The expansionary budget notwithstanding, Finance Minister Arun Jaitley pegged the fiscal deficit for FY18 at 3.2 per cent of the GDP and remains committed to achieve 3 per cent in FY19.
Net borrowings: The budgeted net market borrowing significantly declined—18 per cent to Rs 3.48 lakh crore compared to the budgeted amount in FY17.
Disinvestment update: The divestment target (from PSUs) was raised to Rs 72,500 crore in FY18, including potential listing of three railway PSUs (IRCTC, IRFC and IRCON). This is higher than the Rs 45,500 crore to be raised in the current financial year and bodes well for the government coffers.
Continued focus on rural development and infrastructure: Overall, the budget maintained its focus on spurring agricultural and rural development along with infrastructure with the government maintaining its goal of doubling farmer income by 2022, setting up of irrigation funds and other initiatives.
The overall FY18 budget expenditure increased 6.6 per cent to Rs 21.47 lakh crore in comparison to a mere 1.8 per cent growth in FY17, highlighting the overall fiscal expansion. This increase was primarily driven by expenses focused on rural development and transport.
Foreign Investment Promotion Board abolished: Since more than 90 per cent of the total FDI inflows are via the automatic route without approvals, the Foreign Investment Promotion Board will be abolished in FY18, highlighting the improved ease of doing business.
Real estate-friendly policies: Holding period for long-term capital gains tax for immovable property (land and buildings) was reduced from three to two years. This should make movement of immovable capital easier. Also, the base year for indexation is proposed to be shifted from April 1, 1981 to April 1, 2001 for all classes of assets, including immovable property. Further, classification of affordable housing as “infrastructure” should assist developers via likely lower loan costs.
MGNREGA allocation increased from Rs 38,500 crore to Rs 48,000 crore, the highest ever. Lending target under Pradhan Mantri Mudra Yojana to be doubled to Rs 2.44 lakh crore.
For the consumer, the government has announced a reduction in the tax rate from 10 per cent to 5 per cent for individual assessee with income between Rs 2.5 lakh and Rs 5 lakh. This has partly been offset by a surcharge of 10 per cent for income between Rs 50 lakh and Rs 1 crore. A surcharge of 15 per cent continues for assessee earning more than Rs 1 crore.
For corporates, Jaitley presented an effective corporate tax rate of 25 per cent for small companies (revenues less than Rs 50 crore), thus highlighting the government's pro-MSME stance. Minimum alternate tax credit is allowed to be carried forward up to a period of 15 years, instead of 10 years at present.
Equity shares acquired post-2004 without payment of Securities transaction tax (such as shares acquired pre-IPO, during IPO, via rights, bonus, private equity and employee stock ownership plans) would now attract long-term capital gains tax subject to certain exceptions which remain to be finalised.
Within equities, the budget augurs well for oil marketing companies with the consolidation of a single integrated oil major. Real estate, too, should benefit from the lowering of the long-term holding period and the classification of affordable housing as infrastructure.
Recapitalisation of PSU banks should assist the sector, though the allocation of Rs 10,000 crore stands lower than the approved capital infusion of Rs 25,000 crore in FY17.
Infrastructure (engineering, procurement and construction segment) emerges as another clear gainer with the government's sustained focus on transport and broad infrastructure.
With the government well on its way to achieve 100 per cent rural electrification by May 2018, we expect transformer, transmission and cable companies to benefit.
Swachh Bharat Mission (Gramin) to promote sanitation should give a fillip to piped water supply companies, ceramics, tiles and sanitaryware.
The bond market's reaction to the budget was mildly negative, with the 10-year bonds moving up by a small 5 bps. Bond market investors welcomed the fiscal restraint shown by the finance minister, not yielding to calls by the market to move to a larger fiscal deficit, and yet delivering a pro-growth, non-inflationary plan.
Jaitley demonstrated fiscal restraint in formulating the budget and is clearly moving India towards a pro-growth, controlled inflation path. While the budget was clearly cheered by equity investors, the bond market will take its cues from the data that comes forth in coming weeks on the economy.
On first cut, we didn't see much that would suggest a continued decline in interest rates and see a range bound scenario. We also don't see any necessity for the RBI to step in and deliver a rate cut at the upcoming meeting.
Sunil Sharma is chief executive officer and executive director of Sanctum Wealth Management.