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SMC's Pre-Budget Report 2017-18

SMC | 27 Jan, 2017  | Follow Author | Add to my Favourites 
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The Budget 2017- 2018 assumes vital importance as it being the fourth budget of the Modi government since NDA has come into power. All the stakeholders are eyeing on the government for the announcements that would be made in the budget to stimulate growth especially after the announcement of the demonetization scheme and Goods and Services Tax (GST) to be implemented shortly, which again may pull the economy back only to excel in the long term. Modi government, which is doing all its efforts to transform the Indian economy, is focusing on mainly eight distinct pillars namely; Agriculture and Farmers Welfare, Rural sector, Healthcare, Education, Infrastructure, Financial sector, Fiscal Discipline and Tax Reforms


Agriculture and Farmers Welfare


This Budget could bring some new schemes and allocations to marquee programmers for farmers as the Centre looks to lesser their pain due to demonetization. Agriculture must be the focus of this year’s Budget. Budget this year is likely to have higher allocations to agriculture as well as a higher agriculture credit target. It is projected that low interest loans, subsidies, etc., could be included in the budget to move the focus of farmers towards high-value agricultural products and away from the traditional rice-wheat cropping systems. Interest subvention schemes would be continued with a higher budgetary allocation. The measures may include continuing with a scheme to grant concessional loans to farmers, incentives for states to automate Primary Agricultural Credit Societies (PACSs) and higher allocations to the National Bank for Agriculture and Rural Development. A boost to using technology across the value chain of the farm cycle is expected. This may include using technology and IT systems to adopt high-yield and resistant seed varieties, utilise water for irrigation efficiently, and adopt modern farming practices (crop rotation, phase sowing, drip irrigation, harvesting, etc.). Overall, the budget this year is broadly expected to focus on increasing budgetary allocations for agri-development and not increasingthe deficit by doling out increased subsidies.


Rural sector


The government is preparing to focus on infrastructure, agriculture and banks as well as specific measures to ease pain in the rural economy as part of the 2016-17 Budget. With a good monsoon this year, rural economy was expected to do well, however demonetization could have had a bigger impact on rural sector as it is mainly depends upon cash transactions for daily needs. Keeping this in view, Finance Minister is expected to announce schemes focused towards agriculture, rural sector and farmer welfare such as interest subvention to encourage agriculture credit. Also, there could be increased allocation towards MGNREGA to boost rural employment. It is expected that Union Budget FY18 to focus on rural and skill development through a range of measures and higher allocation. More incentives to the MSME sector are highly expected. Further, all eyes are on how the Budget would attempt to accelerate the adoption of digital payments, particularly in rural areas.


Healthcare


The government’s spending on healthcare has been coming down over years. National Healthcare Policy 2015 has been languishing due to the lack of budgetary support and the bill targets a spending of 2.5 percent of GDP. Now the health care expenditure should increase substantially from its current allocation. The government should make it a priority to make healthcare services affordable to all sections of the society by exempting tax on expenditure incurred for preventive health check-ups and premiums on health insurance for self and immediate family. Furthermore, providing momentum to innovation such as newer health care delivery models, digital technologies and molecular diagnostics is needed to increase accuracy and efficiency in diagnosis and treatment of various diseases. At the same time, government should allow a separate deduction for preventive health checks of Rs 10,000 per family. This will ensure early detection and treatment of disease.


Education


Like healthcare, education is another crucial area that has not been getting the much needed attention. Now, government intends to increase spending on education in 12th five year plan by 2.79 times compared to the 11th five year plan. Budget allocation for the education sector is expected to rise by 10-12% this year, doubling the quantum of increase from the previous year. While the Sarva Shiksha Abhiyan or SSA (drive for the universalization of education) and the midday school meal scheme will continue to get sizable allocations, the Union budget is likely to emphasize the quality of outcome in schools. In order to promote digitization and to make India a cashless economy, Government has already made some attractive announcement earlier after demonetization. Further, more announcements related to that during current budget such as use of payment bank services that mainly target the unbanked and underbanked sections of society are expected. Allocation of funds towards promotion of study related to technologies up gradation and hardware & software learning institutions is also possible.


Infrastructure


Apart from GST’s proper implementation, relief on income tax, more incentives for digital means of transacting and promoting Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) might be amongst the highlights from the upcoming Budget. The overall corpus of allocation for infrastructure projects is expected move up significantly higher specifically for urban infrastructure, roads and railways sector. Given the shift of execution framework for greenfield infrastructure projects towards models ike Engineering, Procurement, Construction (EPC) and Hybrid Annuity Model (HAM), the corpus of funding required for capital expenditure on the government's balance sheet certainly needs dedicated conduits catalysed by a robust single window clearance policy of rolling out commercially viable projects. With aim to achieve housing for all by 2020, budget may include low cost and affordable housing in the definition of Infrastructure sector, which may reduce costs for developers and attract investors. Under “Housing for All”, government would promote to low cost housing and would increase the limit cheaper home loans to individuals who opted for loan earlier it was amounts of up to Rs. 35 lakhs during the 2016-2017 fiscal. The housing or the real estate sector would give real strength to nation buildup and government would allocate funds to promote road & Highways, Electrification, power and may give tax holidays for new low cost housing projects. Higher allocation of fund in Railways: As the modernization of railways is long overdue, it is expected allocation of spending on railways modernization and few new trains.


Financial sector


The financial services industry has been one of the key drivers of growth due to its strong cause and effect relationship with the economy. The foreign investor community is expecting liberalization of indirect transfer provisions, in line with the declared intent to welcome foreign capital into India to promote investment in ETFs , would provide a categorization under Alternative Investment Funds (AIF) which basically includes venture capital funds, private equity funds, debt funds, infrastructure funds and social venture funds. Provision towards promoting digital transactions and dis-incentivising usage of cash, simplification under Bankruptcy code, simplification of provision towards MAT and an exemption from the requirement to deduct tax on the interest portion of the installment paid to NBFCs would facilitate the further growth.


Fiscal Discipline


The Indian economy started slowing even before the announcement of demonetization. Investment demand is expected to contract by 0.2 percent in the current fiscal from 3.9 percent growth recorded in fiscal year 2015 – 2016. In the current scenario economy needs a substantial fiscal stimulus and there are fair chances that the Finance Minister may chose to revise the fiscal deficit target upward to 3.5 percent from 3 percent under the existing fiscal consolidation map. In the last budget the Finance Minister stick to the fiscal deficit target of 3.5 percent.


Tax Reforms


With regards to Goods and Services tax, both Centre and States have agreed to rollout GST with effect from 1st July 2017, after which most services are likely to attract 18 percent tax. It will be interesting to see whether Finance Minster choose to hike service tax by 1 percentage point in order to align it with the GST. The Union budget for 2017-18 is very likely to lower the corporate tax rate. That is not only because of the faltering economy, but also because the finance minister had promised in his 2015 budget speech that the corporate tax rate will be reduced from 30% to 25% over the next four years, together with the phasing out of exemptions and deductions. With a vision to move towards a cashless economy and in line with that, the government may announce further measures to encourage digital payments. With respect to personal tax rate, the finance minister is unlikely to hike the Rs 2.5 lakh as increasing the threshold would lead to fall in the number of assesses. However, the government may give relief to the tax payers in the form of reduction in rates. Also investor’s fraternity and India Inc. would be eyeing on the budget especially for clarity on Minimum Alternative Tax (MAT) and General Anti-Avoidance Rules (GAAR). Any move to end tax breaks on equity gains or levy on foreigners may turn sentiments sour towards the capital market.



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About SMC
SMC Research, founded in 1990, is India’s leading share and stock broker, provides a wide range of financial services and investment solutions. A blend of extensive experience, diverse talent and client focus has made us the 4th largest broking house in India(Source: Dun and Bradstreet, 2008). Over the years, SMC has expanded its operations domestically as well as internationally. Existing network includes regional offices at Mumbai, Kolkata, Chennai, Cochin, Ahmedabad, Jaipur, Hyderabad, Bangalore plus a growing network of 2100+ offices spread across 425 cities/towns in India.


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