Budget insights: Union Budget 2018

This year’s Budget clearly illustrates the government’s intent to look at development holistically. The thrust on fueling the rural economy through measures around agriculture and creating an enabling ecosystem through investments in infrastructure is commendable. These, in addition to incentives planned for MSMEs, will help create additional jobs. The healthcare sector was in dire need of attention and it is good to see the government address some of its concerns with bold and aspirational initiatives. The efforts towards strengthening India’s position as a digital economy through investments around new-age technologies like AI and fintech is a timely and welcome move.

The proposal to extend the lower 25% corporate tax rate to entities having a turnover of up to 250 crore INR is welcome and should reduce the cost of doing business. Besides, it should motivate more taxpayers to fully comply with the law, and is timely taking into account the roll-out of GST. The benefit of the standard deduction of 40,000/- INR to salaried taxpayers appears to be partly offset by the announcement of the removal of medical and other reimbursements.

Allocation of 50 lakh crore INR for infrastructure is welcome as it reaffirms continued funding of various initiatives in roads, railways and urban infrastructure. Quantum leap in airport capacity is a key requirement to keep pace with the rapid growth in aviation. Other initiatives, outside the budget, to revive the private sector play in these sectors, will complement and further the impact of the budget allocations.

After the economic survey, it was expected that the Union Budget 2018 will target rural economy, health, employment and education and this emphasis is clearly visible in the current Budget. Unlike last few years, there have been no big-bang announcements for the creation of transport and logistics infrastructure, which is logical since each of the sectors like railway, roads, ports and airports had been targeted in previous Budgets with long-term capital expenditure plans. With plans like Sagarmala, Bharatmala etc. in place, each successive Budget is now targeted at funding these plans. The plan for capacity expansion of airports leveraging the balance sheet of AAI is a clear indication of the prominent role airports and aviation are expected to play in the economy, not just for passenger transport but also cargo for carriage. Coupled with plans for growth of sea planes, the aviation sector is being set up for accelerated growth. At the same time, the Budget also underlines the need for exploring no-budgetary sources of finance through asset monetisation, leveraging instruments like toll-operate-transfer and InVITs, as in the case of roads, as well as instruments like REITs for monetisation of assets of other central public sector enterprises operating in the infrastructure sectors. Further, the ease of movement through road by pursuing extensive rollout of e-tolling, as well as rationalising the cost burden on user through 'pay per use' policy, will not just enhance the user experience, but will also help bring down time delays and cost of logistics.  

Interestingly, it is the logistics sector, already witnessing transformation post implementation of GST, which could witness new opportunities for servicing the needs of horticulture clusters proposed in the Budget, through setting up of agri-warehousing, cold chains and related supply chain infrastructure. It is worthwhile to note that fresh agricultural produce mostly uses the air route for reaching distant markets and the push for growth in airport infrastructure sits well with the horticulture focus, and the synergy in planning could bode well for long term growth of these sectors. There are, of course, issues around process, technology and infrastructure for receiving and dispatch of airborne cargoes especially perishables, but the fact that different Ministries like Food Processing and Commerce are likely to get involved, should help ease out many of the operational issues. However, it would be imperative to bring customs under the Ministry of Finance also on board to enable effective realisation of planned outcomes. In the context of logistics, the proposed initiative of the Ministry of Commerce for creation of a national logistics portal that brings various stakeholders on board is a badly needed enabler to create transparent and efficient logistics marketplace.

In conclusion, if this Budget is seen against the light of the last few Budgets, then it is evident that a theme emerges where the initial focus was on planning and creating infrastructure, followed by finding innovative ways of financing, and now the emphasis is on improving efficiency of logistics, which in turn will enable critical economic sectors like industries and agriculture to benefit from lower logistics costs and better market access.

Government expenditure on thousands of projects initiated under the Smart Cities Mission across India has already created a large marketplace for the private sector and is going to further translate into jobs at all levels, better and efficient infrastructure, and liveable cities for everyone.

It is great to see the biggest focus on the farm sector. 1.5 times input costs as MSP would give a lot of assurance to farmers. Setting up of rural agricultural markets and keeping them out of APMC is a great move. The cluster model for horticulture produce is innovative. Crop loans for lessee cultivators would also enhance the cultivated area, boosting farm production. Refocusing PMGSY to connect habitations to agricultural markets will allow farmers to better realise prices.

Budget 2018 holds certain key themes for the automotive industry. As expected there is significant push for rejuvenating the rural economy and improving economic development through better infrastructure connectivity. The government has also provided a clear signal to encourage ‘Make in India’ by increasing customs duty rates on CKD and certain component imports. 

Impact on automotive demand

• Rural and agriculture sector push – positive for tractors, utility vehicles and 2 wheelers
• Increased investment in infrastructure to improve rural connectivity – positive impact on commercial vehicles
• Support for MSME 
• Personal income tax benefit is marginal
• Long-term capital gains on equity and dividend distribution tax on mutual funds 

Impact on automotive OEM and supplier industry

• FM highlighted the importance for the industry to leverage digital. A centre of excellence focusing on digital manufacturing, robotics, artificial intelligence, and big data analytics will be setup under NITI Aayog. 
• Auto component industry increase in import duty to 15% for select categories of automotive components. This is a clear signal that the government supports the Make in India programme for the automotive industry and also promotes deeper localization efforts of various vehicle programs.
• Custom duty on fully knocked down CKD imports increased from 10% to 15%. This measure will also encourage more local sourcing of components across vehicle segments.
• Motor vehicles carrying more than 10 people and motor vehicles used for transport of goods which are imported in completely built unit (CBU) which earlier attracted a basic customs duty of 20% would now attract 25% basic customs duty. 

There were several industry expectations on supporting R&D, electric vehicles, and safety which did not find mention in the Budget. Measures to streamline GST rates and compliance process especially for MSME were not announced as part of the Budget. 

Overall, we see this budget as focusing on the basic building blocks of the economy – Rural agriculture, infrastructure and MSMEs. These will translate into demand boosters for the Indian automotive sector in the medium term. The push for localisation will have a positive impact on automotive component and supplier industry.

The country clearly stands to benefit from the potential tax collections due to the imposition of the long-term capital gains tax. However, the impact on long-term investment into India will remain to be seen, given that the differential between long-term and short-term capital gains tax is now a mere 5%. Further, in this scenario, is continuing Securities Transaction Tax justifiable?

There is a clear policy shift towards increasing customs duty to incentivise domestic manufacturing of many items, including cell phones, smart watches, perfumes and juices. The message is loud and clear: ‘Manufacture in India if you want to access the Indian market.’ Also, some tangible steps have been proposed to reduce litigation by having pre-consultation before issuance of notice and timelines for closure of cases. GST law related proposals are expected in the second half of the Budget session.

The nearly four-time increase in the allocation for health insurance through the National Health Protection Scheme is one of the biggest highlights of the Budget. Most of the social sector schemes have seen a marginal increase in allocation, in keeping with trend of actual expenditure. There are no major surprises or radical policy changes in the announcements made.

The focus on (i) promoting MSMEs, infrastructure, rural economy, healthcare, skilled education, and ease of doing business (ii) encouraging investments, innovation and digitisation, and (iii) tax proposals of lowering corporate tax rate to 25% for companies with turnover upto 250 crore INR and higher customs duty for specified products, are all big positives for the Make in India initiative and will fuel growth in the manufacturing sector. 

The reduction of the corporate tax rate to 25% for companies having a turnover less than 250 crore INR is a very welcome step as it will benefit almost 99% of corporate taxpayers. In addition, the rationalisation of 30% deduction for new employment generation is likely to support the government's agenda of job creation.

Affordable housing continues to get preferential treatment given the ‘Housing for all’ agenda. Creation of the Affordable Housing Fund will certainly ease the funding gap. While providing a safe harbour is a welcome move for property transactions, the margin of 5% may not serve the purpose. REIT investors would have to now factor LTCG tax while evaluating investment opportunities, which would increase their return expectations.

The Budget continues to reiterate the structural reforms journey with a renewed focus on social inclusion through health insurance for 10 crore families, creation of infrastructure for education, health and wellness centres, free gas connections for 8 crore women. Dealing with the challenges of urbanisation continues through Smart Cities Mission and Amrut. At the same time, it further strengthens the opportunity for India to gain from the digital economy through initiatives around artificial intelligence, cyberspace, fintech, etc. 

This Budget demonstrated a strong commitment towards the growth and development of MSMEs. The action plan is to give credit support, capital and interest subsidies to the segment by addressing NPAs and stressed accounts. Growth will be propelled by creating the right environment to raise finances through NBFCs, venture capital funds and angel investors. Lastly, the softening of the corporate tax rate to 25% (for companies with a turnover of 250 crore INR during FY 2016-17) will leave them with a higher investible surplus to create more employment opportunities.

Withdrawal of the tax exemption on long-term capital gains for listed shares/MF units comes with a cost basis reset based on stock price as on 31 January. However, as per the current draft, cost reset may not be available to FPIs. This seems like an unintended drafting error, which should be corrected before the Finance Bill becomes an act.

Capital gains tax exemption to non-residents on bonds, GDRs and derivatives traded on stock exchanges in IFSC will move volumes from NSE/BSE to IFSC stock exchanges. This is a significant move to bring IFSC stock exchanges on par with their peers like the Singapore and Dubai exchanges. This will improve trading volumes in IFSC and will reduce migration of investors from Indian exchanges to Singapore/Dubai exchanges.

The continued focus on agricultural sector reform is appreciated, especially the government's effort to integrate rural haats to the eNam and increasing the purview of MSP for comprehensive coverage of agricultural commodities .The farmers can now look forward to better price realisation

Budgetary allocation of 10,000 crore INR for developing fisheries, animal husbandry can give the necessary boost to these sectors. Further focus on developing horticulture cluster, organic farming and move to boost export through mega food parks can help in better linkage of farmers to the processors.

India is clearly moving towards a framework of the National Universal Health Insurance scheme. This would be a precursor, and an experiment, and therefore it would need to be a public-private partnership between the government and insurance companies. The most appropriate thing to do would be for the government to partly subsidise premium payment and leave the operationalisation and risk carrying to insurance companies, which today are well-established both from the point of view of risk capitalisation and operational maturity. This means that individuals can favourably look at allocating an additional 20,000–35,000 INR to health insurance premiums. India still looks at tax benefits for insurance premium payments, and this would therefore be an effective stimulus towards increasing the penetration of health insurance. 

However, health and general insurance companies will need to look at offering attractive features for people to increase their sum insured levels to match up to these levels of premiums.

The government’s move to provide a coverage of up to 5 lakh INR to 10 crore poor families is the biggest scheme of its kind in the world and is in continuation with the trend of the government being a payer rather than a provider in the secondary and tertiary care space. The National Health Protection Scheme will provide much-needed protection to the most vulnerable section of our population and increase productivity due to lower disability-adjusted life years (DALYS) lost. 

The government has recognised the impact of medical inflation and increased the tax exemption for senior citizens from 60,000 to 1 lakh INR under section 80 DDB and medical insurance deduction under section 80 D from 30,000 to 50,000 INR. Also, the move to turn 1.5 lakh health sub-centres into wellness centers will help in the early detection of disease, reducing both mortality and morbidity. It will also help change the current focus from treatment to proactive prevention.