DSIJ Mindshare

Union Budget 2017 Expectations

The Budget for FY18 is scheduled on February 1, 2017 against the normal schedule of February-end. While it is expected that the government's tax revenues would rise substantially on account of demonetisation and owing to widening of the tax base due to Income Disclosure Scheme. This budget is also special, as for the first time, the railway budget will not be a separate event as it will be incorporated into the general budget itself. Considering the rough run up to this budget, the expectations of ‘feelgood' factors being highlights of the Union Budget 2017-18 are high.

The budget for the Central government is about Rs.20 lakh crore. As per government, its revenue is likely to remain about Rs.16 lakh crore for the current year. The shortfall in the income will be bridged through borrowings.

After so much announcements and reforms, some action plans are expected from the government. The Union Budget FY18 is likely to be taxpayer-friendly after the painful implementation of demonetisation drive.

STRUCTURAL CHANGES 

There is a lot of buzz around Budget 2017 which will be presented on February 1. We are expecting a landmark budget with radical measures. NITI Aayog along with four to five sectoral groups have been set to discuss new initiatives and budget proposals. The government is in a sweet spot in terms of fiscal situation and has space to roll out stimulus in the budget for FY18. The effort will be to cushion the impact of the demonetisation drive starting from the new year. Meanwhile, aggressive correction in the market has factored in Q3FY17 earnings.

The NDA government is changing track by incorporating the railway budget into Union budget, instead of presenting the railway budget separately as has been the convention till now. This is a dramatic departure from the 92-year-old convention. The process of preparing the railway budget remains unchanged. A single appropriation bill would be prepared with the estimates of the railway budget as well. The reasoning behind the move is to save time for the government by not having to table two separate bills in the parliament.

Tax reforms are few of the major radical changes expected for the upcoming Union budget. The Goods and Service Tax (GST) is at an important stage as it expected to be implemented from April 1, 2017. The government will also have to see allocation of funds for various sectors to expedite growth of the economy.

After demonetisation drive for curbing black money, some positive announcements are eagerly awaited from Union budget to provide relief to the common people as well as the business class. The government may come up with new income tax slabs for the salaried class. At the same time, there may be reduction in corporate taxes in a phased manner.

SECTORAL EXPECTATIONS 

In the run up to this budget, the Indian economy was comfortably growing at a rapid pace by registering a GDP growth of around 7.6 per cent in the second quarter of FY17 until November 8, 2016, when PM Modi announced demonetisation of high value currency notes. The decision was initially welcomed by one and all in the hope that it will clean up the economy by combating rampant use of illicit and unaccounted cash. However, the move has caused significant damage to the economy which was sailing smoothly before demonetisation. The economy also seems to be getting ready to shift gears further. As of now, demonetisation is expected to have lasting impact on several vital segments of the Indian economy, including automobiles, FMCG and scores of other cash-dependent businesses.

As with every Union Budget, there are always those built-in expectations from the business community and investors, along with the public at large. This budget too does seems to suggest the high expectations that corporate India has from the current dispensation. This budget also holds significance for the NDA government as it comes post the aftermath of ‘surgical' currency demonetisation by the government which has resulted in a slump in demand leading to an economic slowdown in the short term, and consequently hurting all the allied sectors and industries in the country. Therefore, all eyes would be on the Union Budget which is expected to be high on substance and less on the rhetoric given the amount of pain that the country had to go through in the 50-day demonetisation period.

In the upcoming budget, expectations are that a significant part of the budget will focus on taxation which seems to have been a growing chorus going into the budget session this year. The FM too had announced in his previous budget speech that the overall tax rates would be bought down in order to widen the scope of tax base which will be aided by both the income declaration and demonetisation. This will certainly allow the government to lower the tax rates and at the same time make India an attractive destination for foreign investors in line with other global emerging markets.

The government will likely focus on both corporate and personal taxes. However, it is imperative for the government to do more for job creation as that would ultimately boost demand and positively impact private consumption. Special emphasis need to be placed on railways as the railway network is the back bone of the country's economy. Huge capital infusion is needed in railways to put it on the right track if India has to achieve double digit growth rate in the years to come. The FM needs to do more for start-ups, more for incentivisation for job creations in organised sector, more on skills development, more on training and re-training. These are the key areas which will certainly need prime attention even as the government expends more on social spending such as healthcare and education.
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WILL THE MARKETS SEE A PRE-BUDGET RALLY? 

As the Narendra Modi–led government prepares to present its third Union Budget on Feb 1, markets have been in a wait-and-watch mode, given the just concluded 50-day demonetisation drive. The Indian markets have been moving downwards ever since the currency demonetisation drive was undertaken by the government. The S&P BSE Sensex has shed four per cent since the development. The primary reason for the current fall has been the demonetisation drive which has negatively impacted the overall investor sentiments. The Indian markets has also been severely affected by the FII outflows post the US presidential election and demonetisation. The emerging markets economies expect the outflows to happen post Fed going ahead with an interest rate hike in December which too has played spoilsport in the past one month.

Since 2012, when the Manmohan Singh– led United Progressive Alliance (UPA) was in the power, on two occasions — 2012 and 2013 — the S&P BSE Sensex had lost more than two per cent. In 2014, the 30-stock bellwether index delivered positive returns in the NDA government's maiden budget under the leadership of PM Modi. However, the next two budgets of the NDA government did not yield any pre-budget returns in 2015 and 2016.

While history suggests that the budget's influence on the short term performance has been negative (declining trend),however, expectations (measured by pre-budget performance) are still an important factor in deciding how the market is going to perform post the Union budget.Therefore, empirically there is no set pattern for a pre-budget rally. The returns shown in the below graph are computed one month prior to the budget announcement day. So, it is premature to say whether or not there will be a budget rally.

OUTLOOK 

So, will the Union budget be any different this time from the earlier ones, post the massive demonetisation drive initiated by the government? To get an answer to this question, watch out all the related developments till February 1. It will be keenly watched whether the Narendra Modi-led NDA government will be able to deliver answers to all the questions of the countrymen in one of its most crucial budgets.

Here, our aim is to clarify our readerinvestors' doubts and confusions over how they can handle markets during the pre-budget days. Though there are mixed opinions from several external agencies, we suggest whenever there is correction in the pre-budget period, try to make fresh investments in the market.

Historically, if the markets have risen in the month leading up to the budget, 90 per cent of the time markets have declined post budget as the budget proposals failed to meet expectations. After studying historical data of market movements during the pre-budget period, we at DSIJ, suggest that one needs to take cognisance of the nearterm headwinds - the Q3 numbers - due to which there might not be a pre-budget rally this time around.

SECTORS TO WATCH OUT FOR PRE-BUDGET RALLY 

There are always expectations around the budget focussing on certain sectors which are likely to trigger a pre-budget rally. The stocks of a sector where the market anticipates government's focus and expects incentives are usually the rally candidates. The railway stocks too will hog the limelight in the run up to the budget with the Railways Ministry indicating a massive capital infusion into railways.

CONCLUSION 

Lastly, we believe that the upcoming Union Budget is expected to be solely focussed on government's flagship programmes with a populist flavour given the elections to be held in five states in 2017, with a keen eye on Uttar Pradesh elections, which to a great extent would be a precursor to the 2019 General Elections.

The government is also likely to push for more rural expenditure in the current budget, building on from the previous budget and since good monsoons in 2016 have given a fillip to the ailing sector. The middle class too will be wooed by the FM by way of schemes related to housing for all, rebates on construction of houses, lower interest rates, rationalisation of current tax structure, etc. The government would also spend generously on social infrastructure needs of the country, given the windfall from demonetisation exercise. The capex spending on railways and defence would continue in this budget too.

Overall, the budget is expected to be a mixed bag and the Modi-led government will try to tinker with all the sectors of the economy and, at the same time, giving out a definite picture on the economic policies that the government proposes to pursue in times to come.

After more than half-way through the government's tenure, the Modi-led NDA government started its big bang reforms with its demonetisation drive to curb black money and make India a less cash economy. The earlier than usual budget presentation along with railway budget would give more time to the policymakers in getting the parliamentary nod and thereafter start implementing the budgetary allocations from FY18. This is also beneficial as by the time the Union budget gets the President's assent, monsoons starts in several parts of the country, thus hampering the expenditure of the government. In retrospect, we can say that the first half of the government's tenure was spent on policy making and designing actions suitable for policies. On the other hand, it seems that the focus in the other half would be purely on the implementation.

Therefore, Union Budget FY18 will be the most strategic and eye-opener Union Budget for the entire nation, given that the government would only be left with one full-fledged budget in the year 2018 before it goes for the general elections in 2019. Therefore, the upcoming budget will be a make or break budget considering all the metrics in which the country is currently operating. The year 2017 could well be a 'make or break year' for the NDA government, depending on how it manages to utilise the Rs.2.2 lakh crore mopped up through demonetisation to spur economic growth to over 8 per cent. This amount may be used for spending on various important schemes of the government, the fruits of which the government would like to reap in the years to come.

Following are the sectors which according to us will likely to be in focus before the FM presents his Union Budget on Feb 1, 2017 Affordable housing plays, cement, NBFCs, banks, metals, automobiles, cashless player's rural themes and, lastly, the infrastructure sector.
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Promises vs Reality:

Looking back, union budget 2016-17 was pro-poor and pro-farmer with majority of the allocations made towards the growth of rural economy of the country. However, rain god helped with sufficient downpour throughout the country after two consecutive years of drought like situation which further boosted the rural economy and crop sowing activity. Therefore, the government's budget allocations coupled with monsoon helped the economy to grow at 7.6 per cent in the second quarter of FY17. Other than the agriculture sector, there were also green shoots visible in automobile, infrastructure, steel etc. where a considerable amount of expenditure was made by the union government.

Coming on infrastructure front, there were more than Rs.7290 crore allocated to AMRUT and Smart Cities schemes which hardly got kicked off in the manner which the government had expected. However, there were several projects which started floating in the market for smart cities and many of the companies such L&T, Sterlite Technologies bagged various orders under the scheme from respective cities' local administrative bodies.

Government failed to do enough when it came to NPA mess created by the banks and resolution seemed to be farfetched at current juncture.

After demonetisation move, there were slightly disruptions in the country causing sudden fall in demand in several sectors such as automobiles, consumer durables and mostly in the cash dependent unorganised sectors. Banking sector remained quite busy during the demonetisation drive which is destined to give the banks and related industry major boost in near term. More or less, the government managed to live up to its budget promises when it comes to the urban infrastructure and also its pro-poor policies. But when we look at the gravity of financial reforms expected coming from the union government as per the budget document, we will give 50 out of 100 to the present government.

Expectations From Union Budget: Sector-Wise

DEFENCE:

1.Finance Minister Arun Jaitley hinted that the lower amount of cash in circulation will help the country reduce its fiscal deficit and increase budgetary allocations for defence and rural infrastructure.
2.India has jumped to the fourth spot in defence spending. There will be more allocation for year 2017-18 as defence allocation stood at 2.58 lakh crore for the FY17 with an increment of 9.57 per cent on YoY basis. 
3. Funds will be allocated for the 'one-rank, one-pension' scheme

HEALTHCARE

1.Finance Minister to give green signal to ‘Digital Card' to connect people through various schemes. 

2.More funds may be allocated towards Jan Aushadhi Yojana 

3. Government may try to focus on the neglected sections of society in the form of policies and allocations to 'Health for All'

CASHLESS ECONOMY

1.Spread awareness in rural areas for cashless transactions 

2.Keep a tap on security measures for cashless transactions 

3. Encouragement to the electronic payment equipment manufacturers 

4. More funds will be allocated for public sector banking for their wallets and cashless mechanism 

5. Allocation of funds to start-ups that can encourage companies providing services of payment wallets

AGRICULTURE:

1.Though the monsoon was above normal last year, it is expected that this budget will continue with the pro-poor and pro-farmer policies laid down in the previous budgets. 

2.Successive droughts and falling commodity prices had added to agrarian distress. 

3. Focus on pitching for use of latest technology in agriculture sector. 

4. Bankers also suggested that a Krishi Udyam Nidhi be created for giving a boost to sector-related start-ups and IT applications. 

5. NABARD also needs capitalisation of to the tune of Rs.2,500 crore. 

6.Union FM released Rs.1,981.54 crore for Polavaram irrigation project in the last week of December 2016. 

7. During last year's budget, 99 irrigation projects were sanctioned. This budget may also see sanctions for more such projects. 

8. Farm sector experts have suggested incentivising states to undertake market reforms, create corpus fund for promoting farm mechanisation and micro irrigation. 

9. To provide interest subvention for term loans to farmers to double farm income by 2022.

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HOUSING SECTOR:

1.Reducing tax rate to give rise to more demand for the sector
2.The Federation of Indian Chambers of Commerce and Industry (FICCI) has proposed that the deduction available under section 24 for interest on home loan be increased to Rs.3 lakh from the existing limit of Rs.2 lakh. 
3.Interest rate cut cycle from banking sector to aid people for getting cheaper home loans. 
4. Last year's budget promoted low cost housing and offered cheaper home loans to individuals who opted for amounts of up to Rs.35 lakh. These benefits might be extended for FY18. Moreover, there might be additional tax breaks for those involved in the construction of such affordable housing.
5. Housing stocks worldwide have been taken as a barometer to gauge the state of the economy. Even in India, historically whenever there has been a slowdown in the economy housing act as a booster to the economy, so some benefits to the housing sector would be forthcoming.

RAILWAYS:

1.The Indian Railways is expected to have an operating ratio of 94 per cent for FY17 despite huge liability on account of Seventh Pay Commission. Operating ratio shows how much of revenue goes into meeting expenses. 

2. Considering lot of cases of train derailments, the rail ministry plans to set up a dedicated rail safety fund and the finance ministry has given in-principle approval for railway safety. More money is expected to be allocated for safety in the next budget. 

3. Fare review mechanism likely to be implemented. Railways have already introduced flexi-fare system on premium 

4. The government is looking to bring railway coolies under social security net of EPFO 

5.The railways is looking at close to Rs.1.35 lakh crore of financial outlay for FY18 and plans to tap extrabudgetary resources to stick to the FY18 outlay. The Railway Ministry may raise money via IRFC (Indian Railways Finance Corporation) bonds, LIC loans and PPPs. 

6. Railways to demand higher gross budgetary support from the finance ministry. It may be allocated Rs.48,000- 50,000 crore. 

7. Railway Ministry is expecting massive capital infusion.

EDUCATION:

1.Interest rate cut cycle will reduce repayments of education loans which will bring cheer to the students 

2.Centre may consider allocation of funds for building more IITs and IIMs in the country

MANUFACTURING:

1.Funds allocation for various schemes for start-ups and businesses such as Skill India, Make in India, Start-Up India, etc. through tax breaks and other goodies.

2. Encouragement to foreign investors to set up plants in the country. 

3.Build conducive environment for manufacturing sector by providing excessive funds

SERVICES:

1.Government recently clarified that there will not be mandatory service charge by hotels and restaurants. Meanwhile, the Department of Consumer Affairs also clarified that service charges billed by restaurants are optional and it is up to the customers to pay it.

2.There may be surprise announcements for the service sector.

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RENEWABLES, POWER & ENERGY:

1.The power sector is expecting tax concession for solar rooftops and renewables in the upcoming budget. There will be proposals to revitalise hydro sector and tenders of wind power projects will be floated soon. 

2. Union budget may come up with a policy to push stalled projects and extend the benefits for renewable sources like wind and solar to hydro projects beyond 25 MW capacity. 

3. Hydro power potential in the country has been estimated at about 150 GW, with 50 GW coming from Arunachal Pradesh alone. The government may come up with new projects to cater to the burgeoning energy demand of the country.

The Union Budget 2017-18 will be a unique budget and a historical one. First of all, it will be presented earlier than presented so far. February 1 has been chosen as the date to present the Union Budget 2017-18 in the parliament. Secondly, the Railway Budget will not be a separate event for the first time in the history of the nation. Expectations are ripe in the air, especially with a frenzy of reforms in the past year. A few things to expect from the budget could be following:

Reducing tax burden while widening tax net 

The year 2016 witnessed a war between government and parallel economy. Several actions were taken to eliminate black money from the system. Income Disclosure Scheme had its successful run which led to disclosure of Rs.75,000 crore worth of black money, out of which 45 per cent will be pocketed by the Income Tax (IT) department. Demonetisation, digitization and increase in number of surveys conducted by the IT department also continues to contribute to the funds of the taxman. As a result, evading taxes is becoming difficult.

Since the above measures have added a substantial amount to the tax revenues of the government, we can expect it to translate into a reduced tax rate for the common man in the future.

Increase tax deduction on interest paid on home loan 

Affording a house in tier-1 cities has been becoming increasingly difficult for people. The government should remove the cap of Rs.2 lakh on the tax deduction provided to the buyers on home loan interest paid under section 24 for a house that is declared as self-occupied. This will encourage people to buy their dream home and even positively impact on the growth of real estate sector.

Extending the deduction offered on educational expenses 

Education is paramount for the growth of a developing country like India. However, education costs have skyrocketed in the last decade. Taxpayers only get tax deduction on tuition fees paid but there are several other expenses involved in education which contribute considerably to the costs incurred in availing education. The FM should extend the tax deduction to cover all the expenses involved in education, rather than covering just tuition fees. This will ease financial burden on parents and make education more affordable.

Increase healthcare tax benefits under section 80D 

Affordable healthcare facilities are an important part of social security cover a nation strives to offer to its citizens. Unfortunately, several people in our country are unable to afford quality medical treatment. Keeping this in mind, deduction limit for health insurance premium paid under section 80D should be increased to 100 per cent of the actual amount paid by taxpayers. The government should also increase deduction available on preventive health check-up expenses to promote the habit of getting regular health check-ups done as it can help citizens cut down their medical expenses. Moreover, the limit of Rs.30,000 on the medical expenses incurred on the health of super senior citizens (more than 80 years of age) should be increased and allowed for the actual expenses incurred. This will provide a huge relief to these citizens in the form of tax relief.

Demonetisation, digitization and increase in number of surveys conducted by the IT department also continues to contribute to the funds of the taxman. As a result, evading taxes is becoming difficult. Since the above measures have added a substantial amount to the tax revenues of the government, we can expect it to translate into a reduced tax rate for the common man in the future.

 

Union Budget 2017 is going to witness two historical changes. First is the change in the date of presenting the budget from February 28 to February 1 and the second being the merger of railway budget with the Union budget. Both these changes indicate government's intention to expedite the implementation of the financial decisions by the start of the financial year. This year's budget may revolve around two major economic decisions taken by the government in 2016 – introduction of the Goods and Services Tax regime and the demonetisation move announced on November 8. Since people at large are uncertain on the impact of both, the budget is expected to have some positive sops for both individuals and corporates.

Few changes and expectations from the Budget 2017 are: 

a) Various incentives for widening the tax base 
Currently only 3.5 per cent of the 800 million Indian adults file taxes as opposed to developed nations where the ratio is 75 per cent-plus. Further, only 1.2 per cent actually pay taxes in India, as against 1.9 per cent in China, 6 per cent in Brazil, 33 per cent in Russia and 55 per cent in the US (maturity of country's tax economy is also one of the major factors above).

The budget may introduce few incentives which would encourage the non-tax filing population to take steps for filing income tax returns and pay taxes.

b) Expected incentives for individuals 

1.The exemption limit for individuals was revised in FY2014-15. Keeping in view the cost of living trend in the economy and to compensate the population from the inconvenience faced due to demonetization, the tax slab rates may be revised as follows: 

Upto 3 lakh - NIL

3 - 5 lakh -10 per cent 

5-10 lakh -20 per cent 

Above 10 lakh -30 per cent 

2.The education cess may also be revisited keeping in view that it was introduced more than a decade ago with the sole purpose of providing basic education to all. 

3. Long term and short term capital gain up to Rs.5 lakh may be rationalized and taxed based on the slab rate rather than the special rate assigned for the capital gain tax. 

4. Increase in the exemption limit under Section 80C from Rs.1,50,000 to Rs.2,00,000 

5. The limit of deduction of interest on housing loan borrowed for self-occupied house may be increased to Rs.3,00,000 in metro cities in view of the high costs of residential houses in these cities. The condition of completion of construction within 5 years from the year of borrowing may also be done away with.

6.Tax exemption on preventive health check-up may be raised from the current Rs.5,000 to a maximum of Rs.20,000 under section 80-D of the Act. 

7. The current tax exemption limit of Rs.15,000 per annum towards reimbursement of medical expenditure by the employer is inadequate in comparison with the medical expenses incurred by the taxpayer and needs to be increased to at least Rs.50,000 per annum.

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c) Expected incentives for corporates 

1. Reduction in the tax rate for companies The previous budget introduced a reduction in the corporate tax rate from 30 per cent to 25 per cent over the next four years along with corresponding phasing out exemptions and deductions. As a result of this amendment, many exemptions and deductions were phased out but corporate tax rate was reduced to 29 per cent only in case of domestic companies where the total turnover or gross receipts during the previous year 2014-15 does not exceed Rs.5 crore. In order to standardize the same, the following is expected: 
1. Reduction in the corporate tax rate to 25 per cent inclusive of surcharge and education cess 
2. Such reduction should not be restricted to certain domestic companies and should be extended to all tax payers

The Union Budget 2017–18 is being announced at a time when the economy is seeing a growth rate exceeding 7 per cent during this fiscal. At the same time, inflation is down and the current account deficit is under control. Our monsoons have been good. Sowing is also robust in the rabi season, which in turn is expected to stimulate the rural economy and improve purchasing power. Also, the political consensus to usher in the GST augurs well for future growth and inclusion. While demonetization is expected to inhibit the GDP growth rate, this is likely to be a blip in the growth trajectory only for a quarter or two as the underlying fundamentals are largely positive.

Every year, 10–12 million young people join the labour force and five million people leave agriculture to join the non-agriculture sectors. Thus, there exists a total demand of 17–20 million new jobs per annum. Hence, creating job opportunities for the youth every year is one of the biggest challenges for the budget.

The employment growth would be boosted through investments in manufacturing and infrastructure. In the infrastructure space, capital expenditure in key projects like roads, railways, power as well as agri-infrastructure like irrigation, cold storage, warehousing and public housing projects in clusters would kick-start a virtuous cycle of employment-intensive growth. The budget data reveals that capital expenditure is budgeted to increase by a modest 5 per cent in FY2017 after an increase of over 25 per cent in FY2016. It is imperative that this slowdown in public investments be reversed in FY2018.

A renewed attention to manufacturing and ‘Make in India' would be a major driver of growth and job-creation. The government has been in favour of setting up manufacturing zones as well as sector and product-specific clusters.

Within manufacturing, the major employers are the MSMEs and hence it is necessary to nurture them by providing incentives for growth. The government's initiative on Start-Up India and Stand- Up India is one way to enhance the competitiveness of new firms in the MSME domain which in turn would create entrepreneurship and jobs. The Budget should encourage creation of start-ups by removing the burden of state regulation and thereby reducing the compliance costs and tax burden of successful start-ups. The start-up could be defined as any firm less than 5 years old with no further qualification.

The textile and apparels policy can be extended to all sectors. This provides for fixed term employment contracts to workers and state support for employers' provident fund contributions in the first year. Specific reform policies should also be contemplated in the budget for top ten job-creating sectors such as tourism, IT, healthcare, textiles, and food processing, among others.

Tax deduction is available for employment generation under section 80JJAA of the Income Tax Act in respect of cost incurred on any employee whose total emolument is less than or equal to Rs.25,000 per month. This cap on salary is very low, especially in the case of software industry and should be suitably enhanced to at least Rs.50,000.

The tax benefits for investments in skill development, including provision of opportunities for training in specific skills, would encourage firms to hire workers rather than go for capital intensive technologies. A portion of MGNREGA expenditure could be linked to skill development initiatives for those workers who are interested in undergoing a training course.

With incentives such as the ones suggested above, Budget 2017-18 would promote a paradigm change towards employment-oriented growth and help realise the dream of a prosperous and self-sufficient India.

A renewed attention to manufacturing and ‘Make in India' would be a major driver of growth and jobcreation. The government has been in favour of setting up manufacturing zones as well as sector and productspecific clusters.

The Union Budget 2017-18, which has been preponed to February 1 as opposed to the usual date of March 1, is definitely unique, even historic, in many ways. As a representative of agrochemical and Indian agriculture as a whole, I would like to put forth industry expectations, apprehensions and concerns. As we all know, agriculture has been the backbone of Indian economy and, after many ups and downs, Indian agriculture is taking speedy growth towards achieving the national goal of food security. According to CRISIL, with agriculture income growth "at an above-trend 4 per cent", India's real gross domestic product (GDP) is expected to grow at 7.9 per cent in 2017, but this expected GDP growth may come down due to demonetization, as for agricultural business transactions, cash is preferred and hence demonetisation will also affect considerably, but only in the short term.

Considering the rough run-up to this budget, the expectations of "feel-good" factors being featured in the Union Budget 2017-18 are pretty high. A range of farmer-centric policies are expected in this year's budget to boost the economy from the grassroots level. There is no excise duty on seeds, fertilisers and farm equipments, while pesticides attract 12.50 per cent excise duty. Due to the excise and VAT burden, pesticides become costly for farmers. If the excise duty and VAT is abolished on pesticides, the same will become economical for farmers. This way, farmers will be inclined to use more pesticides to safeguard their crops from pest and diseases which will ultimately increase the productivity. According to the 37th Standing Committee report on petroleum and chemicals (2002,) the total loss caused by weeds, insects, diseases, rodents etc in India is roughly 28 per cent of our production of foodgrains amounting Rs.90,000 crore. Over the years, it may have increased by few more crores. In other words, the production of foodgrains in 2002-03 was 174.8 million tonnes and the losses amounted to Rs.90,000 crore. With the present MSP, these losses would be much more, that is, approximately Rs.250,000- 300,000 crore per year.

Most of the Indian farmers are still uneducated and new technology is not accessible to them. The government should strengthen the agriculture extension activities to impart training to the farmers for adoption of new technology to improve yield. Only 45 per cent of agriculture land has irrigation facilities while 55 per cent acreages are still dependent on the monsoon. The government should implement the project of joining rivers at the earliest so that excess water in any river can be moved to the deficit area.

A complete overhauling in the government machinery for proper implementation of Insecticide Act is required. Issuance of 9(3) registrations for new products are abnormally delayed due to which new technology (molecules) which is eco-friendly, less toxic, safer for environment and having less residues are not coming to India at a fast pace.

Indian companies are exporting pesticides worth more than Rs.12,000 crore as per international quality requirements. Indiscriminate samplings of good companies are done by inspectors and good quality samples are also failed in government labs, causing unnecessary harassment for the Industry. The state government labs are not well-equipped and are not NABL accredited. The government should take strict action against spurious pesticides marketed by fly-by-night companies and undue harassment to genuine industry players should be stopped.

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India has reached second position in agriculture GDP, surpassing the US. However, due to non-availability of proper market, horticulture farmers do not get right price for their crops. Farmers throw their crops of potatoes, tomatoes and onions on the roads as they do not get a price of even Re 1 per kg. The government should promote and support the export of horticulture crops so that farmers can get the right price. The cold storage facilities should be improved in the country for storage of horticulture crops.

A range of farmer-centric policies are expected in this year's budget to boost the economy from the grassroots level. There is no excise duty on seeds, fertilisers and farm equipments, while pesticides attract 12.50 per cent excise duty. Due to the excise and VAT burden, pesticides become costly for farmers. If the excise duty and VAT is abolished on pesticides, the same will become economical for farmers.

The Union Budget for FY2018 will be presented at a time when the consequences of the note ban are unfolding, and the monetary policy outlook appears hawkish. The Government of India (GoI) could attempt to revive economic growth through modestly lower taxes, higher productive expenditure and palliatives to boost sentiment, while demonstrating continued fiscal consolidation.

The Budget for 2015-16 had proposed to reduce the corporate tax rate from 30 per cent to 25 per cent over four years. Previously unaccounted income disclosed after the currency note ban would provide a one-time boost to the GoI's tax revenues, estimated by ICRA at Rs.1-1.2 lakh crore. Additionally, proliferation of digital transactions and the introduction of the GST would widen the tax net, leading to the expectation of an imminent cut in tax rates. However, prior to the presentation of the FY2018 budget, the GoI would have limited data on tax flows post the note ban, making it challenging to assess the durable rise in tax revenues. It would be prudent to utilise the one-time revenues toward infrastructure, with a nominal reduction in tax rates.

The exemption limit and slabs for personal income tax may be retained, while providing a rebate of Rs.5,000 to taxpayers. This would boost sentiment by raising their disposable income without posing an inflation risk, while retaining them in the tax net. Additionally, the budget should focus on indirect tax simplification and removal of inverted duty structures. The dividend distribution tax could be reduced, with such income being made taxable at the investor level.

The FY2017 budget had indicated a fiscal deficit target of 3.5 per cent of GDP for FY2017 and 3 per cent of GDP for FY2018. The N.K. Singh Committee's recommendations would guide the fiscal deficit targeted in the upcoming budget. In ICRA's view, the GoI is unlikely to budget a fiscal deficit for FY2018 lower than 3 per cent of GDP or higher than 3.5 per cent of the GDP, which translates to Rs.5-5.8 trillion (Rs.5-5.8 lakh crore), assuming a nominal GDP growth of 10.5 per cent in FY2017 and 11.2 per cent in FY2018.

The revised pay and pensions, following the recommendations of the Seventh Central Pay Commission, (SCPC) have imposed a substantial fiscal burden in FY2017. The overhang of arrears for January-March 2016 (Rs.12,130 crore) released in the current fiscal, would be eliminated in FY2018. However, the revision of allowances (Rs.29,300 crore as per the SCPC report) would bloat expenditure.

Budgetary outlays for capital spending should be enhanced substantially, supplemented by extra-budgetary funds such as the NIIF, institutional finance and market borrowings of CPSEs. Higher priority should be accorded to infrastructure sectors such as affordable housing, roads, renewable energy and railways. Such spending would ease supply side constraints and revive growth in a non-inflationary manner. The enhanced order books of capital goods companies, contractors and developers would also revitalise corporate sentiment.

We hope to see significant outlays for recapitalising public sector banks, beyond Rs.10,000 crore as indicated under Indradhanush, to bolster their balance sheets prior to the advent of the Basel III norms and enable them to support an economic recovery. 

Building upon the recent announcements such as interest relief for farm loans and guaranteed 8 per cent interest for senior citizens, we anticipate enhanced allocations for sentiment-boosting social spending, such as NREGA, food security, insurance and welfare pensions, as well as on promoting digital transactions.

Overall, the budget should focus on reviving sentiment and economic activity in a non-inflationary manner, while attempting incremental fiscal consolidation. A roadmap for reducing the corporate tax rate and rationalising exemptions should be announced after an assessment of the durable widening of the tax base becomes available.

The revised pay and pensions, following the recommendations of the Seventh Central Pay Commission, (SCPC) have imposed a substantial fiscal burden in FY2017. The overhang of arrears for January-March 2016 (Rs.12,130 crore) released in the current fiscal, would be eliminated in FY2018.

What are your expectations for the markets and economy from the upcoming Union Budget 2017? 
The government can speed up or increase spending on the following:

Firstly, we believe infrastructure which includes roads, ports, railways, waterways, water treatment projects, etc. Since the brunt of demonetization has been borne maximum by the rural population we expect some schemes dedicated to rural folks may be announced or allocation to such existing schemes may be enhanced. We expect irrigation, housing (rural as well as affordable), healthcare may be focus areas in the budget.

Secondly, other ways to stimulate sagging economy would be to provide more money in the hands of public (disposable income) by way of cutting personal taxes and/or reducing indirect taxes such as excise duty.

Thirdly, the government can announce some innovative schemes like cash for clinker (scrappage of old vehicles) etc. to provide fillip to commercial vehicle/ automobile sector which in turn can invigorate growth in related auto ancillary sectors too.

Lastly, since small manufacturing units are more impacted by demonetization, we expect government to finds ways to provide more credit to these entrepreneurs. The government can use the huge cash available with banks in some ways (even after normal withdrawals are allowed).

The incremental or extra expenditure may be funded as follows:

We believe the government's tax collection expectation for the next year will be driven by impact of demonetization especially on manufacturing sector which in turn will decide the buoyancy in tax collections. We expect FY18 tax collection may get severely impacted as corporates will have to bear the double whammy of GST and demonetization. In view of revenue generation/enhancement constraints, we expect some relaxation on FRBM targets implying that FY18 fiscal deficit may be higher than earlier stated target of 3.5 per cent of GDP. While any deviation from earlier given target of fiscal deficit may be taken as negative by economists and global investors, but the extraordinary times after demonetization and application of GST can be given as reasons for this deviation with the promise to get back to stated targets as early as FY19.

We believe any increase in taxes of any kind (excise/customs, service, individual or corporate) will not be welcomed by investing community.

What are the sectors or stocks which needs to be tracked for the pre-budget rally? 

Infrastructure related stocks in roads, ports, railways, irrigation, cement, social spending, such as NREGA, food security, insurance and welfare pensions, as well as on promoting digital transactions. Overall, the budget should focus on reviving sentiment and economic activity in a non-inflationary manner, while attempting incremental fiscal consolidation. A roadmap for reducing the corporate tax rate and rationalising exemptions should be announced after an assessment of the durable widening of the tax base becomes available. The revised pay and pensions, following the recommendations of the Seventh Central Pay Commission, (SCPC) have imposed a substantial fiscal burden in FY2017. The overhang of arrears for January-March 2016 (Rs.12,130 crore) released in the current fiscal, would be eliminated in FY2018. housing etc. Stocks to watch out for are IRB, Ashoka Buildcon, KNR Infra, Concor, Adani Ports, Dredging Corporation, Gujarat Pipavav Port, EPC Inds, Mangalam Cement, India Cement, Ultratech, Ashiana Housing, Sunteck Realty, Oberoi Realty, etc.

Which sector can be a loser in the pre-budget market run up? 

We believe the government will be looking at striking a fine balance between providing impetus to economy with no disproportionate increase in burden over the population. In view of the constrained revenue generation avenues, it may need to find new sources of funding in order to meet increased expenditure. We expect high end luxury sector and tobacco/alcohol etc. may attract higher taxes. However, since GST will be followed soon after the budget, we do not expect too many changes in indirect tax rates.

The year 2016 has seen two major economic decisions taken by the government, one being the Goods and Services Tax (GST) and the second being the demonetisation move announced on November 8. While people are still uncertain about the impact of both these decisions, it is the budget of 2017 that is most awaited in determining the government's way of dealing with the current situation and expectations in the country.

INFRASTRUCTURE DEVELOPMENT 

India needs Rs.31 trillion (i.e. Rs.31 lakh crore or US$ 454.83 billion) to be spent on infrastructure development over the next five years, with 70 per cent of the funds needed for power, roads and urban infrastructure segments.

The Indian power sector itself has an investment potential of US$ 250 billion in the next 4-5 years, providing immense opportunities in power generation, distribution, transmission and equipment.

The Indian construction equipment industry is reviving after a gap of four years and is expected to grow to US$ 5 billion by FY2019-20 from the current size of US$ 2.8 billion, according to a report released by the Indian Construction Equipment Manufacturers' Association (ICEMA).

The Foreign Direct Investment (FDI) received in construction development sector from April 2000 to March 2016 stood at US$ 24.19 billion, according to the Department of Industrial Policy and Promotion (DIPP).

Raising public expenditure could be a doorway to inclusive development. Let's say, the government decides to invest in more infrastructure projects like Bharatmala Sagarmala. The completion of the project would not only provide employment opportunities to a lot of people playing out in their favour financially, but would also shore up the standard of the country's infrastructure.

INDUSTRIAL DEVELOPMENT AND GROWTH: 

Another measure to shore up sentiments among investors would include government plans to boost start-ups and businesses such as Skill India, Make in India, Start-Up India, etc. through tax breaks and other goodies. These measures as well as additional measures that would help start-ups raise seed capital cheaply would definitely be something that the government will consider.

WELFARE MEASURES: 

A) Senior Citizens: 
India is home to one in every 10 senior citizens of the world, yet the country spends a mere 0.032 percent of its GDP on them and they are subjected to neglect and isolation. Though elderly continue to face troubles across various strata, the problem worsens when poverty is thrown in.

The ongoing National Programme for Health Care for Elderly is being implemented in only 13 out of the around 600 districts of the country. It is the best time for the government to address senior citizens' issues in the upcoming Budget as benefits of demonetisation have made the government's task much easier on macro-economic front.

Some of the changes that senior citizens expect in this year's budget are as follows: More room should be given for senior citizens in tax rebate; an increase in the exempted limit for the senior citizens ( above 60 years), which currently stands at Rs.300,000 to at least Rs.500,000 would give a boost to their retirement funds; similarly, very senior citizens (above 80 years) who do not come under tax bracket for earnings up to Rs.5 lakh are also expecting a further increase in the exemption limit.

B) Homemakers: 

The homemaker plays a very critical role in the economy as the household budget is in their hands. Typically, most budgets have not looked at the homemaker as one of the key stakeholders in the Union budget exercise. That is changing quite fast. The homemakers have become savvier, better informed and also more vocal.

We saw during the 2014 elections that inflation played havoc with household budgets and that led to a tectonic shift in electoral preferences. It was homemakers who actually signalled this change. What is it that they want from the budget 2017? The PM's announcement on December 31, 2016 to give pregnant womenRs..6000 is a very good decision.

All said and done, the Union Budget 2017-18 is expected to be quite different from many of the previous ones and the entire nation has great expectations from it.

What are your expectations from the upcoming Union Budget? 
The focus of the budget is likely to be on rural India, enhancing expenditure in priority areas of farming, social and utility sector, housing, infrastructure, defence, employment generation along with recapitalisation of banks, direct tax sops to individuals and corporates.

What sectors or stocks need to be tracked for the pre-budget rally?
All of this is likely to boost demand for low cost housing, two-wheelers, white goods, electrical and electronic consumer durables and home refurbishing in particular. Low cost housing finance companies, NBFCs, defence equipment manufacturers, automobile and auto component manufacturers, white goods, electronic and electrical goods manufacturing companies having quality corporate governance and brand recall should qualify for investment picks going into Budget 2017.

Do you see any kind of sops or stimulus being provided by the government to support the economy in the coming budget? 
Yes, tax sops to individuals by hiking exemption limits is much likely. Lowering of corporate tax rates is likely to be speeded up. Prime Minister has already announced lower interest rates on housing loans below Rs.12 lakh in cities and Rs.9 lakh for rural India.

Which sectors can be losers in the pre-budget market run-up? 
Liquor and cigarette manufacturers.

The year 2016 witnessed key policy changes, such as demonetisation of high denomination currency notes by the Government of India, income disclosure scheme to unearth the black money in the domestic economy, amendments to India's tax treaties with Cyprus, Mauritius and Singapore and introduction of the multilateral instrument by the OECD as part of the Base Erosion Profit Shifting Project, which could affect the manner of doing business in India. We have provided below some expectations that may be met in the Union Budget 2017 (Budget) due to be introduced on 1 February 2017.

THE ROAD AHEAD 

Giving a boost to start-ups : The road map to a reduced corporate tax rate was laid down by the Finance Minister (FM) Arun Jaitley in the past which had manifested the government's intention to lower corporate tax to 25 per cent over a period of four years while phasing out deductions. Additionally, the government may consider providing relief to start-ups from applicability of minimum alternate tax and dividend distribution tax.

Reliefs for digital payments : In the backdrop of demonetisation, the focus of the government has been to move towards a cashless economy. Towards that end, one may expect special measures for payments through digital modes.

Changes in capital gains tax on transfer of listed securities : In light of the statement made by Prime Minister Narendra Modi that persons making monetary gains from the financial market should make a fair contribution to nation building through taxes, changes to the capital gains tax regime cannot be ruled out. This could be in the following forms: 
(i) Increase in the period of holding for listed shares or debt instruments for qualifying them as long term capital assets ; or 
(ii) Increase in rate of tax for short term capital gains from transfer of listed securities from the existing base rate of 15 per cent to a higher rate; or 
(iii) Restriction on ability to set off capital loss from transfer of listed shares.

Capital gains tax on transfer of unlisted shares : In order to bring the domestic investors at par with foreign investors, the government may also extend the availability of concessional base rate of tax of 10 per cent on transfer of unlisted shares to resident tax payers as well.

Clarifications in respect of mergers and acquisitions : It would not be unreasonable to expect the Budget to provide clarity on the following issues: 

1.Tax exemption upon conversion of one category of shares into another, and determination of the period of holding of converted shares from date of allotment of original shares, as is the case for conversion of debenture or bonds into equity shares, as against the date of issue of converted shares;

2.Tax exemption from capital gains upon merger of a limited liability partnership (LLP) firm into another LLP firm; 

3.Tax exemption to shareholders of foreign amalgamating company on transfer of shares in amalgamating company for exchange of shares in amalgamated foreign company. Especially, this is relevant in the funds industry where there is multiple tax incidences (direct transfer of shares of Indian companies at the fund level and indirect transfer at investor level) due to layered fund structures created for commercial reasons and not for tax purposes. The CBDT's recent FAQs have not addressed these issues; 

4.Applicability of buy-back tax where the company undertakes capital reduction due to existing tax treatment of capital reduction as ‘deemed dividend' and also capital gains in the hands of the shareholders.

CONCLUSION 

In addition to the above, one could expect the government to take measures to operationalise the additional benches of the authority for advance ruling ("AAR"), given that AAR is widely approached by foreign investors for seeking clarity on tax implications in India.

In order to establish an investor-friendly climate and provide for tax certainty to foreign investors without comprising with the tax base, the government could also consider providing a safe harbour for applicability of the General Anti Avoidance Rule which will come into force from April 1, 2017. One hopes that the Budget draws a fine balance between tax certainty, ease of doing business in India and the measures to curb black money.

Over the years, the budget has been freeing itself from the rigid conduct of tradition and this year it comes earlier than usual on February 1.

Moreover, the rail budget being merged with the Union budget is also a move to get over needless colonial customs. An advancement in budget means the legislative nods needed for any tax proposals or spending plans can be taken well before the new fiscal commences. Prime Minister Narendra Modi, in his new year eve address to the nation, announced a host of initiatives for farmers, small businessmen, senior citizens, pregnant women and the marginalised sections of society.

When Finance Minister Arun Jaitley rises to present the budget, he will have a task at hand of maintaining fiscal prudence while trying to alleviate some of the suffering caused on account of the demonetisation move in November. Post demonetisation, the general consensus seems to be a slowdown in growth in the near future. The opinions on the extent of the slowdown remain varied. On the bright side, as more and more of the informal economy gets converted to the formal economy, GDP numbers are expected to only increase. Add to this reduced tax evasion and structurally the India macro story remains intact.

In recent years, the broad direction of budgets have been to reduce fiscal deficit as part of a pre-committed roadmap. The fiscal deficit fell from a peak of 7.9 per cent in FY09 to 3.5 per cent in FY17E. Given the prevalent slowdown in the economy, the government may miss its fiscal deficit target of 3.5 per cent and 3 per cent for FY17 and FY18, respectively.

The government has to choose between embarking on an expansionary fiscal policy in response to the slowdown due to demonetisation or continuing with the path of incremental reforms and wait for growth to recover on its own. GST is another area which could disrupt supply chains in the near term and cause a drag on growth initially.

Expectations from the budget have become a guessing game and for the sake of this column, I too will indulge in listing some of them. The personal income tax exemptions could be raised from the current level of Rs.2.5 lakh. Any tax simplification measures too would be welcome. An increase in medical reimbursement exemption, home loan interest deduction, exemption limit on interest income for senior citizens are some of the other expectations.

A reduction in individual tax rates and roadmap for reduction in corporate tax rates to make India competitive for foreign investors are among the hopes. In order to boost savings, 80C deduction could be enhanced.

Market participants remain anxious if any change would be effected in the securities transaction tax (STT). Besides, Prime Minister was quoted as saying that those who profit from financial markets must make a fair contribution to nation-building through taxes. Though the Finance Minister issued clarifications, the market has read the message as a possibility of imposition of long-term capital gains tax on equities. Any change in the tax rules for stock investments will see a reaction on the bourses, albeit temporarily.

The ‘Housing For All' push may result in more sops and tax breaks for constructing affordable housing, besides tax incentives for the first-time home buyers. Tobacco and alcohol may continue to see an increase in taxes.

The budget is becoming less and less relevant and investors should focus on proper asset allocation based on their risk appetite. The year 2016 was a great year for fixed income. With the US Fed tightening rates further, there would be lesser headroom for Indian yields to come off from the current levels.

On the equity side, we are likely at a stage where there is significant value emerging in the broader markets. Foreign portfolio investors (FPIs) have been net sellers in domestic equities to the tune of over Rs.25,000 crore since the dual shock of demonetisation and the US presidential election. While equity market valuations in India are comparatively higher than other emerging markets and developed markets, India commands a premium valuation on the back of a strong macro story. Once global investors begin to reallocate across markets, I would reckon India is bound to get an outsized share of the same. As the dust clears over demonetisation, we expect earnings growth to pick up. This, coupled with a supportive Union Budget, will propel equity prices to higher levels.


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