Impact of Union Budget 2018-19 on markets and Stocks

Finance Minister, Arun Jaitley tabled Union Budget 2018-19 today. Following are the key announcements made at macro as well as sectoral levels.

Macro Key Highlights

• Government has crossed the divestment target of Rs72,500cr set last year and is expected to reach Rs1lakh crore in FY2017-18. The divestment target set for Union Budget 2018-19 is Rs80,000cr. However, the target set for divestment is below market expectations of Rs1-1.1 lakh crore.

• FM has revised fiscal deficit target for FY2018-19 to 3.3% of the GDP against the earlier target of 3% after government missed the fiscal deficit target for FY2017-18. Prior budget estimate of fiscal deficit was 3.2% of GDP, the revised estimate at present is 3.5% of the GDP for FY2017-18.

• Corporate Tax rate reduced from 30% to 25% for companies with turnover less than Rs2.5bn in FY2016-17. It is positive for companies like IEX and CDSL.

Sector Based Announcements and its impact

1. MSP for all unannounced kharif crops will be 1.5x of their production cost, similar to majority of rabi crops, resulting in improved rural farm income. This will be in favor of agri input stocks like UPL, Rallis etc.

2. Government proposes to set two new funds – a) Fisheries and Aquaculture Infrastructure Development Fund (FAIDF) for fisheries and b) Animal Husbandry Infrastructure Development Fund (AHIDF) for financing infrastructure requirements of animal husbandry sector.  Government has allocated Rs10,000cr towards these new funds. This will benefit companies like Avanti Feeds, Godrej Agrovet, Apex Foods.

3. Under the Aayushman Bharat program, a total of 1.5 lakh centers will be set up to provide health facilities close to home. Rs1,200cr has been committed in this budget for this program. FM also announced National Health Protection Scheme to cover 10 crore poor and vulnerable families. Under this scheme, Rs5lakh will be provided for medical reimbursement per family per year. This will be largest government-funded healthcare scheme in the world. Further, allocation towards Pradhan Mantri Fasal Bima Yojana has been increased to Rs13,000cr vs Rs9,000cr last year. These steps will be advantageous for insurance companies like New India Assurance, ICICI Lombard etc. Additionally, it will be positive for hospital sector (stocks) such as Shalby Ltd, Apollo Hospitals.

4. Customs duty on truck and bus radial tyres raised from 10% to 15%. The move aims at protecting and encouraging domestic manufacturing. This will be beneficial for Indian tyre companies.

5. Bank Recapitalization has been launched with bonds of Rs80,000cr being issued this year. This recapitalization will pave way for the public sector banks to lend additional credit of Rs5lakh crore. This will benefit public sector banks. Further, to provide impetus to banks, government has increased the allowable provision for NPA from 7.5% to 8.5%. This will reduce tax liability of banks. This is a positive for both public as well as private sector banks.

6. Under Prime Minister Awas Scheme, more than 1 crore houses will be constructed exclusively in rural areas. In urban areas, the assistance has been sanctioned to construct 37 lakh houses. This will be favorable for stock like HUDCO.

7. Infrastructure spending has been increased from Rs4.9lakh crore (revised estimates) in FY2017-18 to Rs5.97lakh crore in FY2018-19. The government has also announced plans to spend Rs2.04lakh crore under "Smart City Mission". This spending will be positive for stocks like Larsen & Toubro, Dilip Buildcon, Sadbhav Engineering, Godrej Properties and NCC.

8. Gold Monetization Scheme will be revamped to enable people to open a hassle free gold deposit account. It looks attractive for stocks like Muthoot Finance and Manappuram Finance.

9. Import duty on footwear has been raised to 20% from 10%. It looks positive for stocks like Bata and Relaxo.

10. Government proposes to increase airport capacity by more than 5 times to handle a billion trips per year.  Further, regional connectivity scheme ‘UDAN’ (Ude Desh ka Aam Nagrik) will connect 56 unserved airports and 31 unserved helipads across the country. This proposal is beneficial for aviation stocks like SpiceJet and InterGlobe Aviation. There are 124 airports under Airport Authority of India whose capacities will be expanded. This looks positive for stocks like GMR infra and GVK Power.

Budget takeaways for Individuals

• Women contribution to EPF reduced to 8% for first 3 years of employment against existing rate of 12% or 10% with no change in employer’s contribution. This will promote women participation in the labor force and will increase their take home payment.

• Standard deduction of Rs40,000 in place of present exemption for transport allowance and reimbursement of miscellaneous medical expenses. It will benefit 2.5 crore salaried employees and pensioners.

• Secondary and Higher Education Cess of 3% will be replaced by a Health and Education Cess of 4%.

• FD and post office interest rate will be exempted till Rs50,000 from existing Rs10,000 for senior citizens. This will give a big relief to most of the senior citizens, as they derive most of their income from bank FDs and post office schemes. Additionally, the limit of deduction for health insurance premium is being increased from Rs30,000 to Rs50,000 for senior citizens.

• Custom duty on mobile phones raised to 20% vs 15%. Thus, mobile phones are likely to be more expensive.

• The government has imposed tax on Long Term Capital Gains (LTCG) on sale of securities on gains exceeding Rs1lakh at the rate of 10%, without indexation benefit. However, all gains up to January 31, 2018 will be grandfathered. Previously, income from capital gains held for more than 1 year were tax free. Going forward investors will have to pay LTCG of 10% on income from capital gains above Rs1lakh, thus impacting the returns of investors. This is a negative for stocks market investors and will increase the cost of equity.

• Government has proposed to implement Dividend Distribution Tax (DDT) of 10% on Equity Mutual Funds. Earlier, dividend received from equity mutual funds were tax free. Thus, the implementation of DDT will reduce the dividend income and in-hand return of the investors.