FY18-19 Union Budget not so populist: Edelweiss

Analysing Union Budget 2018 financial services firm, Edelweiss has elaborated on some of the key issues that were proposed by FM Arun Jaitley in his Budget speech yesterday.

Edelweiss said, the fiscal policy continued on the path of consolidation, albeit at a slower pace than the previous projected path (fiscal deficit (FD) at 3.5%/3.3% for FY18/FY19 vs. 3.2%/3.0% as per previous path).

Importantly, the fiscal impulse (fiscal push to growth) is turning negative in FY19 from neutral in FY18. The fiscal math is broadly credible although expectations of GST collections look optimistic.

Overall, for FY19, the budgeted expenditure growth is modest at 9% (similar to FY18) with maximum tilt towards infra (up 14% YoY) followed by rural (up 9%), while social sector spending is weak (up mere 3%). Oil prices and GST collections will be the key monitorables.

Gross fiscal deficit (GFD): Consolidation continues, but at slower pace; fiscal impulse turning negative

FY18/FY19 FD stands at 3.5%/3.3% of GDP – slip of 30bps from the previous path of consolidation. Fiscal math is broadly credible, but GST revenues are optimistically built in. Importantly, fiscal impulse (fiscal push to growth) is turning negative compared to neutral in FY18.     

Tax revenue: Direct taxes realistic; GST collections optimistic

Corporate tax at 10% YoY and income tax at 20% YoY look reasonable given introduction of LTCG. However, GST collections are optimistically built in. As per our estimate, monthly run rate of India’s total GST collections built in for FY19 is over Rs 1.1 trillion vs. Rs 900 billion in FY18, implying a growth of nearly 25-30% - clearly optimistic. Non-tax revenues are reasonable.      

Expenditure: Modest growth overall, with push towards infrastructure

FY19 budgeted expenditure is set to grow at modest ~9% YoY, with development-related spending up 12%, similar to FY18. Including off-budget sources, the spending is tilted towards infra (roads, railways, metros), which is expected to go up 14% (vs. 20% plus in past two years).

Meanwhile, rural spending (NREGA, rural roads, irrigation, rural housing, etc) is growing at modest 9% (vs. 20% plus in past two years), while social sector (education, health, etc) spending is expected to see significant slowdown. 

Key tax changes and revenue miss/extra achieved on same

Long term capital gains tax of 10% imposed on equities. Government expects to collect Rs 200 billion from the same in FY19.      

Cess on income/corporate tax of highest bracket increased by 1% and will likely help the exchequer garner Rs 110 billion.    

Tax rate for companies with turnover between Rs 500 million to Rs 2500 million reduced from 30% to 25%. It will result in loss of Rs 70 billion.

Relief for salaried taxpayers through standard deduction. It will result in loss of Rs 80 billion.

Other highlights

The government has announced that MSPs for Kharif season will be 1.5x the cost of production. This should support farm incomes, but could weigh adversely on inflation.    

The finance minister mentioned about initiatives for easing stress in MSMEs and also steps for boosting credit to them would be announced shortly.

The government introduced the National Health Protection Scheme, that targets to cover 100 million families for up to Rs 5 lakh per family per year for secondary and tertiary care.

Market reactions

Bond market reacted adversely with 10-year bond yields rising 15-20bps. Such an adverse reaction was perhaps due to fiscal slippage and the announcement on MSP policy.

Equity markets initially reacted adversely to announcement of LTCG, but later recovered most of its losses.