Sunday 6 March 2016

UNION BUDGET 2016

The Union Budget for FY 2016-17 is on the path set by the government in its previous budget that focuses on infrastructure, rationalization of taxes and overall development of the economy. The Union Budget has delivered on fiscal prudence while keeping a strong impetus on rural economy and consumption growth.


The budget was wholly aimed at improving the infrastructure of the country, especially in road sector. With monsoon not being adequate for last two consecutive years, the rural economy is under pressure, and hence, the budget had many provisions addressing the rural segment of the economy.


Meanwhile, there was also impetus on entrepreneurship and rationalization of tax structure for start-ups and new setups in the manufacturing sector.

Key Positives

Adherence to fiscal deficit target: Despite the pressures on the Government budgets, the Government has gone ahead with a fiscal deficit target of 3.5% of GDP for FY17 vis-à-vis 3.9% of GDP for FY16. This is despite providing allowances for the 7th Pay Commission recommendations and the OROP (One Rank and One Pension) scheme. This is extremely positive for bond yields and will raise the chances of a policy rate cut by the Reserve Bank of India (RBI) in the near term.

Capex: The push for infra development continues. Budget allocation for roads is up 25% YoY (year-on- year) at Rs 550 billion. Rail capex allocation is also up 30% YoY at Rs 450 billion. Overall plan expenditure is up 15% YoY at Rs 5,500 billion.

Rural: The budget provided huge impetus to rural sector. To alleviate the stress on the rural economy, the government has increased its planned spending. Through various rural schemes, the Government is budgeting to spend Rs 876 billion in FY17 on rural development (including rural roads, interest subvention on agricultural-loan, crop insurance etc.). This is up 20% YoY.

Social spending gains impetus: Social welfare schemes relating to women and children, healthcare, and insurance schemes have continued. All these have long-term positive ramifications, as social spending is focused through the organised route of financial inclusion.


Capital expenditure directed towards higher multipliers: While central government capital spending is increasing by just 4%, spending on roads and railways is increasing by 36% and 40% respectively. Central government spending on infrastructure (including capital outlay for railways) for FY17 will be Rs 2.2trillon, implying an increase of 30% yoy.



Macro Highlights



v  Gross Domestic Product (GDP) growth at 7.6% despite slowdown in global economy from 3.4% to 3.1%.
v  Consumer Price Index (CPI) inflation down to 5.4%.
v  Foreign exchange reserves touched highest ever level of about USD 350 billion
v  Fiscal deficit roadmap retained, 3.9% in FY16 and 3.5% in FY17
v  CAD (Current Account Deficit) reduced from USD 18.4 billion in first half of last year to USD 14.4 billion this year
v  Revenue Deficit target at 2.5% from 2.8% in FY 2015-16
v  15.3% increase in Plan Expenditure to Rs 5,500 billion; this is the last year of the 12th Plan. Total expenditure projected at Rs 19,781 bn.
v  Gross market borrowing at Rs 6 trillion and net borrowing at Rs 4.25 trillion. (Bond Market +ve)
v  Plan vs non-plan distinction to be replaced with Capital vs Revenue expenditure in FY2017.
v  Every new scheme to have sunset date and outcome review.

Key Changes in Direct taxes

Resident Individual Tax:
v  Citizens earning less than Rs. 5,00,000 p.a. to receive tax rebate of Rs 5,000 under Section 87A of The Income Tax Act, 1961. Earlier the tax rebate was Rs. 2,000.
v  Those living in rented houses and not getting HRA (House Rent Allowance) from employers to receive tax exemption up to Rs 60,000 under Section 80GG of The Income Tax Act, 1961. Earlier the exemption was Rs. 24,000.
v  First-time home-buyers to receive Rs. 50,000 as an additional tax exemption on interest payment for home loans up to Rs. 35 lakh for houses costing less than Rs. 50 lakh.
v    The government has given a 4-months window for individuals to declare income that was not disclosed to the Income Tax department under Income Declaration Scheme (IDS).
v  10% tax on dividends in excess of Rs 10 lakh received by individuals, HUFs (Hindu Undivided Families) and Firms under Section 115O of The Income Tax Act, 1961. (Applicable to dividend declared by domestic Indian Companies. Not applicable to dividends declared by Mutual Funds)
v  LTCG (Long Term Capital Gains) period for unlisted firms reduced to 2 years.


Corporate Tax:
v  Corporate tax: Accelerated depreciation limited to 40% of asset value for first year. IT rate for FY17 of relatively small enterprises, with turnover of less than Rs. 5 crore reduced to 29% plus cess.
v  10% tax on dividends in excess of Rs 10 lakh received by individuals, HUFs (Hindu Undivided Families); this will be in addition to DDT (Dividend Distribution Tax); LTCG (Long Term Capital Gains) period for unlisted firms reduced to 2 years.
v  100% deduction of profits for 3 out of 5 years for startups setup during April, 2016 to March, 2019.
MAT (Minimum Alternate Tax) to apply in such cases.

Our Outlook : 2016 – Year to look forward to equity Participation

·         We believe that Fin. Yr 2016-17 budget is a balanced budget where govt. has maintained its commitments towards fiscal consolidations.
·         This is done at the time when inflation is likely to be benign and when the economy faces headwinds from global economic concerns, lower output and balance sheet stress.
·         Govt. borrowing in 2016-17 has also been contained and this could lead the way for the RBI to ease policy rates further.
·         The Union Budget also underlines the Govt’s determination to provide an impetus to the economy especially through the infrastructure, rural and financial sectors. It lays emphasis on repairing balance sheets of the banks, reducing nonperforming assets and boosting employment in the largest section of the economic pyramid.
·         Given this focus on reform, repair and revival, we see a prospective up-cycle in the economy.

·         The recovery process could provide ample opportunities to accumulate equities in 2016.