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08 Jul 2019


Revive growth through repair, reforms and innovation

Executive Summary

Acuité Ratings believes that the philosophy behind the Union Budget 2019 has been to grow and strengthen the economy through repair and reforms. In its opinion, there are three important focus areas for the government in the Budget exercise:

  • It intends to step up public investments and reinvigorate the economy with the proposal to deploy Rs. 100 lakh Cr in infrastructure sectors like roads, railways, power transmission, waterways and water management over the next 5 years along with private sector participation.
  • Secondly, it plans to strengthen the financial sector through measures such as further bank capitalisation of Rs. 70,000 Cr and better funding access to NBFCs through bank pool buyouts, supported by first loss guarantee up to 10%. It has also proposed to deepen the corporate bond market through the setting up of Credit Guarantee Enhancement Corporation and initiating corporate tripartite repo transactions. A separate electronic funding platform for the social sector and raising the minimum public holding to 35% from 25% will further provide buoyancy to the capital markets over the medium term.
  • Thirdly, there is a push for digitization and technological innovations through disincentives on large cash withdrawals, incentives for faster rollouts of electric vehicles and launch of smart cards in urban transport systems.

While the implementation of some of these measures will entail significant expenditure, the government is also intent on maintaining fiscal discipline and avoid any significant slippages on the fiscal deficit front.


Pursue growth with fiscal discipline

While India’s GDP is expected to reach the milestone of USD 3 trillion in FY20, the growth rate has slipped to 6.8% in FY19 and there are risks of a continuing slowdown. The government aspires to reach the milestone of $5 trillion GDP by FY24. Clearly, such growth targets need to be driven by a high level of investment with focus on channeling both domestic as well as foreign capital into infrastructure spending which is projected to be of the order of Rs. 20 lakh Cr annually over the next five-year period.

The government intends to keep the focus on fiscal discipline and continues to retain the earlier fiscal deficit target of 3.3% in line with the FRBM mandate despite the shortfall in expected revenues in FY19 and the public investment prerogative. It also expects to benefit from the declining interest rates with RBI having reduced the repo rate by 75 bps and Gsec yields in a gradually declining trajectory in the current calendar year. The interest obligations are a significant liability of the Government and currently stands at over Rs. 6.6 lakh Cr. Higher taxes are proposed to be raised through increased tax rates on very high-income individuals and additional duties on fuel. The government has also set itself an ambitious target of Rs. 1.05 lakh Cr through disinvestment of PSUs.

Infrastructure investments and foreign capital to act as key growth drivers

The government is clearly intent on stepping up public investments to propel the economy to a higher growth orbit. The proposal to invest Rs. 100 lakh Cr in the infrastructure sector over the next 5 years is expected to provide a boost to the economy and job creation in the construction sector. The government will continue to work on the development of the road sector and a budget of Rs. 80,000 Cr has been provided for the upgradation of 1.25 lakh kms of rural roads under PMGSY Phase III. Additionally, significant investments are planned for water management and conservation given the water crisis in certain parts of the country. There also will be further investments in rural electrification with a target to provide electricity access to every rural family by 2022. An impetus has been provided for affordable housing with an additional tax deduction of Rs. 1.5 lakh on the loan interest over and above the existing Rs. 2.0 lakh for house purchases up to Rs. 45 lakhs. This is likely to increase the demand for affordable housing particularly in tier 2/3 cities.

The government aims to attract foreign capital in a big way to support such large investment targets. The global financial market is currently characterized by an accommodative monetary policy in most developed economies such as the US, EU and Japan in the backdrop of a global growth slowdown. Such an environment provides a significant opportunity for a relatively high growth economy like India with macroeconomic stability and a low inflation regime to tap foreign capital at a competitive rate. Given the fact that India’s sovereign external debt at less than 5 per cent of its GDP is one of the lowest in the world, the government plans to raise sovereign bonds in external currencies. Such a step while diversifying the funding sources for the government will also help to address the effects of crowding out of domestic capital. Further, the budget has moved closer to rationalize KYC norms for FPIs, which have been stifled by stricter policy in the past. Also, 100% FDI has been allowed in sectors such as media and single brand retail which will go a long way in facilitating investments and job creation in the latter. Steps have been taken to promote the development of International Financial Services Centre (IFSC) such as tax concessions for the businesses being undertaken in them.

As part of a long-term plan to bring down the corporate tax rates, the government has provided relief to the small and mid-corporate segment by reducing the corporate tax rate to 25% for turnover up to Rs. 400 Cr as compared to the earlier ceiling of Rs. 250 Cr. Additionally, support has been provided for the MSME sector through an 2% interest subvention scheme for all GST registered SMEs and creation of a separate platform for them to facilitate timely payments particularly from the Government. Inadequate funding along with working capital constraints have been the key challenges for India’s SMEs and all such steps will complement the initiatives taken for the sector in the last two years, thereby providing incentives for growth and job creation.

Repairs and reforms for a healthy financial sector

The domestic financial sector has witnessed significant upheavals in the near past with a high level of stressed assets in the banking sector further aggravated by high profile defaults in the debt markets. This has led to a credit aversion among banks and mutual funds and inadequate availability of funds particularly in the NBFC sector that caters to the informal economy. In this context, the announcement of Rs. 70,000 Cr of capital infusion in public sector banks reflects the continuing commitment of the government towards their revival along with plans for consolidation and reforms. With banking sector NPAs over its peak and some of the weaker PSBs emerging out from the PCA framework, fresh capital infusion will help to step up lending for infrastructure asset creation among other things. In order to improve the fund flow to the fundamentally sound NBFCs starved of liquidity, the government proposes to provide a first loss guarantee to banks up to 10% for a loan pool purchase programme aggregating up to Rs. 1 lakh Cr within a six-month period. Further, the requirement of debenture redemption reserve (DRR) has been waived for public issuances of NBFCs, thereby encouraging fund raising though the latter route. The tax treatment for income from NPAs has also been standardized across banks and NBFCs, thereby benefitting the latter. Beyond these support measures, there is a clear intent to strengthen the supervisory and the governance framework of the non-banking sector- bringing the regulatory jurisdiction of HFCs back from NHB to RBI and higher powers to the latter to take appropriate actions against any erring management. Essentially, all these steps will go a long way to strengthen the financial sector and lay down a consistent regulatory framework for both banks and non-bank NBFCs.

As part of its ongoing efforts to deepen the corporate bond market, the government proposes to set up a Credit Guarantee Enhancement Corporation which will facilitate the issuance of longer-term bonds particularly against infrastructure assets. This is a welcome step in the backdrop of declining volumes in the primary bond market and challenges faced by the infrastructure sector in tapping the long-term debt market investors such as provident funds and insurance companies. Additionally, measures are to be taken to develop the corporate tri-party repo market where bonds rated up to AA- will be permitted as collateral. This is expected to improve the liquidity in the secondary bond market.

Apart from these measures to give a fillip to the bond market, the budget has taken a few initiatives which are expected to strengthen the domestic equity markets. One interesting proposal is the funding and listing of non-profit social enterprises through an electronic platform. This may lead to the formation of Social Stock Exchanges (SSE) under the guidelines of SEBI. Another is the suggestion to enhance the minimum public holding in listed companies from the current level of 25% to 35%. While the timeframe for the latter’s implementation is uncertain, it will not only help to enhance retail participation in the equity markets but also improve liquidity in mid-cap stocks and thereby the ability of promoters to access capital.

Continuing thrust on digitization and innovation to improve economic productivity

India has made significant progress in the path to digitization with the adoption of JAM (Jan Dhan Bank Account, Aadhar and Mobile) and one of the world’s highest per capita data consumption. In order to provide a further push to digitization, the budget has talked about multiple measures including a levy of 2% TDS on large cash withdrawals exceeding Rs 1.0 Cr from a bank account. With an objective to encourage a cash less economy, the government has also proposed higher use of low-cost digital payment modes such as UPI, Aadhaar Pay, NEFT, RTGS etc by businesses with annual turnover of over Rs. 50 Cr with no charges or merchant discount rates (MDR) on the latter or their customers. Clearly, such steps will help to create a robust payments infrastructure in the country; however, better pan India data connectivity will remain a crucial factor in the digitization agenda.

Among other innovations that are being pursued by the government, the key one is facilitating the development and usage of electric vehicles (EVs) as a replacement for petrol or diesel vehicles. The proposal to lower the GST rate for EVs from 12% to 5% and reduce customs duties on the components reflects the government’s resolve to move ahead on cleaner mobility. The above along with substantial tax exemption for EV purchase loans will work to reduce the existing large ownership cost gap with traditional vehicles. Acuité, nevertheless believes that the setting up of convenient and cost-efficient charging infrastructure will be critical for any steady buildup of EV demand in India.

Another innovative proposal worthy of mention is the launch of a National Transport smart card as part of a national mobility plan. Such a smart card can be used for various modes of transport such as roadways and railways and will particularly ease mobility for the daily urban commuters.


The Union Budget 2019 has laid down a good platform for sustainable economic growth and financial stability over the medium to long term. The impact of the budgetary measures on specific sectors has been outlined in Annexure-1. The budgetary figures are appended in Annexure-2. It however remains to be seen whether the immediate risks to short term growth can be addressed through such measures; also, effective implementation will be the key to the realization of the government’s vision of a USD 5 trillion Indian economy by FY2024.

                          Annexure-1: Sectoral Impact

Infrastructure Sector

  • Infrastructure sector will see increased growth in the Northeast states, with the Government proposing to increase the allocation by 21% to Rs. 58,000 Cr in FY19-20, we expect increased number of projects to be awarded in this region.
  • The government expenditure towards NHAI has remained fairly stable and in line with expectations. However, allocation under PMGSY has been ramped up by over 25% to Rs.19,000 Cr boosting infra spending in rural areas.
  • For railways, proposed capex in the industry is Rs. 66,700 Cr, of which the Government will support with Rs.55,100 Cr.
  • The government is also increasing focusing on major clean-up projects pertaining to the country’s water bodies and efficiently use water in irrigation. Government has proposed to use Public-Private Partnership to reach this goal.
  • To enhance the sources of capital for infrastructure financing a number of measures like a Credit Guarantee Enhancement Corporation would be set up in FY20, permitting of investments made by FIIs/FPIs in debt securities issued by Infrastructure Debt Fund – Non-Bank Finance Companies (IDF-NBFCs) to be transferred/sold to any domestic investor within the specified lock-in period.
  • Government has announced its intention to invest Rs.100 lakh Cr in infrastructure over the next five years. For this, it has proposed to set up an expert committee to study the current situation relating to long term finance; leveraging on past experience with development finance institutions, and recommend the structure and required flow of funds through development finance institutions.
  • Promoting the development of world class financial infrastructure in India, tax concessions have been provided in respect of businesses carried on from an IFSC.

MSME Sector

  • Government has introduced providing of loans up to Rs.1 Cr for MSMEs within 59 minutes through a dedicated online portal. Under the Interest Subvention Scheme for MSMEs, 350 Cr will be allocated for FY 2019-20 for 2% interest subvention for all GST registered MSMEs, on fresh or incremental loans. This would ease access to credit for MSMEs.
  • Government payments to suppliers and contractors are a major source of cash flow, especially to SMEs and MSMEs. Investment in MSMEs will receive a big boost if these delays in payment are eliminated. Government will create a payment platform for MSMEs to enable filing of bills and payment thereof on the platform itself.
  • To extend pension benefit to three Cr retail traders with an annual turnover less than Rs 1.5 CrunderPradhan Mantri Karam Yogi Man Dan Scheme (BE is Rs.750 Cr for FY20).
  • 100 new clusters will be set up in FY20 to enable 50,000 artisans to come into the economic value chain; to launch mission to integrate traditional artisans and creative persons with global market; to obtain GI/patents for them
  • Start-ups who provide details in returns will have no scrutiny in respect of valuation of share premium and period of exemption from capital gains from sale of start-ups extended; Start-ups will not be required to justify fair market value of shares issued to investors in Category II Alternative Investment Funds
  • Proposes to expand self-help groups to all districts; one woman in every SHG to get a loan up to Rs 1 lakh under Mudra Yojana


Real Estate

  • The period of exemption for levy of tax on notional rent, on unsold inventories, has been extended from 1 year to 2 years, from the end of year in which the project is completed. This will reduce tax burden on real estate players whose large pile of inventory has remained unsold in the recent years & demand is not picking up. Majority of housing inventory is lying unsold in metro & tier I cities like Mumbai, Pune, Bengaluru, Gurugram etc. This move is expected to benefit large developers in the real estate market.
  • Demand for affordable housing segment will improve. The benefits under Section 80-IBA of the Income Tax Act have been extended for one more year, i.e. to the housing projects approved till 31st March, 2020. Under Section 80-IBA, 100% profits are exempt for housing builders & developers (affordable housing) subject to some conditions. This move will make more homes available under affordable housing scheme and give a push to the crumbling real estate sector. Major cities for affordable housing segment include Hyderabad, Kolkata, Navi Mumbai, Ghaziabad (NCR) etc.
  • Deduction of interest for affordable housing:To incentivise purchase of affordable house, it has been proposed that a deduction of up to Rs. 1,50,000 for interest paid on loan taken for purchase of residential house having value up to Rs. 45 lakhs will be available. This shall be in addition to the existing interest deduction of Rs. 2 lakhs. This is expected to boost real estate sector and make property purchase more affordable.
  • Alignment of definition of affordable housing with GST Acts: In order to align the definition of affordable housing in the Income-tax Act with the GST Acts, the budget has proposed to increase the limit of carpet area from 30 square meters to 60 square meters in Metropolitan regions and from 60 square meters to 90 square meters in nonmetropolitan regions. It has also proposed to provide the limit on cost of the house at Rs. 45 lakh, which is in line with the definition in the GST Acts.
  • RBI will also get regulation authority of housing finance sector from the present National Housing Bank (NHB). This would lead to efficient and conducive regulation of housing sector.
  • Additionally, the budget proposes setting up 1.95 Cr houses under Pradhan Mantri Awas Yojna (Rural) in Phase II (By 2022). A total of 1.54 Cr rural homes have been completed in the last five years (Phase I). A model tenancy law to be also finalised and circulated to states, proposing steps for rental housing.


Agriculture Sector

  • The budget brings about a boost for agricultural infrastructure and would support private entrepreneurships in driving value-addition to farmers’ produce from the field and for those in allied activities like bamboo and timber. Benefits also for those engaging in generating renewable energy.
  • Government to form 10,000 new Farmer Producer Organizations, to ensure economies of scale for farmers over the next five years.
  • Central Government to work with State Governments to allow farmers to benefit from electronic agricultural national market (e-NAM). Presently, under the Agriculture Produce Marketing Cooperatives (APMC) Act, farmers are unable to get a fair price for their produce. For ease of doing business and living for farmers – Zero Budget Farming to be introduced, an innovative model which would train and help farmers in doubling their income.
  • The budget also proposes a focused Scheme – the Pradhan Mantri Matsya Sampada Yojana (PMMSY) – the Department of Fisheries is to establish a robust fisheries management framework which would address critical gaps in the value chain, including infrastructure, modernization, traceability, production, productivity, post-harvest management, and quality control as fishing and fishermen communities are closely aligned with farming and are crucial to rural India.
  • In addition, government will provide an assured income support to the small and marginal farmers, under "Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)” programme, aiding 12 Cr farmer families. It is expected to entail an annual expenditure of Rs.1.1 lakh Cr FY19-20. The scheme is expected to supplement farmer income and also aid meeting their needs before the harvest season.
  • The amount of interest subvention from government has doubled the crop loan to farmers which has increased to Rs.11.68 lakh Cr in 2018-19. With higher loan availability and other schemes by the government such as soil health cards, irrigation schemes and neem-coated urea to remove shortage of fertilizers, farmers to purchase better quality seeds which will lead to higher yields and incomes.
  • The government has allocated Rs. 550 Cr under scheme for creation and maintenance of buffer stock of Sugar as against Rs. 450 Cr in the previous budget. Further it has allocated Rs. 1000 Cr under scheme for assistance to sugar mills for 2018-19 season. We expect increased stability in profits in the segment.
  • Allocation under Rashtriya Gokul Mission increased to Rs.750 Cr in FY19. Also, the "Rashtriya Kamdhenu Aayog" to upscale sustainable genetic up-gradation of cow resources and to enhance production and productivity of cows. This is expected to increase the dairy output of the country, thus boosting the sector.
  • Under the Kisan Credit Card scheme, the government has increased support to animal husbandry and fishery farmers, with a 2% interest subvention and further on timely repayment an additional 3% interest subvention.
  • Increasing farmer reforms in the agriculture sector such as interest subsidies, will mitigate the debt stress in the sector, further subsidy on timely repayments will promote timely debt repayments in the sector.


Automotive Sector

  • Budget has been moderately positive for auto and auto ancillary sector. This is because in order to promote Make in India concept, basic customs duty on auto parts has been increased which ranges from 5 percent to 30 per cent.
  • On the other hand, however, increase of income tax slab to Rs.5 lakhs will boost disposable incomes from the middle-class segment which has been cautious over the last two years. The rural demand especially for motorcycles, mopeds would see impetus due to the direct benefit transfers to marginal farmers and increased allocation for rural roads by over 25% to Rs.9000 Cr under PMGSY. We expect this to have an incremental growth of 50-100 bps in FY 20.
  • Tractors segment to see marginal benefits as the direct benefit transfer scheme is for farmers with less than 2 hectares, a segment that has low tractor penetration.
  • Tax incentive for electronic vehicle will have a positive and direct impact on demand for this sector. Reducing GST rate on E-Vehicle to 5% from existing rate of 12% will have a significant positive impact on the sector.
  • However, increasing tax on income of upper income group may have an adverse impact on consumption luxury car segment, which is anyway reeling under a high tax incidence of 28% GST bucket + incremental cess.


Capital Goods & Machinery

  • To promote domestic manufacturing, customs duty reductions have been proposed on certain raw materials for capital goods. These include certain inputs of CRGO sheets, amorphous alloy ribbon, ethylene di-chloride, propylene oxide, cobalt matte, naphtha, wool fibres, inputs for manufacture of artificial kidney and disposable sterilized dialyzer, and fuels for nuclear power plants. To further incentivize e-mobility, customs duty is being exempted on certain parts of electric vehicles. Customs duty is also being exempted on capital goods required for manufacture of specified electronic goods.
  • Budget has also abolished import duties on 36 capital goods which will increase imports of capital goods. This would further reduce competitiveness of domestic industry as India already imports majority of capital goods. However, this would be helpful for consumer goods manufactures as their cost of investment reduces. Current account deficit of capital goods is expected to increase further.


Gems & Jewellery

  • Increased disposable incomes to the tune of Rs.5-10 thousand per household per annum for about 20-30 lakh households due to raised income tax bracket should serve as tailwinds for jewellery designers. The middle class drive most of the demand for gold. Middle class people usually park part of their savings in gold. With average disposable income set to increase, demand for gold is expected to rise. However, the budget has proposed that custom duty on gold and other precious metals would increase from the current 10% to 12.5%, partly offsetting such demand.


Mining & Metals

  • The Ministry of Mines has allocated Rs.1690 Cr for mineral exploration for the fiscal year 2019-20. This is 3.4 per cent lower compared to the revised allocation of Rs.1750 Cr for 2018-19; Rs.822 Cr for the exploration of coal and lignite was allocated. This is expected to boost India’s domestic coal production. Further the trickle effect from expected improvement in Infrastructure, real estate and auto segments expected to bolster iron ore and bauxite production.


Textile Sector

  • Textile industry will see benefit from the relaxation for MSME’s on funding and interest rates. The budget allocation towards technological upgradation (TUFS) scheme has seen a decline to RS. 700 Cr from previous allocation of Rs. 2300 Cr. Last year only 30% of the budgeted amount could be used due to low disbursements in the sector. Procurement of cotton by cotton corporation under price support scheme is allocated Rs. 2018 Cr for FY19-20 as against Rs. 924 Cr in previous budget, an increase of 118%. We expect cotton input prices to stabilize and witness an increase in investments in MSME textile space.
  • GST rates for Textiles goods such as caps, synthetic filament yarn, artificial filament yarn, sewing to reduce from 18 per cent to 12 per cent.


Renewable Power Sector

  • There were no schemes for pushing renewable energy. With muted capacity addition to the tune of 5GW in FY19 (till December), the target of 175 GW till 2022 seems like an overstretch. There was a decline in allocation for Wind projects by 25%, down from Rs. 950 Cr in FY 19 while allocation for Solar remained stable.
  • To ensure power connectivity everywhere – One Nation, One Grid to be established– that has ensured power availability to states at cheaper prices.
  • Government had launched Ujjwal DISCOM Assurance Yojana (UDAY) in 2015 aimed at financial and operational turnaround of DISCOMs. Government is examining the performance of the Scheme and it may be further optimized. A package of power sector tariff and structural reforms would soon be revealed as well.
  • In a bid towards further reduction in customs duty to promote renewable energy, all goods required to set up nuclear power plant would be nil.


Healthcare Sector

  • GOI has announced an allocation of Rs. 1750 Cr for capital expenditure and Rs. 61547 Cr revenue budget under Ministry of health and family welfare.
  • Under the Ayushman Bharat scheme, it aims to provide medical treatment to 50 Cr people. Under Pradhan Mantri Jan Arogya Yojana PMJAY the government has allocated Rs. 6400 Cr, the scheme will provide cover of Rs. 5 lakh per family.
  • Rs 250 Cr has been allocated for setting up Ayushman Bharat Health and Wellness Centers under the National Urban Health Mission to provide comprehensive and quality primary care. Rs 1350 Cr has been earmarked for setting up Health and Wellness Centers under the National Rural Health Mission. The government allocated Rs.2,500 Cr to its National AIDS and STD Control Programme 20% increase from the previous year. The Rashtriya Swasthya Bima Yojna (RSBY) which features under the NHM saw an allocation of Rs. 6556 Cr. for FY19-20.
  • All of this should increase healthcare awareness and penetration in the rural areas, which will trickle into the private healthcare sector.


Financial Sector (Banks, NBFCs)

  • Government proposed to provide an incremental Rs.70,000 Cr capital infusion and will carry further consolidation of the PSBs.
  • Fundamentally sound NBFCs to keep getting funding from banks and mutual funds
  • To allow FIIs and FPIs investment in debt securities issued by NBFCs
  • Requirement of Debenture Reservation Reserve to be done away with for NBFCs
  • A one-time 6-month partial credit guarantee is proposed to be to be given to public sector banks for the purchase of high-rated pooled assets of structurally important NBFCs amounting to Rs 1 lakh Cr in FY20.
  • To encourage digital payments, TDS of 2% on cash withdrawal exceeding Rs.1 Cr in a year from a bank account has been levied. This would be a big boost in increasing digital transaction volumes through various payment modes like UPI, BHIM, etc.


                              Annexure - 2: Key Budgetary Figures

Fiscal Statistics (% of GDP):

Fiscal Statistics: (All amount in Rs. Cr)

Source of Financing Deficit:

Subsidy and Pension:

Expenditure in major sectors:

Revenue from Major Sources: