Fiscal slippage, LTCG, rural push main focus of Budget 2018

The Union Budget 2018 made all efforts to appease rural and EWS population, trying to maintain the fiscal discipline by keeping fiscal deficit target at 3.5% and 3.2% for FY18E and FY19E, respectively. 

Although deficit targets are higher compared to previous estimates but considering surge in the crude oil prices, these are respectable numbers,  said Rakesh Tarway, head research, Reliance Securities. 

Higher than estimated expenses and lower than expected revenue on account of lower GST collection and no spectrum auctions lead to miss on fiscal deficit targets. 

Budget speech has talked about total expenses from all agencies at Rs 14 lakh crore towards aiding rural economy /farmers’ income. This will have a far reaching impact on growth rates of country and reduction of income gaps in society, Tarway said. 

"Companies and sectors deriving majority of revenues from rural economy like 2-wheelers, FMCG companies, fertiliser companies will benefit from push to rural spending. We like HUL, Hero Motocorp, ITC, Godrej Agrovet to benefit from the move."

Budget 2018 continued to put strong focus on infrastructure development, which is in line with the expectations. FM has allocated an extra budgetary support of Rs 5.97 lakh crore against Rs 3.96 lakh crore in the last year Budget for infrastructure sector, which is encouraging as India needs large amount of investment in infrastructure due to growing needs. 

"We understand higher allocation in infrastructure segment will essentially expedite infrastructure development in the country, which in turn will aid many industries i.e. metals, cement, building materials, etc."  
 Union Budget has also proposed coverage of Rs 5 lakh per household to total 10 crore households for hospitalisation. The move will benefit hospital chains like Apollo Hospitals and Narayana Hrudyalay. It will also have positive rub-off impact on companies like Thyrocare and Dr Lal Path Labs. Insurance companies will also benefit because of insurance premium received towards coverage of families, Tarway added.

Among other major initiatives, the Budget has proposed creation of affordable housing fund under National Housing Bank (NHB). This will benefit all affordable housing players like Mahindra Lifespace, Ashiana Housing etc. It will also have positive impact on affordable housing financiers like Gruh Finance, DHFL and Can Fin Homes.

Within tax proposals, budget has proposed to increase Customs duty on imported truck and bus radials from 10% to 15%, which will benefit companies like Apollo Tyres and JK Tyres which have major exposure towards truck tyres.

Govt has also decided to impose 10% tax on Long Term Capital Gains (LTCG) for equity and equity oriented investments for amount exceeding capital gains of Rs1 lakh. The tax will be applicable based on cost prices prevailing on January 31, 2018, which will prevent any large scale selling in stock markets. While LTCG tax has been imposed, there is no tinkering on Securities Transaction Tax, which makes India as probably only country in the world to have both taxes at the same time. Grandfathering of cost prices for LTCG will prevent any knee jerk reaction in stock prices but imposition of tax is a clear negative for equity markets as far as sentiments are concerned.

Mayuresh Joshi, fund manager at  Angel Broking said the Union Budget 2018 will go down as a higher pragmatic Budget with a big picture outlook. It is pragmatic in the sense that with a tight ship to run, the government did not have leeway to give away too many freebies. 

However, within its Budget constraints, the government had to accommodate big spends on rural infrastructure as well as health care and education. 

Besides that, the fiscal deficit is spilling over by just 30 basis points from 3.25 as per FRBM to 3.5% for the financial year 2017-18. For the year 2018-19, the fiscal deficit target is set at 3.3% which is understandable considering the counter-cyclical measures that were called for, Joshi said.

"The tax on LTCG did come in but like in case of dividends it has been restricted only to capital gains above a certain level. The LTCG will be imposed at 10% on net capital gains exceeding Rs 1 lakh only.  Again, this is the net capital gains after adjusting for losses," he added.

However, if the government was really positive about the potential of taxing LTCG, it should ideally have done away with STT. Most probably, LTCG tax could be more of a temporary measure. However, the decision to deduct 10% tax on equity fund dividends may be a tad unfair as it amounts to double taxation for equity fund investors.

But, essentially this is a big picture Budget with Rs 5.97 lakh crore allocations to infrastructure and Rs14.34 lakh crore to rural livelihood programmes. The government has set ambitious targets for divestment up to Rs 80,000 crore for 2018-19 as well as for tax collections. Success of tax collection will depend upon implementation part.

 Mustafa Nadeem, CEO of Epic Research, said the Budget was well-balanced. Markets as expected were volatile. The long-awaited relief for middle-class was a disappoinment and a 10% tax on long-term capital gains was introduced which may dent the AMC companies a little in short run. 

The government was clearly tapping the capital markets for additional revenue which would net around Rs 20,000 crore in government’s kitty. Clear winner was agriculture sector which got big reliefs from the government. The increase in MSP prices offered to farmers and big investment boost in agriculture allied products were positive for the sector. 

"Additionally, we may see certain pick up in gold demand coming from rural sector. The major expenditure has gone into National Health Mission with the aim of providing health care to the weakest of society. We draw big relief from less than expected borrowing programme by the government."

The Finance minister has divestment target of Rs, 80, 000 crore even as he assured of expenditure in connecting the regional air connectivity which might be boon for Indian aviation sector. The focus in defence sector has been on manufacturing as inferred rather than boosting the purchases.  The increase in customer duty from 15 to 20% in mobile manufacturing would net in additional funds for the government. 

"We believe budget was a well-balanced act by the current government consider now such free lunch and bog sops before the looming national election and major state elections. This budget should rather boost the corporate earnings and stir rural demand to additionally benefit the economy," Nadeem said.

Nifty Futures closed at 11,033 after slipping below 11,000 in the noon session. It ended below its previous close.

The volatility index fell sharply by -11.44% which cushioned the markets against any increase in downside fear. 

"Nifty had a big candle which ended on a narrow range and a long tail. We expect the markets to be consolidating for next few trading sessions. The fall in fear index does provide a sigh of relief from downside but investors have to be cautious how market plays out in coming sessions."

The upward bias remains same with a cautious approach. Resistance comes at 11100/11140. Downside support comes at 10980/10900.

Ashishkumar Chauhan,  MD &  CEO of the BSE, said, “The Finance Minister has rolled out an excellent Budget with a thrust to core areas such as agriculture, health care, education infrastructure and rural development." 

"The overall focus is to support farmers and rural areas, fine print focuses on boosting growth, jobs and private investment. Overall, this is a positive budget, with continued focus on fiscal prudence, boosting the manufacturing sector, augmenting MSME's, improving healthcare and skill development. Impetus to GIFT City IFSC, Gold Exchanges, Disinvestment, ETF's for debt financing and measures to reviving corporate bond markets augers well for the capital markets.”

Ramesh Iyer, MD, Mahindra and Mahindra Financial Services, said, “Rural was clearly the focus in this Budget. The announcements on helping double rural income by 2020, Rs 5,750 crore for the National Livelihood Mission in 2018-2019, Rs 2,600 crore for the Har Khet Ko Pani scheme in 2018-2019, measures like increase in MSP and the plan to build two crore toilets in the next fiscal year are all welcome moves." 

"The budget aims to leave higher disposable income in the hands of the rural population and the focus on rural infrastructure will provide a further boost for the rural economy.”

“We look forward to the tax incentives indicated for MSMEs, this should enable better financing and ease the cash flow issues faced by the sector.”

Jayant Manglik, president of Religare Broking, said the much-awaited Union Budget turned out to be a balancing act, pleasing some and disappointing others. The announcement of long term capital gains on equity investments combined with possible slippage in meeting fiscal deficit target dampened the sentiment. 

Personal income tax too should have been addressed, or at least the slabs indexed to inflation. The focus on Bharat as well as farmers was expected and necessary.

"We might see an overhang of this event for next couple of sessions and then focus will return to earnings.  Signals are in the favor of consolidation in the index while profit taking may continue on the broader front. We reiterate our bullish yet cautious stance and suggest preferring index majors for trading."