Budget strong on intent

Implementation is the key to growth sustainability

Acuite believes that the Union Budget 2018-19 has set up a good platform for rejuvenation of the economy and for a balanced development of the key sectors. However, focused implementation of the measures announced is critical to ensure that the objectives on growth and macroeconomic stability are achieved.

The Indian economy has benefitted significantly from the low oil prices between 2014-17. However, with the firming up of commodity prices and particularly oil, the inflationary headwinds are visible in 2018-19. The government would therefore, need to address the challenge of inflation along with driving the economy into a stronger growth trajectory.

Acuite is of the opinion that the budget of the current year has five fundamental themes which are elucidated here as follows:

• Strengthen the rural economy
  
  The budget's focus on the rural economy has been consistent with our expectations and we believe that schemes such as Pradhan Mantri Awas Yojana (factoring in MGNREGA) as well as vegetable marketing co-operatives will boost rural incomes and consumption power. The thrust on irrigation will strengthen the longer term farm output in the country. It is noted that global agricultural market size is worth around $1.6 trillion - India’s share is only 2.2% and there is an immense untapped potential and indicator of the sector’s potential.
  
  The key measure for agriculture in fixing Minimum Support Price (MSP) for agro commodity at 1.5 times of product cost will give a fair valuation of agricultural products. This is expected to benefit around 12 crore farmers in India and help in achieving the goal of doubling the farmers’ income by the year 2022. The subsidy on food items has increased by a very substantial 16.5%, in line with the requirements for MSP support. However, as we mentioned in our pre budget commentary, inflation is a major aspect in India’s economic sustainability and higher MSPs may augur an increase in food inflation.
  
  The budget has the highest allocation for infrastructure with almost Rs. 5 lakh Cr earmarked with particular focus on the rural infrastructure, transport and roads. We expect such investment to be a major driver of the economy with significantly positive impact on sectors such as food processing, agricultural machinery, cement, construction equipment and rural focused NBFCs.

• Put SMEs on fast-track
  
  The budget has trimmed the corporate tax rate for companies with turnover of less than Rs. 250 Cr to 25%; this will lower the tax burden for almost the entire MSME sector thereby making them more competitive. The budget has also allocated Rs. 3 lakh crore under MUDRA scheme to facilitate funding for the start-up companies. This will encourage entrepreneurship and higher number of registrations with Udyog Aadhaar portal is expected.

• Provide impetus to "Make in India"
  
  The budget proposes a rise in custom duties on certain categories of manufactured products which will support the growth of the domestic industry, which has been increasingly impacted by cheaper imports of such products. Higher customs duty announced for products in auto components, food processing, textile, electronic and footwear sectors will facilitate scalability and higher investments in domestic manufacturing capacity.

• Further thrust on Social Development
  
  Providing affordable housing to the poor people has been a top priority of this government. The government has constructed 51 lakh houses in rural area in FY18 under Pradhan Mantri Awas Yojana. It has proposed to construct another 51 lakh houses in FY19 as well. Likewise, financial assistance will be provided to construct 37 lakh houses in urban area. This will create strong demand for the real estate, construction, cement and steel industry.
  
  We see the India Health Mission as perhaps the most important announcement in the budget as it will be critical for affordable healthcare services. The health mission is an extension of the Affordable Medicines and Reliable Implants for Treatment (AMRIT) scheme and initial allocation of Rs. 2,000 crores will expand multifold in the coming years. It proposes to create medical coverage for 10 Cr poor households’ hospitalization expenses. While generics and certain implants such as stents have already been made cheaper, the mission will target the intensive care and treatment aspect of Indian healthcare system.
  
  In order to improve the quality of education, the government has proposed to train 13 lakh teachers. Moreover, the government has proposed to shift the education system from "black board" to "digital board".

• Boost to Bond Market
  
  The government has proposed to undertake two initiatives to expand the bond market. First, it is considering guidelines for large corporate to raise a minimum of one-fourth of funding from corporate bond market. Secondly, it is also considering an inclusion of "A" category rated bond for eligible investments by provident, pension and insurance sector. Currently, the outstanding corporate bond in the market is Rs. 26.47 trillion. If these regulations are put in place, bond market is expected to witness a sustained healthy growth.
  
  
• Sectoral Impact of Budget FY19