Union Budget

F Y 1 9 U N IO N B U D GE T : K E Y TA K E A W A Y S

FISCAL DEFICIT–MODERATE FISCAL GLIDE-PATH

 FY18 Fiscal deficit projected at 3.5% of GDP (vis-à-vis initial target of 3.2%), remaining unchanged from
FY17.
 Fiscal consolidation to resume in FY19 with deficit at 3.3%
 Reaffirmed commitment to fiscal consolidation with adoption of FRBM recommendation of reducing
central government debt to 40% of GDP by FY25

MACRO-STABILITY IMPLICATIONS
The more moderate fiscal glide-path is not expected to result in a build-up in inflationary pressures as total
expenditure-GDP ratio is expected to reduce to 13.0% in FY19 from 13.2% in FY18RE. Expenditure quality
remains broadly neutral.

MONETARY POLICY – ON HOLD IN 2018 WITH UPSIDE RISKS

We expect RBI to remain on a prolonged pause in 2018 with upside risks on the back of rising inflation
trajectory. The MPC commentary is likely to remain cautious in the near-term as CPI inflation is expected to
remain above RBI’s 4% target for majority of 2018.

FY19 BORROWING & MARKET IMPLICATIONS

Net g-sec supply of INR 3.90 tn is broadly in line with market expectation of ~INR 4 tn. Prima facie, we don’t
expect any slippage in government’s estimate of market borrowing as fiscal arithmetic appears credible. Price
action post budgetary announcement suggests an upside risk to our FY19 10Y g-sec trading range of 7.1-7.6%.

KEY THEMES

THEME 1: AGRICULTURE AND RURAL

 Better price realisation for farmers through higher kharif MSPs, direct sale to customers and Operation
Green to minimize volatility of perishables
 Focus on food processing with new infra funds & INR 14bn budget allocation
 Higher allocation to rural road scheme and affordable housing
 MNREGA allocation maintained at INR 550bn

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THEME 2: INFRASTRUCTURE

 Total allocation (including off budget items) increased by 21% to INR 5.97 tn
 Roads, railways and urban infra (incl. metro projects) remain priority sectors for capital expenditure

THEME 3: MSMES AND EMPLOYMENT

 Lower corporate income tax rate (25%) up to turnover of Rs 2.5 bn

 Govt will contribute 12% of the wages of new employees in EPF for all sectors

THEME 4: SOCIAL SECTOR

• Total budget outlay increased by 13.1% to INR 1.38tn
• Focus was on three pillars health, education and social protection

Y19 BUDGET AT A GLANCE

FY17 FY18BE FY18 FY19 FY17 FY18BE FY18 RE FY19
RE BE BE
Total Receipts 14,396 16,002 16,229 18,179 14.4% 11.2% 12.7% 12.0%
Revenue Receipts 13742 15158 15054 17257 15.0% 10.3% 9.5% 14.6%
Net Tax Revenue 11,014 12,270 12,695 14,806 16.7% 11.4% 15.3% 16.6%
Non-Tax Revenue 2,728 2,888 2,360 2,451 8.6% 5.8% -13.5% 3.9%
Non-Debt Capital 654 844 1,175 922 3.8% 29.2% 79.7% -21.5%
Receipts
Disinvestments 477 725 1,000 800 13.3% 51.9% 109.5% -20.0%
Total Expenditure 19,752 21,467 22,178 24,422 10.3% 8.7% 12.3% 10.1%
of which, Subsidies 2348 2729 2641 2928 -11.1% 16.2% 12.5% 10.9%
Food 1102 1453 1403 1693 -21.0% 31.9% 27.3% 20.7%
Fertilizer 663 700 650 701 -8.4% 5.6% -2.0% 7.9%
Petroleum 275 250 245 249 -8.2% -9.2% -11.2% 1.9%
of which, Interest 4807 5231 5308 5758 8.8% 8.8% 10.4% 8.5%
payments
Revenue Expenditure 16906 18369 19443 21418 9.9% 8.7% 15.0% 10.2%
Capital Expenditure 2846 3098 2734 3004 12.5% 8.9% -3.9% 9.9%
Fiscal Deficit 5,356 5,465 5,948 6,243 0.5% 2.0% 11.1% 4.9%
Fiscal Deficit / GDP 3.5% 3.24% 3.54% 3.33%

• FY19 fiscal deficit at 3.3% of GDP marginally higher than expectations (3.2%)
• Quality of expenditure remains neutral in FY19 capital exp to GDP holding steady
• Total subsidy as % of GDP holds steady – oil subsidy could face upside risk

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FY17 FY18BE FY18 RE FY19 BE

Revenue deficit/GDP 2.1% 1.9% 2.6% 2.2%
Primary deficit/GDP 0.4% 0.1% 0.4% 0.3%
Subsidies (% of GDP) 1.5% 1.6% 1.6% 1.6%
Gross tax as % of GDP 11.2% 11.3% 11.6% 12.1%
Expenditure as % of GDP 12.9% 12.7% 13.2% 13.0%
Capital Exp. As % of GDP 1.9% 1.8% 1.6% 1.6%
Interest cost as % of GDP 3.2% 3.1% 3.2% 3.1%

FY19 DEFICIT CONSOLIDATION LED BY REVENUE EXPENDITURE

MODERATION
Stacking up Government’s Revenues and Expenditure as a % of GDP

• FY19 fiscal consolidation (of 20 bps) to be single-handedly driven by lower revenue expenditure as
% of GDP
• Capital expenditure to hold steady at 1.6% of GDP
• On the revenue side, buoyancy in Net-tax revenues (+30 bps) to be completely offset by marginally
lower collections on Non-tax (-10 bps) and Non-debt capital receipts (-20 bps)
• Higher nominal GDP growth for FY19 BE at 11.5% vs. 10.0% for FY18 RE to also aid lower the deficit
to GDP ratio

FY19 DIRECT TAX BOOST FOR MSMES

• Income tax: Moderation in income tax revenue growth in FY19 is expected as FY18 revenues were
supported by revenues from the income tax disclosure schemes and demonetization
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 Government measures to improve tax compliance have resulted in increase in number

of tax payers to 82.7mn in FY17 from 64.7mn in FY15 and revenue gain of INR 900bn
over the last two financial years.
• Standard deduction of INR 40000 in lieu of transport allowance and medical expenses
• Corporate tax: Moderation in corporate tax revenues growth partly due to cut in corporate tax to 25%
for companies with turnover less than Rs 2.5bn. Benefitting 99% of the companies and resulting in
revenue loss of INR 70bn.
• Long Term Capital Gains Tax of 10%, resulting in likely revenue gain of INR 200bn

FY19 INDIRECT TAX REVENUE: GST REVENUES TO GAIN TRACTION

• Rise in indirect tax buoyancy on the back of expected pick-up in GST revenues. Implementation of e-way
bills & matching of invoices expected to improve compliance
• Rise in custom duty to promote Make in India initiative sectors such as food processing, electronics, auto
components, footwear and furniture
• Decline in non-GST indirect taxes (excise, customs and services) as these are subsumed under GST

OTHER NON-TAX REVENUES DISAPPOINT; DISINVESTMENT

OUTPERFORMS
• Non tax revenue estimated to decline by 14% in FY18. Decline to be attributed to shortfall in dividend from
RBI and communication receipts on account of financial stress in the sector
• Dividend receipts in FY19 appear to be conservative. Some upside possible from
 Higher than FY18 dividend from RBI
 Improvement in financial metrics of Public Sector Banks

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• FY18 is the first instance of more than 100% achievement of disinvestment target. Given the vibrant equity
market condition & active Government dispensation, FY19 target appears realistic.

QUALITY OF EXPENDITURE SUFFERED IN FY18; TO REMAIN NEUTRAL IN

FY19
• Revenue shortfall in FY18 led to contraction in capital expenditure from FY17 levels.
• Normalization of indirect tax revenues in FY19 to allow Govt. to continue on its commitment of improving
quality of expenditure
• Total capital expenditure growth on infrastructure in FY19 envisaged at 21%. Budget support kept at Rs 1.6
tn, higher than 21% vs FY18RE.
• Roads, railways and urban infra (incl. metro projects) remain the priority sectors for capital expenditure

SUBSIDY BURDEN TO REMAIN UNCHANGED; RISKS REMAIN

• Expenditure on subsidies expected to rise by a 11% in FY19 driven by increase in food & fertilizer
subsidy
• However, subsidy to GDP ratio budgeted to remain unchanged at 1.6% in FY19
• It appears petroleum subsidy is under-accounted for FY19. FM indicated his comfort at USD 60/bbl of
crude oil prices. This is the lower end of our base case scenario of average price of crude at USD 60-
65/bbl in FY19

Major Subsidies (INR bn) Growth (%)

FY17 FY18 FY18 FY19 FY18 RE FY19 BE/ FY18
(Actual) BE RE BE / FY17 RE
Total Subsidies 2,348 2,729 2,641 2,928 12.5 10.9
(as % of GDP) 1.54 1.62 1.57 1.56 - -
Food 1,102 1,453 1,403 1,693 27.3 20.7
Fertilizer 663 700 650 701 -2.0 7.8
Petroleum 275 250 245 249 -10.9 1.6
Others 308 326 343 285 11.4 -16.9

GOVERNMENT SPENDING GETS MORE CHISELED

• Continued double-digit growth in outlays seen for select ministries of –
 Agriculture & Farmer’s welfare
 Skill development and Entrepreneurship
 Women and Child development
• On the back of high expenditure growth in FY18, rationalization seen in spending on Rural, Housing,
Health, HRD among others

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QUALITY OF FISCAL ADJUSTMENT REMAINS MIXED

• FY19 budget not only adhered to fiscal consolidation, it also fared better-than-expected on few quality
metrics
• There is reliance on greater tax revenue buoyancy to fund the deficit, rather than more- transitory non-
tax revenues
• The expenditure mix between revenue and capital is expected to worsen marginally, though overall
capex growth would be ~10%

FRBM BACK IN FOCUS

• After market speculation over the FRBM Amendment Act, Union Budget FY19 has proposed to accept
the suggestions of the Act
• Key recommendations of the FRBM Committee relate to the adoption of the Debt Rule to bring down
Central government debt to GDP ratio to 40% by FY25
• Fiscal deficit target will be the key operational parameter. Revenue deficit and effective revenue deficit
have been done away with.
• In line with rolling-forward of FY18 fiscal deficit, medium-term fiscal deficit targets have been rolled-
forward (see Table) with 3.0% of GDP target now expected to be reached in FY21
• In our view, in the backdrop of a new indirect tax regime, a minor deviation in the fiscal path is not a
cause for concern. The government’s re-iteration of medium-term debt /fiscal sustainability is a
positive for fiscal policy credibility in general

MARKET IMPACT

BOND
• Net g-sec supply of INR 3.90 tn is broadly in line with market expectation of ~INR 4 tn
• Prima facie, we don’t expect any slippage in government’s estimate of market borrowing as fiscal
arithmetic appears credible overall
• With CPI inflation likely to move higher towards 5.75-6.00% by Jun-18, sentiment in the bond market
could remain fragile until then
 Provision of INR 281 bn of ‘switch’ in FY19 will add to duration pressure
 While we expect RBI to maintain monetary policy status quo during CY18, the MPC is
likely to remain cautious amidst rising inflation trajectory in the near term. Risks of a
rate hike, however cannot be ruled out at this stage.
 Price action post budgetary announcement suggests an upside risk to our 10Y g-sec
trading range of 7.1-7.6% for FY19

RUPEE
Both lack of fiscal consolidation in FY18 and the degree of proposed fiscal tightening in FY19 were along the
lines of market expectations

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 Policy focus on credible fiscal consolidation, supplemented by a growth push is likely to support
rupee
 We continue to expect USDINR in 62.5-64.5 range through Mar-19
 Oil prices and global monetary tightening could provide key risk

ECONOMIC THEMES: A WELL-ROUNDED BUDGET

AGRI AND ALLIED SECTORS: SUSTAINED FOCUS

Incentives for Farm Sector: Augment Farmer’s Income and Enhance Productivity

FY19 Announcements Current Status

For Remunerative Prices MSPs raised around 1.5 times for
 MSPs for kharif crops at 1.5x production cost the most Rabi crops
For Direct Sale to Consumers 470 APMCs connected to e-NAM; 115
 Upgrade existing 22000 rural haats into GrAMs APMCs to be connected by Mar-18
 Set up a new Agri-Market Infra Fund: INR 20 bn
 - To upgrade GrAMs & 585 APMCs
Price Stabilization & Tax incentives
 New Scheme “Operation Greens”: INR 5 bn
 100% deduction for Farmer Producer Cos. (turnover<INR 100 cr)
To check price volatility of perishable commodities
Promote FPOs, agri-logistics, processing facilities

Crop Insurance 5.71 cr farmers covered FY18TD

 Fasal Bima Yojana: INR 130 bn (vs 107 bn in FY18)
Crop Irrigation Fully utilization budgeted amount of
 Krishi Sinchai Yojana: INR 94.3 bn, 28%YoY over FY18 INR 73.9 bn in FY18 (RE); 44%YoY rise

Focus on Allied-Farm and Food Processing Sectors

FY19 Announcements

2 new Infra Development Funds: INR 100 bn – 1) Fisheries & Aquaculture infra 2) Animal Husbandry
Kisan Credit Cards extended to fisheries and animal husbandry
Food Processing Allocation: Doubled to INR 14 bn

CONTINUED THRUST ON RURAL SECTOR

Creating Rural Infrastructure

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FY19 Announcements Current Status

PM Gram Sadak Yojana: INR 190 bn -Actual utilization of INR 169 bn vs. BE of INR 190 bn
-5.08 lakh km of road length completed (Apr-Oct 17)
-More than 82% villages connected by road
Saubhagya Scheme: INR 27.5 bn - Launched in Nov-17
Housing for All by 2022: 1cr houses to be built -17.83 lakh houses built over past 3 years; 33 lakh
by 2019 houses expected
in rural areas to be completed by Mar-18
Ujjawala Scheme
- LPG connections to be given to 8 cr women

Augmenting Livelihood
FY19 Announcements Current Status
MNREGA: Allocation INR 550 bn -4.35 cr households have been provided employment
under MNREGA (Apr-Dec 17)
-Actual utilization of INR 550 bn vs BE of INR 480 bn
National Rural Livelihood Mission: INR 57.5 bn - Loans to SHGs grew by 37% in FY17 to INR 425 bn
- Finance loans to SHGs

• Total allocation (incl. off budget) for rural employment & infrastructure: INR 14.34 tn
• To create: 1) Employment of 321 cr person days 2) 3.17 lakh km of rural roads 3) 51 lakh new rural houses
4) 1.88 cr toilets and 5) 1.75 cr new household electricity connections

INFRASTRUCTURE PUSH

Sector FY19 Announcements/ Current Status

Road - Bharatmala Project: 34,800 km of road construction in Phase I at cost of

INR 5.35 trn approved
- 9000 kms expected to be completed in FY18

Railways -Allocation INR 1.49 tn

- To redevelop 600 major stations

Air -NABH Nirman to be launched to expand

Transport airport capacity to handle a bn trips/year
-UDAN: 56 unserved airports and helipads to be connected

Smart Cities - 99 cities selected with an outlay of INR 2.04 tn

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Digital/Tele com Infra -Allocation doubled to INR 30.7 bn (Digital)

- 5lakh wifi hotspots to be set up

• FY18TD, Average rate of constructing highways stands at 20.26 km/day (vs. the target of 41.1
• km/day)
• Investment in excess of INR 50 tn needed to increase GDP growth and connect nation with network of
roads, railways, ports and airports
• Total allocation for Infrastructure development increased by 21% to INR 5.97 tn in FY19

REVIVING MSMES TO BOOST EMPLOYMENT

MSMEs Employment Generation

Tax Burden Reduction Incentives for Job creation

25% corporate tax on MSMEs with turnover up to Rs 250 • 12% contribution of wages of the new
cr employees in the EPF for all sectors for
three years
MUDRA Yojana FY19 lending target: INR 3 tn • Fixed term employment extended to all
sectors

Focus on Labour Intensive Sectors

• Emolument deduction of 30% to
new employees under Section
80JJAA, relaxed to 150 days for
apparel industry
• Above scheme extended to footwear
and leather
• Outlay for textile sector increased
by 19% in FY19 to INR 71.48 bn
Future Initiatives Skill Development
• Linking TReDS with GSTN • PM Kaushal Kendra: 306 PMKKs have
• Online loan sanctioning facility been established
• Measures to address NPAs and stressed assets in • Skill centre to be established in every
MSME sector district under PMKK
• Allocation of Ministry & Skill
development enhanced by 44% in
FY19, building on 54% rise recorded
in FY18

Lower Corporate Income Tax (25%) expected to leave 99% companies with higher investable surplus, thereby
leading to capacity enhancement and job creation

SOCIAL SECTOR: 3 PILLARS

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Health Education Livelihood Security

National Health protection Scheme Revitalizing Infrastructure National Social Assistance:

- Cover 10 cr poor families; and Systems in Education INR 99.75 bn
coverage up to INR 5 lakh (RISE) to be launched Ayushman Bharat:
Invest INR 1 tn over next 4 - Enhance productivity,
yrs) well
being
National Health Policy: INR 12 bn Integrated B.Ed. program 115 districts selected
-1.5 lakh centers to provide - to improve the quality for improving the
healthcare services of teachers quality of life,
education, skilling,
financial inclusion, etc
Nutritional support to all TB patients: INR DIKSHA Coverage of PM Jeevan Jyoti
6 bn - increasing digital Bima and Suraksha Bima
intensity in education Yojana to be extended
- 5.22 cr families and
13.25 lakh persons
insured respectively

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