Budget 2017-18 Preview - CSEC Research

We are going to have the major economic event, i.e. Union Budget 2017-18 on 1st Feb 2017 and for the first time Railway budget is going to get merged with the union budget. We believe this union budget is going to be a significant event, under the backdrop of slowdown in economy post demonetization, credit growth at a multi-decade low, external demand is weak and crucial election such as Uttar Pradesh and Punjab around the corner.

Key things to watch-out in Union Budget 2018:

- We expect the government will comfortably meet the fiscal deficit target of 3.5% for FY17, without cutting the expenditure due to higher tax revenue than budgeted, which will offset the shortfall in non-tax revenue. Tax revenue during April - November witnessed a growth of 22% YoY, which is way higher than the budgeted estimate of 12% growth.

- Tailwind for the budget FY18: Budget will see a tailwind from Income declaration scheme (IDS) & demonetization windfall, which will likely to improve the tax compliance & widening of tax base, thus providing additional revenue to the tune of ~0.6-0.8% of GDP.

- Headwind to the budget FY18: Centre's windfall from oil decline is largely over and tax revenues will normalize from 17-18% growth to 12-14% growth.

- In order to achieve Fiscal Deficit target of 3% in FY18, government need to scale back development spending sharply, which is not desirable under the backdrop of slowdown in economy, credit growth at multi-decade low and external demand is weak. We expect the Government to relax its fiscal target to 3.5% of GDP in FY18.

- During this budget government is likely to Increase capital spending on infrastructure, especially on roads, power transmission, defense, low-cost housing and railways. Defense spending has been scaled back sharply from 0.79% in 2011 to 0.57% in 2017, leaving limited scope for further reduction.

- We expect government to reduce tax liability for individuals, by increasing the income tax slab extension and increase in deduction under 80C, which may provide a much needed boost to the consumer related sector.

- Considering the likely implementation of GST from July 2017, we do not expect any major changes in indirect taxes for most sectors.

- Budget may focus on incentivize further adoption of digitalization and provide additional incentives to start-ups.

- We will also be keenly watching government's commentary on GST compensation to states.

- Key focus area: consumption, rural (MNREGA, road, housing) and social sector (education, health), Infra, income tax incentives.

- Sectors to benefit: rural consumption (consumer staples, two wheelers), housing finance, cement, EPC road construction

Source : Equity Bulls

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