuasions of lower-than-budgeted fiscal deficit.

Figure 6: Axe falls on productive spending 0 -100 -200

-113

-300

-400 -500 -600 -700 -706 -800

-900

-869

-867

FY13

FY14

-1000 FY12

Cut in productive expenditure (Rs. Billion)


6

FY15

Figure 7: Direct benefit transfer can re-write the food subsidy script Direct benefit transfer, or DBT, will likely prove to be a game changer in food subsidy. We estimate that DBT could help the government save as much as 20% (or Rs 250 billion) in food subsidy expenditure by eliminating costs associated with procuring, distributing and storing foodgrains. Moreover, DBT will help bring millions of poor households that currently do not have access to PDS into the food subsidy net. We estimate that at fiscal 2016 prices, the cash transfers under the DBT will amount to almost Rs 5,800 per year for a family of five, which will implicitly raise their disposable income. At first glance, Rs 5,800 may seem small, but it is higher than the reported total annual expenditure (food +nonfood) of the poorest 5% of the rural households and more than half the annual expenditure of the poorest 10% of urban households. Given the high marginal propensity to consume at lower income levels, such a significant unconditional cash transfer will undoubtedly raise discretionary spending of the recipient households, providing a consumption boost the economy.

Figure 8: After 8 years, capex will exceed subsidies Capital Expenditure (% of GDP)

2.5 2.3

2.2

Major Subsidies (% of GDP)

2.6

2.2

2.2

2.1

2.4 1.8 2.0 1.4

1.8

1.7

1.7

1.6

FY08

FY09

1.7

1.7 1.5

FY10

FY11

FY12

FY13

FY14

FY15 RE

FY16 BE


Will there be a boost to public investments? 

Despite improving macros, India Inc remains cautious on fresh investments. A recent CRISIL survey of 192 listed, private and public sector companies shows that planned capex by private companies surveyed is likely to decline in 2015-16. A revival in investments, therefore, hinges on increased public spending, especially on infrastructure – roads, power transmission/distribution and railways – because of its significant multiplier effect of creating demand for steel, cement, capital goods and commercial vehicles and spurring investments in the manufacturing space as well.

What has the budget done to aid public investments and infrastructure creation? 

The budget plans a 25% increase in capital expenditure in 2015-16, compared to 2.5% increase in 2014-15, taking its ratio in GDP up by 20 basis points to 1.7%. Central plan outlay is budgeted to increase by 35.5% in 2015-16 compared to an average fall of 3.4% in the last three years. The budget lays focus on four sectors providing crucial infrastructure - roads, railways, power and rural development.

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

Focus on these sectors is important again because of the multiplier impact on output. For instance, the output multiplier for rail equipment is 2.7. This means one unit increase in demand for rail equipment raises overall output by 2.7 units. Similarly, the output multiplier for rail transport services is 1.9, while that for electricity is 2.2. The Economic Survey said this “government can now do for the neglected railways sector what the previous NDA government did for rural roads”. Such focus on strengthening transport infrastructure will also boost manufacturing.

Figure 9: Sectors with higher plan outlay (%, y-o-y) Figure 10: CPSUs shoulder most capital spending %, y-o-y

% share in total capital outlay

174.5 60.6

61.1 56.4

66.5

43.6

53.0

39.4

38.9

2011-12

2012-13

55.5

44.5

55.0

45.0

15.5

11.1

7.3

-10.6 Roads and Bridges

-30.6 Rural Development

Railways

FY12 to FY15 average

Power

FY16 B.E.

2013-14

Budget support

2014-15 RE 2015-16 BE I.E.B.R.

RE: Revised estimate, BE: Budgeted estimate Note: Data is only for central plan outlay and taken as per Heads of Development. I.E.B.R.: Internal and extra budgetary resources which are raised by central PSUs through profits, loans and equity Source: Budget documents

Where will the money come from? 1. Direct spending from budget: 

The relaxation of the fiscal deficit target for 2015-16 by 30 basis points directly releases Rs 423 billion for funding projects. So, while total central plan outlay is budgeted higher next fiscal, much of it is due to an increase in budgetary support, which is 37.3% higher on a weak base. o

Road cess and taxes on petroleum products - The budget raised additional excise duty on petrol and diesel to Rs 6 per litre from Rs 2 per litre, which is levied as road cess. This raises available funds for roads and railways to Rs 431 billion in 2015-16 from Rs 232 billion in 2014-15. In addition, to fund infrastructure development (particularly roads), the government had increased the basic excise duty on petrol and diesel by around Rs 7 to 8 per litre between October and January. Incremental revenues accruing from this is estimated at Rs 780 billion in 2015-16.

o

Govt’s revenue collections – In 2015-16, the budget plans to collect divestment revenues of Rs 695 billion on account of stake sales and spectrum sale revenues of Rs 431 billion which can be utilised towards infrastructure development.

2.

Larger onus on CPSUs to raise money:



The budget also envisages a sharp 34.1% increase in investments by central public sector enterprises (CPSUs) compared with a 10% drop last fiscal. Their share in total central plan outlay is thus budgeted at nearly 55%. To fund this, CPSUs will have to raise resources from the bond market. Of the total estimated to be raised in 2015-16, nearly 37.1% is to come from accruals (down to 49% from last year), 37% from capital market (up from 26%) and 26% from external commercial borrowings and other sources. From the bond markets, PSUs in the roads and railways sector

8

are together slated to borrow Rs 803 billion in 2015-16 compared with Rs 208 billion last year. The budget allows for a large part of this borrowing to be in the form of tax-free bonds.

3.

Crowding in private investment



Public investment in infrastructure (especially railways and roads) can create large complementarities for private sector investments. In addition to increased spending, the budget also takes a few other measures to boost infrastructure investments.



On infrastructure financing, the budget announced the setting up of a National Investment and Infrastructure Fund (NIIF) where an annual budgetary flow of Rs 200 billion will be ensured. This will enable it to raise debt and further invest as equity in infrastructure finance companies such as IRFC and NHB. The budget also proposed to permit tax-free infrastructure bonds for roads and railway sectors where large investments are being planned. The budget reiterates the government’s intention to revisit the private-public-partnership.



Overall, despite the pressure on fiscal consolidation, the budget has managed to create room for infrastructure spending through a mix of its own resources as well as by nudging CPSUs to invest more. However, though there is an increase in resources available for funding infrastructure, the government’s implementation capacity to ensure efficient delivery remains a concern. This, therefore, should be the next area of focus for the government.

How fiscal federalism is an enabler It is well understood that greater power to states is essential for local capacity building and efficient use of resources. This power emanates through higher resources and flexibility in utilising these resources at the state level. The government has taken steps in the right direction in this regard in the current budget. Total transfers as a percentage of GDP from the centre to the states have increased from 4.5% in 2013-14, 5.5% in 2014-15 to 6.0% in 2015-16.

Figure 11: Increasing fiscal flexibility for states 2014-15

2015-16

5.5

6.0

Total Transfers

6,930

8,522

States Revenue share

3,378

5,240

Fully flexible/Untied

Central Assistance for State and UT plans

2,703

1,958

Restructured to make semi - flexible :

Total transfers % of GDP

Change in Flexibility

Rs billion

23 schemes fully supported by union, 13 supported on sharing pattern and 8 delinked from the union Centrally Sponsored Schemes Non - Plan grants and loans

46

239

803

1,086

Inflexible/tied

Note : Total transfers include grants and loans under the central assistance for state and UT plans, non -plan grants and loans, revenue share of states and centrally sponsered scheme transfers. Source: Budget documents, Crisil Research

9


Budget implements Fourteenth Finance Commission’s (FFC) recommendation Greater resources for states The Budget has raised states’ share in total divisible pool of tax revenues to 42% from 32% as per the recommendation of the FCC, recording the biggest-ever increase in vertical tax devolution. In level terms, states’ share of the divisible pool will rise to Rs 5.24 trillion in 2015-16 – twice the share in 2011-12 – from Rs 3.38 trillion in 2014-15. This money will help states design, implement and finance programmes according to their specific needs. In addition, higher tax devolution will also imply that any buoyancy in tax collections will benefit states to a greater extent as compared to previous years.

Transfers under centrally sponsered schemes have risen … In order to ensure that the fiscal situation of the center remains preserved, with increasing transfers from the divisible pool –the central assistance to states has seen a decline. The total central assistance for State and UT plans has moderated from Rs 2.7 trillion in 2014-15 to Rs 2 trillion in 2015-16. On the flipside, even as the centre’s position is squeezed with higher devolution, the transfers under centrally sponsered schemes has risen substantially to Rs 239 bilion from Rs 46 billion in 2014-15. Allocations as per schemes has risen under MGNREGA ( rose by Rs 12 billion) and in sectors such as agriculture, education, health, and rural infrastructure including roads.

But flexibility of transfers has also increased… Past data suggests that above 50% of the divisible pool is given to the states but a major portion of this goes under tied or conditional transfers. In the last few years, plan transfers have moved away from the Gadgil formula to more discretionary transfers resulting in lower flexibility. These are the “conditional or tied” transfers. As per the recommendation of the FFC, the central assistance to state and UT plans has been restructured.The budget has announced a changed sharing pattern between the centre and the state in terms of scheme implementation and financing. The budget also proposes 8 centrally sponsered schemes (CSS) to be de-linked from the support of the centre and 13 schemes ( for example, Urban Rejuvenation Mission – 500, Development of 100 smart cities etc) to be run in a sharing pattern between the centre and states. Details of the sharing pattern are yet to be disclosed.

Implementing capacity of states now needs attention With an increase in fiscal flexibility of the states also comes the question of capability of the states to invest these resources. In the past, states have not fully utilised the fiscal resources available to them resulting in insufficient capital expenditure. Capital expenditure as a % of GDP has fallen from 2.8% in 2008-09 to 2.2% in 2012-13. As, recommended by the FFC, the absorptive capacity of states needs to be enhanced to raise capital expenditure and boost growth.

Other measures at fiscal federalism The government since June has also announced other changes that will result in greater benefit for states. One such change is the revenue sharing on natural resources auctions. The auctions of 204 coal blocks – a corrective measure after the coal scandal – will benefit state finances. So far, 18 blocks have been auctioned and will help raise over Rs 1 trillion over the next 30 years in states such as Jharkhand, Odisha, Chhattisgarh, Madhya Pradesh, Maharashtra and West Bengal. This will contribute towards states’ fiscal resources.

10

Overall, this budget showcased a strong resolve towards encouraging cooperative federalism in India. That said, certain sections of the transfers continue to be tied/conditional. Therefore, continued steps towards increased federalism will be needed in the coming years. In addition, the ball is in the states court now and they need to use these resources judiciously to enhance growth.

How will the budget boost manufacturing? Manufacturing sector is a private sector enterprise with over 90% of the investments and output generated in the private sector. Government can play a facilitative role in improving its prospects. The budget has taken many small steps to support the manufacturing sector through indirect channels. 

Support through forward and backward linkages : The government has taken measures to boost the manufacturing sector by improving the domestic investment environment and raising the spending on physical infrastructure which complements manufacturing activity. Spending on rail, road and ports will crowd in private investment and support manufacturing activity via backward and forward linkages.



Improvement in ease of doing business: The above will be complemented by efforts to improve the ease of doing business in India - its current rank is 142 out of 189 countries. Towards this regard, the budget announced reforms in bankruptcy law to bring about legal certainity and speediness.



Reduction in custom and excise duty to support ‘Make in India’ : The budget supports the Make in India initiative through reduction in custom duty on certain inputs to address the problem of duty inversion and reduce the cost of raw materials.

11


Overall sectoral impact There are five focus areas in the Union Budget and each will impact India Inc. Here’s a look at how: 

Enabling financial sector efficiencies: Setting up of autonomous bank board bureau marks the initial move towards formalising a holding company structure for public sector banks. This will improve governance, optimise capital contribution by government, and provide greater functional autonomy. Along with more stringent bankruptcy laws, these are two key long-term positives. On the other hand, providing a mere Rs.79 bn towards capital support for public sector banks is grossly inadequate. Elsewhere, the inclusion of NBFCs under the purview of SARFAESI Act, along with the new bankruptcy code will improve recovery efforts for financial institutions and support their capital position. The new Micro Units Development Refinance Agency (MUDRA) Bank for refinancing of microfinance institutions will support micro credit. Proposals to promote financial savings are also a positive.



Enabling infrastructure investments: The intent to ratchet up public spending on infrastructure is clearly visible. There is a sharp increase in allocation to roads, railways and rural infrastructure development. In addition, many significant steps have been taken to improve the availability of funds for infrastructure. This includes higher allocation for road cess, more funding through the National Infrastructure Investment Fund, tax-free bonds and rationalisation of taxes for infrastructure investment trusts. However, timely implementation of projects remains a key concern. The government’s intent to salvage the broken public-private partnership model to attract investment is also a positive. The deferment of GAAR and allowing foreign capital in alternative investment funds will attract foreign capital.



Boosting power and renewable energy: The government has set an aggressive target for renewable energy of close to 175 GW, including 100 GW of solar capacity by 2022. It has also announced five new UMPPs for conventional power -- with all approvals in place to ensure faster execution. But the key concerns remain timely implementation, resolution on fuel availability, clearances, transmission corridor availability and financial health of distribution companies. The government continues increasing allocation towards transmission and distribution – it’s up 26% in 2015-16 compared with the current fiscal. Coal cess has also been increased a touch, which will marginally lift tariffs. We expect generators to pass it on.



Marginal changes in taxes: The budget has proposed a marginal increase in excise duty from 12.36% to 12.5% and in service tax from 12.36% to 14%. However, given the decline in input prices (both food and non-food), we expect companies (manufacturers or service providers) to largely pass on the burden to customers and protect their margins. Although surcharge on corporate tax has been increased for this fiscal, paving a structural path towards lower rates by doing away with many exemptions is a positive.



Leg-up to rural income: With increased allocation to MGNREGA, rural incomes should rise. Add a good monsoon and what you get is greater consumption of FMCG products and higher sales of consumer durables and twowheelers. Increased agricultural credit would also lead to higher sales of tractors and irrigation equipment. Better volume growth and softer commodity prices will improve the margins of companies in this arena.

12

Industry

Impact

Automobiles: Marginally positive for tractors, neutral for other segments

Neutral

Key budget proposals: 

Farm credit target increased by Rs 500 billion to Rs 8.5 trillion. Higher allocation to rural financing agencies such as NABARD and RRBs, and to initiatives such as MGNREGA, micro-irrigation watershed programs, etc.



Allocation of Rs 750 million to promote manufacturing of electric vehicles (EVs). Concessional customs and excise duties on hybrid and EV parts extended until March 2016.



Increase in customs duty on fully-built commercial vehicles (CVs) from 10% to 20%. Reduction in excise duty on ambulance chassis from 24% to 12.5%.



Tax on royalty payments to foreign companies reduced to 10% from 25%.



Creation of a trade receivables discounting platform for medium and small enterprises (MSMEs).

CRISIL Research’s View The increase in allocation to farm credit and rural schemes is likely to be favourable for tractor sales. Proposals on electric and hybrid vehicle parts will not materially impact the sector given low population of vehicles in India (less than 1% share). The proposals will have a limited impact on the CV segment as imports of fully built CVs and sales of ambulances comprise a small proportion of the CV industry. The reduction in tax on royalty payments to foreign companies will be marginally positive for Indian companies who import technology. Creation of an electronic platform for facilitating financing of trade receivables of MSMEs will help improve liquidity of auto component manufacturers.

Cement: Higher spending on infrastructure to benefit in the medium term

Positive


Investments outlined under various infrastructure schemes related to areas such as roads, urban development and irrigation indicate a targeted government spending of Rs 1,080 billion in 2015-16.



Duties and tariffs directly levied on cement have increased marginally. The effective excise duty on cement has increased marginally from 12.4% + Rs 120 per tonne to 12.5% + Rs 125 per tonne.



The clean energy cess on coal (domestic and imported) has been hiked to Rs 200 per tonne from Rs 100 per tonne.



The rail freight rate for cement has been increased by 2.7% and for coal by 6.3%.

CRISIL Research’s View The government’s focus on infrastructure is evident with the total targetted spending in 2015-16 almost double the revised estimates of 2014-15. This should result in a sustained recovery in demand, but the execution capability of funding institutions/players has to be scaled up appropriately. Further, the rise in duties and tariffs is expected to have a muted impact on total cost, which is expected to increase 0.8%. Power and fuel cost (~20% of cost of sales) will increase 2%. Freight cost, which accounts for 25-30% of cost of sales, will increase 1% with the rise in freight rates. However, amid rising demand, players will be able to offset it with a rise in prices.

13


Consumer goods: Little to savour

Neutral


Basic customs duty on organic LED (OLED) panels removed.



Specific excise duty on tobacco and tobacco products increased 15-25%.



Excise duty of 2% without CENVAT credit or 6% with CENVAT credit levied on condensed milk and peanut butter.



Basic excise duty increased to 18% from 12% on mineral water and aerated water containing added sugar or other sweeteners/flavours. Additional excise duty of 5% on the products exempted.



Excise duty on leather footwear with retail price exceeding Rs 1,000 per pair halved to 6%.

CRISIL Research’s View Improvement in rural income, owing to increase in MNREGA allocation, to support consumer durable and FMCG sales. Removal in customs duty on OLED to only marginally affect OLED TV sales as segment accounts for less than 0.5% of panel TV sales. The excise duty hike will hurt the demand for tobacco-based products, but aerated beverages demand will only be marginally impacted.

Financials: Setting up of holding company and bankruptcy code a positive

Positive


The Union Budget has proposed to provide Rs 79.4 billion as capital support to all public sector banks (PSBs) in 2015-16.



NBFCs registered with RBI, having an asset size of Rs 5,000 million and above, may be considered for notification as 'Financial Institution' under the SARFAESI Act, 2002.



Autonomous Bank Board Bureau and bank holding company to be set up to improve governance of public sector banks.



Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs 200 billion and credit guarantee corpus of Rs 30 billion, to be created.



MUDRA Bank will be responsible for refinancing all microfinance Institutions, which lend to small entities, and focusing on scheduled caste/ scheduled tribe entrepreneurs.

CRISIL Research’s View Allocation of funds (an average of Rs 111 billion has been infused over the past three years till 2014-15) for capitalising PSBs seems inadequate, given the high capital requirements to meet Basel 3 commitments. In this context, the proposal to create a holding and investment company and an Autonomous Bank Board Bureau would be a positive and improve autonomy for PSBs and help them raise funds, as the holding company too can leverage. Allowing NBFCs recourse to SARFAESI Act will help smoothen the asset recovery process. This, coupled with establishment of the Bankruptcy Code would help improve asset quality within the banking and financial services industry. Setting up of MUDRA bank will help improve availability of funds for small business entrepreneurs.

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Infrastructure: Investment boost through higher public funding

Positive

Key Budget Proposals: 

Budgetary allocation: Total outlay for infrastructure has been increased by 1.5 times to Rs 2.8 trillion (roads, railways and urban infrastructure the biggest beneficiaries).



Roads: Investments for development of national highways proposed to be hiked by 178% y-o-y to Rs 85,607 crore. A major portion of this increase will be funded by a Rs 4 per litre increase in road cess on petrol and diesel.

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Railways: Total outlay raised by 52% to Rs 1,000.11 billion. In the Railway Budget 2015-16, there have been many announcements of PPP projects in areas of coastal connectivity, gauge conversion, dedicated freight corridors (DFCs) and the Mumbai suburban rail.

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Airports & Ports: No new project announcements. Exemption on service tax for constructing airports and ports has been withdrawn.

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Funding availability: A Rs 200 billion National Investment and Infrastructure Fund to be set up for infrastructure finance companies to raise debt. The budget also provides for issuance of tax-free bonds for roads, railways and irrigation projects, and aims to rationalise the tax regime for Infrastructure Investment Trusts.



Other measures: The government's intent to table a Public Contracts (Settlement of Disputes) Bill will help speedy redressal of disputes in large public projects and create a conducive environment for PPP projects.

CRISIL Research’s View At a time when private sector interest in infrastructure development is low, the increase in budgetary support holds the potential to kick-start capital investments in the economy. Moreover, the significant increase in public funding for the roads sector has the potential to boost execution of national highway projects by about 5,800 km annually and create a robust construction opportunity for road engineering procurement & construction (EPC) companies. The National Investment and Infrastructure Fund will create additional funding resources for private developers, over and above the rise proposed in public funding. Moreover, rationalisation of tax regime for Infrastructure Investment Trusts may help free up private capital currently locked in completed projects. While the budget provisions are positive, it puts the execution capability of implementing agencies such as the National Highways Authority of India (NHAI) at test. Addressing on-ground issues such as clearances and land acquisition becomes extremely critical to ensure a sharp increase in project execution.

Metals: No big announcement

Neutral


Basic excise duty increased to 12.5% from 12.36%.



Clean energy cess on coal doubled to Rs 200 per tonne.



Basic customs duty on metallurgical coke raised to 5% from 2.5%.



Special additional duty on iron and steel scrap reduced to 2% from 4%.

CRISIL Research’s View The thrust on infrastructure is a long term positive. But in the near term, the budget proposals will have negligible impact on the sector. Increase in basic excise duty will only slightly raise aluminium and steel prices by Rs 200 and Rs 50 per tonne, respectively. Hike in clean energy cess will also have only a mild impact on sponge iron and aluminium players.

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Similarly, impact of hike in customs duty on metallurgical coke will be negligible as most Indian steel players import coking coal and subsequently convert it into coke.

Oil & gas: Higher Govt share in under-recovery burden for 2015-16: positive for oil companies Positive Key budget proposals: 

Government announces oil subsidy of Rs 300 billion for 2015-16.



Change in excise duty structure on petrol and diesel: Reduction in CENVAT by Rs 3.5-3.7 per litre, increase in road cess by Rs 4 per litre, removal of 3 per cent education cess levied on overall excise duty



Exemption of special additional customs duty on petrol and diesel, in excess of Rs 6 per litre

CRISIL Research’s View The overall impact is marginally positive. The government's estimate of oil subsidies in 2014-15 and 2015-16 will wipe out the subsidy rollover of Rs 90-100 billion from 2014-15, reducing working capital requirements of oil marketing companies. With the government contributing Rs 300 billion towards fuel subsidies (including rollover), upstream oil companies will see a 5% decline in their contribution to under-recoveries in 2015-16. Increase in road cess on petrol and diesel has been completely offset by the decline in basic excise duty and removal of education cess. Hence, there will be no impact. As petrol and diesel imports are marginal, exemption in special additional customs duty will not have any major impact.

Power: Higher budgetary allocations and fund availability to boost investments

Positive


Capacity additions: Installed capacity target for renewable energy set at 175 GW, led by additions of 100 GW of solar power capacity by 2022. Setting up of five ultra-mega power plants (UMPPs), each of 4,000 MW, with preawarded clearances and fuel linkages envisaged.



Budgetary allocation: Allocation to transmission & distribution (T&D) segment increased by 26% to Rs 63.5 billion . Funding to renewable energy sector has also been increased by 5% to Rs 61.6 billion.



Funding availability: Rs 200 billion National Investment and Infrastructure Fund to be set up for help infrastructure finance companies to raise debt.



Duties and levies: Clean energy cess on coal doubled to Rs 200 per tonne in 2015-16; however, the rise in generation cost of Rs 0.06/unit to be largely passed through. Moreover, steps have been taken to correct the inverted duty structure in renewable energy for selected components. However, the overall impact on capital costs is less than 5%.



Dispute redressal: Public Contracts Bill introduced for resolving contractual disputes to create a conducive environment for PPP projects



Other benefits: Additional depreciation of 20% granted to new plant and machinery installed by a manufacturing unit or a unit engaged in generation and distribution of power.

CRISIL Research’s View The budget provides a thrust on investments in the power and renewable energy space, with a 16% y-o-y increase in planned expenditure. We believe that a healthy growth in capacity additions and augmentation of T&D infrastructure will reduce power deficit to about 1% by 2018-19. However, a favourable regulatory framework coupled with states facilitating implementation of projects will be critical to boost investments.

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While the provisions are positive, addressing fuel availability issues and improving the financial health of state distribution companies is important to alleviate financial stress in the sector

Real Estate: Commercial real estate developers to benefit in the medium term

Neutral


Rationalisation of capital gains tax for the sponsors at the time of listing of real estate investment trusts (REITs).



Service tax increased from 12.36% to 14%.

CRISIL Research’s View Rationalisation of capital gains tax for the sponsors* exiting at the time of listing of REITs is positive for developers with a significant exposure to rental yielding real estate assets. The increase in service tax will be marginally negative for the real estate sector. *As per the Securities Exchange Board of India, ‘sponsor’ has been defined as any person(s) who set(s) up the REIT and designated as such at thetime of application made to the Board

Textiles: Allocation under TUFS slightly reduced; No major impact

Neutral


Budgetary allocation under the Technology upgradation Funds Scheme (TUFS) has been reduced to Rs 15.2 billion for 2015-16 from Rs 18.6 billion in 2014-15.

CRISIL Research’s View The government has been supporting the industry through TUFS, which enables players to expand/ modernise at lower costs. Though the budgetary allocation under TUFS has been reduced slightly in 2015-16, it will not greatly impact the industry given the existing demand-supply dynamics. Continuation of a zero excise duty will aid a 6-8% rise in domestic sales volumes of apparels in 2015-16, vis-a-vis a 5-6% rise in 2014-15.

Technology, Media & Telecom: No significant impact of the Budget proposals

Neutral


Mobile handsets: Excise duty on mobile handsets (costing above Rs 2,000) hiked from 6% (with CENVAT credit) to 12.5%.



Service tax: Service tax, hiked from 12.36% to 14%, will have a bearing on the bills of postpaid telecom subscribers.

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Telecom receipts: Budgeted receipts from spectrum auctions, one-time spectrum charges and other levies have been estimated at Rs 429 billion for 2015-16, vis-a-vis Rs 432 billion for 2014-15.



Media: Service tax to be levied on tickets purchased for events such as concerts, pageants, sporting events and award functions, if the admission amount exceeds Rs 500 per person.



IT: Rs 10 billion has been allocated towards the Techno-Financial Incubation and Facilitation Programme for technology start-ups and self-employment activities. Also, input components used in manufacturing tablet computers have been exempted from basic customs duty, countervailing duty (CVD) and special additional duty (SAD).

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CRISIL Research’s View The proposals are unlikely to have a significant impact on the telecom and media sectors. The hike in excise duty on mobile handsets would result in an increase in their prices, which would somewhat impact the rate of growth in smartphone adoption. The hike in the service tax rate would inflate the bills of postpaid subscribers, who, however, constitute only about 5 per cent of India’s wireless subscriber base. The budgeted receipts from telecom services indicate that another round of spectrum auctions can be expected in 2015-16. Service tax to be levied on event ticket prices exceeding Rs 500 is unlikely to have a major impact as organisers would pass on the resultant price hikes to the ticket buyers. The proposals will not have a significant impact on the IT industry. Allocation of funds for start-ups will help the IT industry adopt new technologies and provide employment opportunities. Tablet computer prices are set to reduce with the removal of custom duties.

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Capital markets Focus on social security a good augury for future A. Enhancing coverage of pension and health insurance: With an aim to expand pension and insurance coverage in India, Arun Jaitley’s Budget seeks to include the unorganized and the under-privileged. As per CRISIL estimates, about 65% of the old age population in India is not covered by social security. Increase in deduction (by Rs 50,000) under Section 80C for contributions to pension funds and National Pension System (NPS), and under Section 80CCC for pension funds launched by insurance companies is expected to boost interest in these products. An additional tax deduction of Rs 50,000 has also been provided for contribution to the NPS under Section 80CCD. Increase in tax incentives for health insurance is expected to enhance the coverage of health insurance products. The budget has increased the available choices in pension and health insurance. Subscribers can plan for retirement by choosing between asset classes and products offered by the Employees Provident Fund (EPF) and the NPS. Likewise, products recognised by the Insurance and Regulatory Development Authority of India (IRDA) for health cover are an option to Employees State Insurance Corporation (ESIC). These measures are expected to encourage healthy competition in the insurance and pension funds sectors.

B. Funding infrastructure through alternative investment funds The budget includes key measures to enhance investor interest in alternative investment funds (AIFs). Increased asset flow to AIFs, especially Category I and II AIFs, will boost funding options for the infrastructure and real estate sectors. The introduction of pass-through status for taxation of Category I and II AIFs allows for tax to be levied on the investors (unit holders) of these funds and not on the funds. This is expected to increase investor interest in these funds. Opening of AIFs to foreign investors will enhance the investor base for AIFs. This is expected to boost inflows and energise start-ups and projects that may otherwise face difficulties in funding. Details are, however, awaited on the tax implications for such foreign investments.

C. Channelling physical gold savings to financial savings India is amongst the largest consumers of gold. Gold investments are predominantly held in a physical form, which means the investment once made is not used productively. Further, the huge demand for gold increases India’s gold imports, which adversely impacts the balance of payment and the rupee. The budget seeks to introduce schemes such as Gold Monetising Scheme, Indian Gold Coin and Sovereign Gold Bonds, which address these concerns. While these are steps in the right direction, the efficacy of the schemes - given the country’s penchant for physical holdings - remains to be seen.

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D. New agency for government borrowings, yet very few measures for deepening debt market The proposal to establish a ‘Public Debt Management Agency’ for government borrowings is expected to facilitate better planning and management of domestic and foreign market borrowings for the Centre. This will also reduce the operational burden on the Reserve Bank of India and help it focus on core functions related to monetary policies. Introduction of tax-free infrastructure bonds will help channnelise investments to the bond market. While provisions for pension funds and AIFs are also likely to have a positive impact on asset flow to the debt markets, given the role that the debt markets have to play in the realisation of several of the measures that have been announced in the Budget, there is very little to cheer. No concrete measures have been announced for deepening or broadening the markets.

E. Encouraging foreign investments Continuation of the withholding tax rate of 5% and deferment in applicability of the GAAR are likely to maintain the positive atmosphere for foreign investors. Modification to norms of Permanent Establishments (PE) and rationalisation in Minimum Alternate Tax (MAT) are also positive. Details are awaited on the removal in distinction between Foreign Portfolio Investors (FPIs) and Foreign Direct Investments (FDIs).

F. Very little for the mutual fund industry The mutual fund industry could have done with a few more measures. Given the fact that mutual funds are expected to be a key vehicle to channelise retail savings, this is a negative. The only positive for the industry has been the proposal to provide tax neutrality on transfer of units in case of mergers of schemes. This will enable mutual funds to consolidate similar schemes, which is important to retain simplicity of products for retail investors. Introduction of service tax for mutual fund distributors is likely to reduce the margins on distribution of schemes. Given the challenges the industry faces with distribution, this is a negative. Increase in surcharge from 10-12% for capital gains and distributed income will increase the effective tax rates for investors and may, in turn, impact investor interest.

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