The Budget Impact on Various Sectors

The Budget has come and gone ending months of speculation and discourses. Some are calling it good, while other feel more could have been done. Almost everything has been said about it.  However, there is much in the fine print, and  best put in the words of India's most credible research leader; Crisil. Going beyond the fine print Crisil Research has analysed the impact of the Union Budget on each sector.

There are five focus areas in the Union Budget and each will impact India Inc. Here’s a look at how:

• Enabling financial sector efficiencies: Setting up of autonomous bank board bureau marks the initial move towards formalising a holding company structure for public sector banks. This will improve governance, optimise capital contribution by government, and provide greater functional autonomy. Along with more stringent bankruptcy laws, these are two key long-term positives. On the other hand, providing a mere Rs.79 bn towards capital support for public sector banks is grossly inadequate. Elsewhere, the inclusion of NBFCs under the purview of SARFAESI Act, along with the new bankruptcy code will improve recovery efforts for financial institutions and support their capital position. The new Micro Units Development Refinance Agency (MUDRA) Bank for refinancing of microfinance institutions will support micro credit. Proposals to promote financial savings are also a positive.
   
• Enabling infrastructure investments: The intent to ratchet up public spending on infrastructure is clearly visible. There is a sharp increase in allocation to roads, railways and rural infrastructure development. In addition, many significant steps have been taken to improve the availability of funds for infrastructure. This includes higher allocation for road cess, more funding through the National Infrastructure Investment Fund, tax-free bonds and rationalisation of taxes for infrastructure investment trusts. However, timely implementation of projects remains a key concern. The government’s intent to salvage the broken public-private partnership model to attract investment is also a positive. The deferment of GAAR and allowing foreign capital in alternative investment funds will attract foreign capital.
   
• Boosting power and renewable energy: The government has set an aggressive target for renewable energy of close to 175 GW, including 100 GW of solar capacity by 2022. It has also announced five new UMPPs for conventional power -- with all approvals in place to ensure faster execution. But the key concerns remain timely implementation, resolution on fuel availability, clearances, transmission corridor availability and financial health of distribution companies. The government continues increasing allocation towards transmission and distribution – it’s up 26% in 2015-16 compared with the current fiscal. Coal cess has also been increased a touch, which will marginally lift tariffs. We expect generators to pass it on.
   
• Marginal changes in taxes: The budget has proposed a marginal increase in excise duty from 12.36% to 12.5% and in service tax from 12.36% to 14%. However, given the decline in input prices (both food and non-food), we expect companies (manufacturers or service providers) to largely pass on the burden to customers and protect their margins. Although surcharge on corporate tax has been increased for this fiscal, paving a structural path towards lower rates by doing away with many exemptions is a positive.

Automobiles:
Marginally positive for tractors, neutral for other segments
Key budget proposals:

• Farm credit target increased by Rs 500 billion to Rs 8.5 trillion. Higher allocation to rural financing agencies such as NABARD and RRBs, and to initiatives such as MGNREGA, micro-irrigation watershed programs, etc.
• Allocation of Rs 750 million to promote manufacturing of electric vehicles (EVs). Concessional customs and excise duties on hybrid and EV parts extended until March 2016.
• Increase in customs duty on fully-built commercial vehicles (CVs) from 10% to 20%. Reduction in excise duty on ambulance chassis from 24% to 12.5%.
• Tax on royalty payments to foreign companies reduced to 10% from 25%.
• Creation of a trade receivables discounting platform for medium and small enterprises (MSMEs).

NEUTRAL

VIEW: The increase in allocation to farm credit and rural schemes is likely to be favourable for tractor sales. Proposals on electric and hybrid vehicle parts will not materially impact the sector given low population of vehicles in India (less than 1% share). The proposals will have a limited impact on the CV segment as imports of fully built CVs and sales of ambulances comprise a small proportion of the CV industry. The reduction in tax on royalty payments to foreign companies will be marginally positive for Indian companies who import technology. Creation of an electronic platform for facilitating financing of trade receivables of MSMEs will help improve liquidity of auto component manufacturers.

Cement:
Higher spending on infrastructure to benefit in the medium term:
Key budget proposals:

• Investments outlined under various infrastructure schemes related to areas such as roads, urban development and irrigation indicate a targeted government spending of Rs 1,080 billion in 2015-16.
• Duties and tariffs directly levied on cement have increased marginally. The effective excise duty on cement has increased marginally from 12.4% + Rs 120 per tonne to 12.5% + Rs 125 per tonne.
• The clean energy cess on coal (domestic and imported) has been hiked to Rs 200 per tonne from Rs 100 per tonne.
• The rail freight rate for cement has been increased by 2.7% and for coal by 6.3%.

POSITIVE

VIEW: The government’s focus on infrastructure is evident with the total targetted spending in 2015-16 almost double the revised estimates of 2014-15. This should result in a sustained recovery in demand, but the execution capability of funding institutions/players has to be scaled up appropriately. Further, the rise in duties and tariffs is expected to have a muted impact on total cost, which is expected to increase 0.8%. Power and fuel cost (~20% of cost of sales) will increase 2%. Freight cost, which accounts for 25-30% of cost of sales, will increase 1% with the rise in freight rates. However, amid rising demand, players will be able to offset it with a rise in prices.

Consumer goods:
Little to savour:
Key budget proposals:

• Basic customs duty on organic LED (OLED) panels removed.
• Specific excise duty on tobacco and tobacco products increased 15-25%.
• Excise duty of 2% without CENVAT credit or 6% with CENVAT credit levied on condensed milk and peanut butter.
• Basic excise duty increased to 18% from 12% on mineral water and aerated water containing added sugar or other sweeteners/flavours. Additional excise duty of 5% on the products exempted.
• Excise duty on leather footwear with retail price exceeding Rs 1,000 per pair halved to 6%.

NEUTRAL

VIEW: Improvement in rural income, owing to increase in MNREGA allocation, to support consumer durable and FMCG sales. Removal in customs duty on OLED to only marginally affect OLED TV sales as segment accounts for less than 0.5% of panel TV sales. The excise duty hike will hurt the demand for tobacco-based products, but aerated beverages demand will only be marginally impacted.

Financials:
Setting up of holding company and bankruptcy code a positive:
Key budget proposals:

• The Union Budget has proposed to provide Rs 79.4 billion as capital support to all public sector banks (PSBs) in 2015-16.
• NBFCs registered with RBI, having an asset size of Rs 5,000 million and above, may be considered for notification as 'Financial Institution' under the SARFAESI Act, 2002.
• Autonomous Bank Board Bureau and bank holding company to be set up to improve governance of public sector banks.
• Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs 200 billion and credit guarantee corpus of Rs 30 billion, to be created.
• MUDRA Bank will be responsible for refinancing all microfinance Institutions, which lend to small entities, and focusing on scheduled caste/ scheduled tribe entrepreneurs.

POSITIVE

VIEW: Allocation of funds (an average of Rs 111 billion has been infused over the past three years till 2014-15) for capitalising PSBs seems inadequate, given the high capital requirements to meet Basel 3 commitments. In this context, the proposal to create a holding and investment company and an Autonomous Bank Board Bureau would be a positive and improve autonomy for PSBs and help them raise funds, as the holding company too can leverage.

Allowing NBFCs recourse to SARFAESI Act will help smoothen the asset recovery process. This, coupled with establishment of the Bankruptcy Code would help improve asset quality within the banking and financial services industry. Setting up of MUDRA bank will help improve availability of funds for small business entrepreneurs.

Infrastructure:
Investment boost through higher public funding:
Key Budget Proposals:

• Budgetary allocation: Total outlay for infrastructure has been increased by 1.5 times to Rs 2.8 trillion (roads, railways and urban infrastructure the biggest beneficiaries).
• Roads: Investments for development of national highways proposed to be hiked by 178% y-o-y to Rs 85,607 crore. A major portion of this increase will be funded by a Rs 4 per litre increase in road cess on petrol and diesel.
• Railways: Total outlay raised by 52% to Rs 1,000.11 billion. In the Railway Budget 2015-16, there have been many announcements of PPP projects in areas of coastal connectivity, gauge conversion, dedicated freight corridors (DFCs) and the Mumbai suburban rail.
• Airports & Ports: No new project announcements. Exemption on service tax for constructing airports and ports has been withdrawn.
• Funding availability: A Rs 200 billion National Investment and Infrastructure Fund to be set up for infrastructure finance companies to raise debt. The budget also provides for issuance of tax-free bonds for roads, railways and irrigation projects, and aims to rationalise the tax regime for Infrastructure Investment Trusts.
• Other measures: The government's intent to table a Public Contracts (Settlement of Disputes) Bill will help speedy redressal of disputes in large public projects and create a conducive environment for PPP projects.

POSITIVE

VIEW: At a time when private sector interest in infrastructure development is low, the increase in budgetary support holds the potential to kick-start capital investments in the economy. Moreover, the significant increase in public funding for the roads sector has the potential to boost execution of national highway projects by about 5,800 km annually and create a robust construction opportunity for road engineering procurement & construction (EPC) companies.

The National Investment and Infrastructure Fund will create additional funding resources for private developers, over and above the rise proposed in public funding. Moreover, rationalisation of tax regime for Infrastructure Investment Trusts may help free up private capital currently locked in completed projects. While the budget provisions are positive, it puts the execution capability of implementing agencies such as the National Highways Authority of India (NHAI) at test. Addressing on-ground issues such as clearances and land acquisition becomes extremely critical to ensure a sharp increase in project execution.

Metals:
No big announcement:
Key budget proposals:

• Basic excise duty increased to 12.5% from 12.36%.
• Clean energy cess on coal doubled to Rs 200 per tonne.
• Basic customs duty on metallurgical coke raised to 5% from 2.5%.
• Special additional duty on iron and steel scrap reduced to 2% from 4%.

NEUTRAL

VIEW: The thrust on infrastructure is a long term positive. But in the near term, the budget proposals will have negligible impact on the sector. Increase in basic excise duty will only slightly raise aluminium and steel prices by Rs 200 and Rs 50 per tonne, respectively. Hike in clean energy cess will also have only a mild impact on sponge iron and aluminium players. Similarly, impact of hike in customs duty on metallurgical coke will be negligible as most Indian steel players import coking coal and subsequently convert it into coke.

Oil & gas:
Higher Govt share in under-recovery burden for 2015-16: positive for oil companies:
Key budget proposals:

• Government announces oil subsidy of Rs 300 billion for 2015-16.
• Change in excise duty structure on petrol and diesel: Reduction in CENVAT by Rs 3.5-3.7 per litre, increase in road cess by Rs 4 per litre, removal of 3 per cent education cess levied on overall excise duty
• Exemption of special additional customs duty on petrol and diesel, in excess of Rs 6 per litre

POSITIVE

VIEW: The overall impact is marginally positive. The government's estimate of oil subsidies in 2014-15 and 2015-16 will wipe out the subsidy rollover of Rs 90-100 billion from 2014-15, reducing working capital requirements of oil marketing companies. With the government contributing Rs 300 billion towards fuel subsidies (including rollover), upstream oil companies will see a 5% decline in their contribution to under-recoveries in 2015-16.

Increase in road cess on petrol and diesel has been completely offset by the decline in basic excise duty and removal of education cess. Hence, there will be no impact. As petrol and diesel imports are marginal, exemption in special additional customs duty will not have any major impact.

Power:
Higher budgetary allocations and fund availability to boost investments:
Key budget proposals:

• Capacity additions: Installed capacity target for renewable energy set at 175 GW, led by additions of 100 GW of solar power capacity by 2022. Setting up of five ultra-mega power plants (UMPPs), each of 4,000 MW, with preawarded clearances and fuel linkages envisaged.
   
• Budgetary allocation: Allocation to transmission & distribution (T&D) segment increased by 26% to Rs 63.5 billion. Funding to renewable energy sector has also been increased by 5% to Rs 61.6 billion.
   
• Funding availability: Rs 200 billion National Investment and Infrastructure Fund to be set up for help infrastructure finance companies to raise debt.
   
• Duties and levies: Clean energy cess on coal doubled to Rs 200 per tonne in 2015-16; however, the rise in generation cost of Rs 0.06/unit to be largely passed through. Moreover, steps have been taken to correct the inverted duty structure in renewable energy for selected components. However, the overall impact on capital costs is less than 5%.
   
• Dispute redressal: Public Contracts Bill introduced for resolving contractual disputes to create a conducive environment for PPP projects
   
• Other benefits: Additional depreciation of 20% granted to new plant and machinery installed by a manufacturing unit or a unit engaged in generation and distribution of power.

POSITIVE

VIEW: The budget provides a thrust on investments in the power and renewable energy space, with a 16% y-o-y increase in planned expenditure. We believe that a healthy growth in capacity additions and augmentation of T&D infrastructure will reduce power deficit to about 1% by 2018-19.
However, a favourable regulatory framework coupled with states facilitating implementation of projects will be critical to boost investments. While the provisions are positive, addressing fuel availability issues and improving the financial health of state distribution companies is important to alleviate financial stress in the sector.

Real Estate:
Commercial real estate developers to benefit in the medium term:
Key budget proposals:

• Rationalisation of capital gains tax for the sponsors at the time of listing of real estate investment trusts (REITs).
• Service tax increased from 12.36% to 14%.

NEUTRAL

VIEW: Rationalisation of capital gains tax for the sponsors* exiting at the time of listing of REITs is positive for developers with a significant exposure to rental yielding real estate assets. The increase in service tax will be marginally negative for the real estate sector. *As per the Securities Exchange Board of India, ‘sponsor’ has been defined as any person(s) who set(s) up the REIT and designated as such at the time of application made to the Board.

Textiles:
Allocation under TUFS slightly reduced; No major impact:
Key budget proposals:

• Budgetary allocation under the Technology upgradation Funds Scheme (TUFS) has been reduced to Rs 15.2 billion for 2015-16 from Rs 18.6 billion in 2014-15.

NEUTRAL

VIEW: The government has been supporting the industry through TUFS, which enables players to expand/ modernise at lower costs. Though the budgetary allocation under TUFS has been reduced slightly in 2015-16, it will not greatly impact the industry given the existing demand-supply dynamics. Continuation of a zero excise duty will aid a 6-8% rise in domestic sales volumes of apparels in 2015-16, vis-a-vis a 5-6% rise in 2014-15.

Technology, Media & Telecom:
No significant impact of the Budget proposals:
Key budget proposals:

• Mobile handsets: Excise duty on mobile handsets (costing above Rs 2,000) hiked from 6% (with CENVAT credit) to 12.5%.
• Service tax: Service tax, hiked from 12.36% to 14%, will have a bearing on the bills of postpaid telecom subscribers.
• Telecom receipts: Budgeted receipts from spectrum auctions, one-time spectrum charges and other levies have been estimated at Rs 429 billion for 2015-16, vis-a-vis Rs 432 billion for 2014-15.
• Media: Service tax to be levied on tickets purchased for events such as concerts, pageants, sporting events and award functions, if the admission amount exceeds Rs 500 per person.
• IT: Rs 10 billion has been allocated towards the Techno-Financial Incubation and Facilitation Programme for technology start-ups and self-employment activities. Also, input components used in manufacturing tablet computers have been exempted from basic customs duty, countervailing duty (CVD) and special additional duty (SAD).

NEUTRAL

VIEW: The proposals are unlikely to have a significant impact on the telecom and media sectors. The hike in excise duty on mobile handsets would result in an increase in their prices, which would somewhat impact the rate of growth in smartphone adoption. The hike in the service tax rate would inflate the bills of postpaid subscribers, who, however, constitute only about 5 per cent of India’s wireless subscriber base. The budgeted receipts from telecom services indicate that another round of spectrum auctions can be expected in 2015-16. Service tax to be levied on event ticket prices exceeding Rs 500 is unlikely to have a major impact as organisers would pass on the resultant price hikes to the ticket buyers. The proposals will not have a significant impact on the IT industry. Allocation of funds for start-ups will help the IT industry adopt new technologies and provide employment opportunities. Tablet computer prices are set to reduce with the removal of custom duties.