Low Deficit Target, Higher Spending and Investments, GST introduction, Infrastructure push, Industry incentives
Fiscal deficit target of 4.1% is a positive surprise (people had expected Jaitley to raise it to 4.5%). This lower target will lead to lower inflation, stronger currency, lower debt burden, and improved sovereign rating. It is a strong positive in long run for the economy. He aims to achieve it not by cutting the spending or raising rates but by controlling expenditure and broadening of the base.
Growth Drivers: Higher Spending on Infrastructure and Industry – Jaitley announced construction of roads, ports, warehouses, power plants, airports, waterways, smart cities, sanitation, and rural infrastructure. These measures will create jobs in manufacturing sector, expand industrial activity, and build better infrastructure for industrial growth
GST will be started this year
No reforms on land acquisition & labor, no clear decision on retrospective tax, DTC, and GST, subsidy rationalization is not clear, same MNREGA budget, lack of clarity over how he would cap the big fiscal deficit
EXPECTED SECTORAL IMPACT
Positive: Real Estate, Infrastructure, Power, Metals, Capital Goods, Banking, Insurance, Defense, Cement, FMCG, Retail, Logistics, Aviation, Commercial Vehicles, Education
Neutral: Telecom, Oil & Gas, Media, IT, Pharma, Textile, Hotels
- Defense, Insurance: FDI raised to 49% from 26%
- Real Estate:
- Focus on affordable housing with Rs 12k crore allocation to NHB,
- Rs 7k crore to modernize 100 Smart Cities,
- Tax benefit on home loan interest raised,
- Built-up area for FDI decreased from 50k sq m to 20k sq m and minimum investment halved to $5 million
- REIT with tax incentives, proposal to amend rules to end double taxation for REITs will boost transparency in the real estate sector and help developers raise funds
- Rs 5k crore for warehousing, 37k crore for roads, 11k crore for 16 new ports, more coal fired power plants, airports in small cities, waterways
- Revive SEZs,
- Funds raised by banks for infrastructure loans will be exempted from reserve demands like the Cash Reserve Ratio, Statutory Liquidity Ratio and priority sector lending,
- Proposal to extend 10 year tax holiday for power producers, transmission and distribution companies that begin operations by March 31, 2017.
- National gas grid, new metros, concession for solar, wind energy proposed
- The government also plans to introduce a REIT-type structure for infrastructure projects which will help reduce pressure on the banking system and such instruments will attract long-term finance from foreign and domestic investors. It is a roadmap for providing long term funds on a sustained basis to the cash starved infrastructure sector.
- Reduction of several customs and excise taxes particularly in power and steel
- Single window customs clearance at ports
- Improve risk buffer and boost capital through share sales, comply BASEL III by 2018.
- The budget has several steps for faster implementation of power and infrastructure projects, which will help the banks to improve asset quality
- Capital raising, consolidation, and debt recovery tribunals are big positives
5. Rural – Rs 1k crore for irrigation access, Rural infra, power, water, roads, cattle breeding, Kisan Vikas Patra
6. Aluminum producers – will raise export duties on bauxite to help local aluminum producers, which are facing a shortage of the raw material because of mining curbs
7. Steel: plans to raise the import duty on flat-rolled stainless steel to 7.5 percent from 5 percent to help the industry
8. Tourism – e visa,
9. FMCG – low duties on inputs and income tax sops,
10. Education for all, Skill India project,
11. MSMEs – Rs 10k crore fund
12. Mining: Higher fund allocation
13. Textiles: Higher fund allocation
Nifty has breached the major support of 7500. It is now near a 38.2% Fibonacci support level of 7365, and if that is broken then it may fall further to the next major support zone of 7200-7100. There is a minor RSI diversion indicating reversal from current slide and on Monday Nifty may rise from its immediate support of 7410. If this support fails then Nifty may remain in down trend during the week. But if Nifty manages to sustain above 7500 next week, it may rise further.
Existing investors should hold their investments in equity mutual funds and new investors may watch for the 7365 and 7500 levels.