The government has delivered a very pragmatic budget with realistic financial assumptions.

Even though the budgeted fiscal deficit (FD) for FY16 is pegged at 3.9% versus expectation of 3.6%, the quality of FD has improved remarkably with a sharp increase of 25% in capital expenditure. The tax to GDP is likely to improve from 9.9% to 10.3% and subsidies are budgeted at 1.7% of GDP compared to 2.1% in FY15. Inspite of the saving in subsidies and other expenditure of 0.8% and increase in revenue of 0.4%, the reduction in fiscal deficit for FY16 is still low (0.2% over FY15) due to the increase in transfer to states by nearly 1% of GDP.

The tax revenue collection estimates appear to be conservative as explained below:

The net market borrowing through dated Govt securities has been pegged at Rs 4,56,405 crores compared to Rs. 4,46,922 crores in FY15. In addition, the total tax devolvement and grants to states and union territories has increased by Rs 1,59,800 crores (up 24% YoY), which should result in a much lower issuance of bonds.

Some of the key highlights of the budget are:

1) Infrastructure Push and Revival of Capex

1. Outlay for Roads increased by 178% YoY to Rs 85,607 cr and Urban Infra by 51% YoY to Rs 14,600 cr.

2. PSU capex increased from Rs 2,37,045 cr to Rs 3,17,889 crore, up 34% YoY

3. Additional depreciation allowance of 20% on new plant & machinery for one year

4. National Investment and Infrastructure Fund (NIIF) to be established with an annual outlay of 20,000 crores, this will be leveraged and infused as equity in infra finance companies.

5. Tax free infrastructure bonds for rail, road and irrigation sectors also.

6. 5 new Ultra Mega Power Projects, each of 4000 MW, in the Plug-and-Play mode. Similar model for Road, Railway, airport and ports also envisaged

7. Target for renewable energy capacity revised to 175 GW by 2022, comprising 100GW Solar, 60 GW Wind, 10GW Biomass and 5GW of Small Hydro.

8. Public contract dispute resolution Act to be introduced - aimed at reducing litigations/disputes in infra projects.

9. To introduce a regulatory reform law to amend the regulatory frame work across sectors of infrastructure.

10. Revitalize PPP mode of infrastructure development with major part of risk assigned to government.

11. Corporatisation of major ports to leverage land resources and attract private investment.

2) Ease of doing business - number of steps taken to improve the ease of doing business in India. Endeavour is to have 'minimum government and maximum governance' in place.

1. Proposed a plug-and-play model wherein all clearances and linkages will be put in place before a project is awarded. They have started this initiative with five new UMPPs with the aim of extending this to other infrastructure projects over time.

2. Reduce the number of clearances. Launched an e-biz portal, which integrates 14 regulatory permissions at one source.

3. GAAR deferred by 2 years and its application to be done on a prospective basis.

4. Corporate tax rates aim to be moderated and simplified. Various tax exemptions to be withdrawn.

5. Implementation of GST.

3) Measures to curb black money

1. New bill in the current budget session on black money to specifically deal with black money stashed abroad.

1. Concealment and/or non-disclosure in IT return of foreign assets will be liable to rigorous imprisonment.

2. Penalty at 300% of tax on concealed income.

2. Benami Transactions (Prohibition) Bill to enable confiscation of benami property especially in real estate.

3. Quoting of PAN mandatory for any purchase or sale exceeding Rs1 lac.

4. New measures to incentivize credit or debit card transactions, and disincentivise cash transactions soon.

4) Consumption

1. Impact of Budget proposals is neutral for domestic consumption.

2. There are no proposal directly impacting disposable income of consumers, but they will have to pay slightly higher amount for the various services, due to the increase in service tax rate from 12.36% to 14%.

3. Budget also gives power to government to levy Swachh Bharat Cess of 2% on services, from a date to be notified.

4. For employees below a certain threshold of monthly income, contribution to EPF would be optional, without affecting employer's contribution. This could boost current disposable income for such employees.

5) Personal Income

1. There are no major changes in direct tax rates.

2. There is an increase in the deductions permissible in calculation of taxable income by Rs 60,000 towards health insurance premium and contribution to the National Pension Scheme (NPS). Also exemption under transportation allowance raised by Rs 9,600.

3. However contrary to expectations, permissible deductions for other savings (Section 80C) and for interest on housing loans have not been changed.

4. Surcharge has been increased from 10% to 12% for those earning income higher than Rs 1 crore.

6) Social Sector

1. The Budget contains several measures to provide social security net and achieve inclusive growth.

2. Direct Transfer of Benefits scheme is to be extended with a view to increase number of beneficiaries from 1 crore to 10.3 crore.

3. Two new insurance schemes, namely Pradhan Mantri Suraksha Yojna and Pradhan Mantri Jeevan Jyoti Bima Yojna have been launched to provide for death insurance cover of Rs 2 lac in case of accidental and any kind of death respectively for premium of Rs 12 and Rs 330 per year. A new pension scheme, Atal Pension Yojna, has also been constituted wherein government will bear 50% of the premium, limited to Rs 1000 per year, for five years.

4. Deen Dayal Upadhyay Gramin Kaushal Yojna has been constituted to enhance employability of rural youth. More branches of premier educational institutes are planned to be opened at different locations.

5. Government has also reiterated its ambitious agenda of housing, 24x7 electricity, clean drinking water, toilet and road connectivity for all households by 2022. This involves building of 2 crore new homes in urban areas and 4 crore new homes in rural areas. Ensuring medical services in each village and senior secondary school within 5 km reach of every child while improving quality of education and learning objectives are also long term plans of the government.

6. Allocation to MNREGA has been raised, with focus on raising quality and effectiveness of spend.

7) Agriculture

1. Recognizes the problem of stress on agriculture incomes.

2. Government to work with State governments, under NITI, for creation of a Unified National Agriculture Market to get better price for agriculture produce.

3. Soil health cards scheme will enable appropriate usage of inputs and aid productivity.

4. Significantly higher allocation to micro irrigation. Focus on watershed management and the Pradhan Mantri Krishi Sinchai Yojna.

5. To allow tax free bonds to fund irrigation facilities.

8) Capital markets & Corporates

1. Introduction of composite cap for foreign investment- Distinction between FDI and FPI removed.

2. Merger of FMC into SEBI- Single regulator for Equity, Commodity & Currency markets.

3. Corporate tax- Effective corporate tax to increase from 34% to 34.6%, due to increase in surcharge. But roadmap laid to reduce basic corporate tax rate to 25% from the current 30% over 4 years starting from FY17 and removal of plethora of exemptions.

4. Distribution tax - Increase in surcharge from 10% to 12% on Dividend distribution tax and buyback of shares, or by mutual funds and securitisation trusts on distribution of income.

5. Sovereign Gold Bond- Instrument carrying fixed rate coupon and redemption value linked to gold price, as an alternative to physical gold. Could help structurally alleviate pressure on the Current Account.

6. Real Estate Investment Trusts (REITs) - Rationalization of taxation for REITs and Infrastructure Investments Trusts (InvITs), including pass-through status.

7. Boost to on-shore fund management - Changes to tax norms to remove disincentives for locating fund manager within India. Positive for development of asset management industry in India.

8. Public Debt Management Agency (PDMA)- Creation of independent agency to handle internal and external debt markets. Would lead to deepening of the bond markets.

Our assessment of the Sectoral impact of changes in the budget is summarized below:

Banking & Finance

1. Formation of Bank Board Bureau (BBB) en-route to formation of Bank Investment Committee - structural positive for governance on public sector banks.

2. Bankruptcy code- Comprehensive bankruptcy code will help in speedy resolution of stressed assets in banks.

3. Applicability of SARFAESI Act to NBFCs- Will bring regulatory parity in matters of recovery for NBFCs in line with Banks.

4. Setting up of Micro Units Development Refinance Agency (MUDRA) Bank- To facilitate easy access to formal banking channels for micro and small entrepreneurs and also aid socio-financial inclusion.

5. Electronic Trade Receivables Discounting System (TReDS) for SME- This should improve the liquidity in the MSME sector significantly

Oil & gas

1. Budget subsidy provision of Rs300bn implies flat realisation for upstream oil companies in FY16E as FY14 assuming no rollover of subsidies in FY16 and Brent at $60/bbl in FY16E.

Telecom

1. Total receipts are flat for FY14, FY15RE and FY16. Hence, the budget implicitly assumes a similar sized auction in FY16 as well. This is neutral for the sector.

Media

1. Service tax increase from 12.36% to 14% is marginally negative for broadcasters and DTH operators.

2. The inclusion of amusement parks in the service tax ambit is a material negative till GST comes into force as parks would be paying both entertainment tax and service tax. Multiplexes continue to be exempt from service tax.

Pharma

1. Additional investment allowance (@ 15%) and additional depreciation (@35%) to new manufacturing units set up during the period 01-04-2015 to 31-03-2020 in notified backward areas of Andhra Pradesh and Telangana (both states are Pharma manufacturing hubs)

2. Full tax paying companies would benefit from lowering of corporate tax rate from 30% to 25% over 4 years. Low tax paying companies could get impacted from withdrawal of exemptions

Auto sector

1. Marginal increase in excise duty rate from 12.36% to 12.5%

2. Indirect positives are re-iteration of GST implementation timeline of April, 2016, significant increase in allocation towards road-building.

3. The stress on infrastructure is positive for CV sector.

Metals

1. Effective rate of clean energy cess is being increased from Rs.100 per tonne to Rs.200 per tonne on all types of coal

2. Potential impact of 2-3% on the landed cost of coal which is likely to increase cost for aluminium players

IT services / Software

1. Expect companies paying Effective Tax Rate (ETR) above 25% to be benefited and those IT companies paying an ETR of less than 25% could have negative implications

Consumer

1. Increase in service tax rate also to impact companies consuming services in a significant manner. E.g. all retailers paying rent. It also increases prices of services for consumers, which could impact demand. E.g. restaurants, QSRs, etc.

2. Definition services expanded to include

1. Job work in manufacture of alcoholic liquor. Negative for alcoholic beverages companies.

2. Entry to amusement parks.

3. Transportation of food stuff other than food grains and agricultural produce. Negative for restaurants sector.

3. Requirement of PAN card for all transactions in cash above Rs 1 lac. Negative for Jewellery sector. Also plan to create Gold Monetization Scheme by replacing existing Gold Metal Loans could mean higher cost of working capital for jewellery sector.

4. Excise duty on leather footwear selling above Rs 1000 reduced from 12% to 6%. Positive for footwear industry.

5. Excise duty on cigarettes raised by 15%-25%. Negative for cigarette companies.

6. Goods brought under excise duty @ 2% (without CENVAT) from being exempt earlier - condensed milk & peanut butter. Negative for specific FMCG companies.

7. Rate of tax on royalty and fees reduced from 25% to 10%. Positive for MNC companies paying royalty fees to parents.

Conclusion and Market Outlook:

In summary, the budget scores very high on nearly all parameters.

It sets the economy on a higher and sustainable growth path, desists from populism, aims to improve business conditions, improve government's functioning and improve delivery of services to citizens while maintaining fiscal discipline.

The budget reinforces our view of improving economic conditions in India.

We maintain a positive outlook of equity and fixed income markets.

While the fiscal deficit number is a shade higher than market expectations, the quality of the deficit is very good. Further, the view that inflation has a greater bearing on interest rates than small changes in fiscal deficit, we maintain our view that interest rates should continue to move lower in the medium term.

Improving growth prospects of the economy, especially of the capex cycle, improving margin outlook of corporates, likely lower interest rates and reasonable valuations lead to a positive outlook for equity markets over the medium to long term.

DISCLAIMER: This document is dated February 28, 2015 and views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. It is issued for information purposes only and is not an offer to sell or a solicitation to buy/sell any mutual fund units/securities. It should be noted that the analysis, opinions, views expressed in the document are based on the Budget proposals presented by the Honorable Finance Minister in the Parliament on February 28, 2015 and the said Budget proposals may change or may be different at the time the Budget is passed by the Parliament and notified by the Government. The information contained in this document is for general purposes only and not a complete disclosure of every material fact of Indian Budget. For a detailed study, please refer to the budget documents available on www.indiabudget.nic.in. The information/ data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. All opinions and estimates included in this document constitute our view as of this date and are subject to change without notice. Stocks / Sectors referred herein are purely illustrative and are not recommended by HDFC Mutual Fund/ HDFC Asset management Company Limited (HDFC AMC). The Fund may or may not have any present or future positions in these Stocks/ Sectors. Neither HDFC AMC nor HDFC Mutual Fund nor any person connected with it accepts any liability arising from the use of this information. The recipient(s) should before taking any decision based on the information contained in this document should make his/their own investigation and seek appropriate professional advice. HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme(s).The recipient alone shall be fully responsible / liable for any decision taken on the basis of this document. No part of this document shall be duplicated, copied or distributed in whole or in part in any form without prior written consent of the HDFC AMC / HDFC Mutual Fund.

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