UnionBudget

Union Budget2019-20
2019-20
AAReasonable
ReasonableOne
One

The first Union Budget of the re-elected NDA Government has tried to balance conflicting needs. It ticks most
of the right boxes and resists the temptation to infuse fiscal stimulus to support growth.
A brief snapshot of the fiscal journey over the past 5 years highlights the following points
 Rise in gross revenue has been offset by increase in devolution to states. Further, Non tax revenue as % of
GDP declined from 1.6% of GDP in FY15 to 1.3% in FY19.
 Revenue expenditure excluding subsidy and interest payments has remained largely stable.
 Subsidy has decreased substantially from 2.1% of GDP in FY15 to 1% of GDP in FY19. However, this was
largely attributable to lower food and petroleum subsidy. It should be noted that food subsidy might not
reflect the true picture in FY19 due to substantial pending dues.
 Capital expenditure as percentage of GDP has remained stable at 1.6%. However, part of expenditure has
shifted to Central Public Sector Enterprises which are funded through External budgetary resources.
 Fiscal deficit has reduced over past 5 years from 4.1% to 3.4%.

% of GDP FY15 FY16 FY17 FY18 FY19 FY20

Net Tax Revenue 7.2% 6.9% 7.2% 7.3% 6.9% 7.9%
Gross Tax Revenue 10.0% 10.6% 11.2% 11.2% 10.9% 11.7%
Income tax 2.1% 2.0% 2.3% 2.5% 2.4% 2.7%
Corporate tax 3.4% 3.3% 3.2% 3.3% 3.5% 3.6%
Goods and service tax 0.0% 0.0% 0.0% 2.6% 3.1% 3.2%
Customs duties 1.5% 1.5% 1.5% 0.8% 0.6% 0.7%
Excise duties 1.5% 2.1% 2.5% 1.5% 1.2% 1.4%
Service tax 1.3% 1.5% 1.7% 0.5% 0.0% 0.0%
Other taxes 0.1% 0.1% 0.1% 0.1% 0.1% 0.0%
Less
States' share 2.7% 3.7% 4.0% 3.9% 4.0% 3.9%
NCCD transferred 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Non- Tax revenue 1.6% 1.8% 1.8% 1.1% 1.3% 1.5%

Capital Receipt 0.4% 0.5% 0.4% 0.7% 0.5% 0.6%

Revenue Expenditure 11.8% 11.2% 11.0% 11.0% 10.6% 11.7%

Subsidies 2.1% 1.9% 1.5% 1.3% 1.0% 1.6%
Interest payments 3.2% 3.2% 3.1% 3.1% 3.1% 3.1%
Revenue expenditure ex subsidies and interest 6.5% 6.0% 6.3% 6.6% 6.5% 6.9%
Capital expenditure including loans & advances 1.6% 1.8% 1.9% 1.5% 1.6% 1.6%
Fiscal Deficit 4.1% 3.9% 3.5% 3.5% 3.4% 3.3%
Source: CMIE.
Union Budget 2019-20
A Reasonable One

The budget was presented under the shadow of slowing growth, limited fiscal space, discretionary consumption
slowing, private capex not reviving significantly and global headwinds. Further, the structural factors like slowing
household savings rate and low investment rate are also adversely impacting the growth. Keeping these
constraints in mind, budget is quite reasonable.
The, budget has no fiscal stimulus and tax cuts to support consumption, which is a prudent approach in our
opinion. The focus has been to drive down the cost of capital with likely launch of foreign currency denominated
sovereign debt. This should keep the yields low and in turn may nudge growth in private investment. However,
the impact of foreign currency debt could pose challenges in medium to long term.
A detailed commentary of the key issues in the budget follows.
Fiscal Snapshot

FY20 fiscal deficit target has been revised marginally downward to 3.3% of GDP from 3.4% of GDP for FY19
primarily supported by higher revenue collection from additional excise duty raised on petrol and diesel as well
as higher custom duties especially on import of gold. This should help government to set off the increase in
expenditure. Further, government is estimating strong growth in personal income tax and also additional
dividends.

Some of the key assumptions for this are given below:

Growth assumptions based on Remarks
provisional actual numbers
Nominal GDP : 11.0%  Revenue assumptions appear optimistic by nearly Rs. 63,000
crs (~0.3% of GDP, Income tax - Rs 33,000; Customs - Rs
Corporation Tax : 15.4%
12,000 and Excise duties - Rs 18,000)
Personal Taxes : 23.3%  Aggressive increase in dividend/profits.
Custom & Excise: 30%  Expenditure may have to be reduced to keep the net shortfall
GST : 13.6% at Rs 50,000-60,000 crs

 The quality of budgeted expenditure was worse off than FY19 with revenue expenditure increasing by 22%
as compared to 11.8% increase in capital expenditure.

Major Budget Proposals

 New Jal Shakti Mantralaya to ensure ‘Har Ghar Jal’ – water in every household
 Pension benefits to retail traders and small shopkeepers under Pradhan Mantri Karam Yogi Maandhan
 Establish robust fisheries management framework under Pradhan Mantri Matsya Sampada Yojana (PMMSY)
 Bharatmala phase 2 to be launched. State road networks to be developed.
 PPP in railways infra development. Improving operating ratio of railways, from 98.4% in 2017-18 to
budgeted estimate of 95% for 2019-20
 Houses under PMAY-Urban – Sanctioned: 81 lakh, Construction started: 47 lakh, Completed: 26 lakh,
Delivered: 24 lakh
Union Budget 2019-20
A Reasonable One

 Houses under PMAY- Rural - 1.5 crore rural homes completed, 1.95 crore houses proposed for second phase.
o Average days for completion down to 114 days in 2017-18 from 314 days in 2015-16
 Measures for boosting infrastructure financing:
o Credit Guarantee Enhancement Corporation to be set up in 2019-20
o Action plan to deepen long term bonds market
o To permit transfer of FII/FPI investment in debt securities issued by IDF-NBFCs to domestic investors
Direct Taxes:
 Effective tax rate for individuals having taxable income between Rs 2 crore & Rs 5 crores has been increased
by 3% and for those above Rs 5 crores increased by 7%.
 TDS of 2% on cash withdrawal exceeding Rs 1 crore in a year from a bank account to promote less cash
economy.
 Threshold for applicability of lower corporate tax rate of 25% increased from ₹250 crore to ₹400 crore.
99.3% of companies will now come under this bracket.
 Listed companies shall also be liable to pay additional tax at 20% in case of buy back of shares, as is the case
currently for unlisted companies.
 Additional deduction upto Rs. 150,000 for interest paid on loan taken for purchase of residential house
having value upto Rs. 45 lakh.
 Additional income tax deduction of Rs 150,000 on the interest paid on loans taken to purchase electric
vehicles.
 Increase the limit of exemption from current 40% to 60% of payment on final withdrawal from NPS.
 Relief in levy of Securities Transaction Tax (STT) by restricting it only to the difference between settlement
and strike price in case of exercise of options.
 International Financial Services Centre (IFSC) – additional tax benefits to promote and develop IFSCs at par
with similar IFSCs in other countries.
 Scheme to invite global companies through a transparent competitive bidding to set up mega-
manufacturing plants (in sunrise and advanced technology areas) and provide them investment linked
income tax exemptions under section 35 AD of the Income Tax Act, and other indirect tax benefits.
Simplification of Direct Tax System to benefit Tax-payers
 A scheme of faceless electronic assessment involving no human interface to be launched this year. Cases
selected for scrutiny shall be allocated to assessment units in a random manner and notices issued
electronically.
 Pre-filled tax returns will be made available to taxpayers to reduce time taken to file a tax return and also
ensure accuracy of reporting of income and taxes.
 Sabka Vishwas Legacy Dispute Resolution Scheme proposed for quick closure of erstwhile service tax and
excise related litigations.
 Fully automated GST refund module shall be implemented. An electronic invoice system is proposed that
will eventually eliminate the need for a separate e-way bill from January 2020.
Union Budget 2019-20
A Reasonable One

Other Proposals:
 Proposed to SEBI that the promoter holding limit be brought down from 75% to 65%.
 GoI to raise part of its gross borrowing programme in external markets in external currencies.
 100% Foreign Direct Investment (FDI) will be permitted for insurance intermediaries. Local sourcing norms
will be eased for FDI in Single Brand Retail sector. GoI examining further opening up of FDI in aviation, media
(animation, AVGC) and insurance sectors.
 FPI limit in companies go up to the sectoral foreign investment limit automatically.
 Rationalize and streamline the existing Know Your Customer (KYC) norms for FPIs to make it more investor
friendly.
 Creating an electronic fund raising platform for listing social enterprises and voluntary organizations
working for the realization of a social welfare.
 GoI to take measures to develop T-bills and government securities market for retail investors.
Sectoral Impact
Sectors Impact
Positives
 Recapitalisation of PSU banks by INR 70,000cr – would support credit growth in the
economy
 One Nation one card – Rupay card with feature to pay across different areas – like metro
fare, toll taxes, bus travel, parking charges, etc., would promote digital transaction.
 Government to raise a part of its gross borrowing program in external markets in foreign
currencies. This is positive for the bond market
Banks
 Interest subvention of 2% on fresh loan or incremental loan upto INR 1cr – provided the
MSME has GST registration
 Platform to facilitate timely payment to SME & MSME for government related contract
work
Negatives
 MDR on digital transaction done via BHIM UPI, UPI-QR Code, Aadhaar Pay, certain Debit
cards, NEFT, RTGS etc has been waived off on merchants with turnover above INR 50cr
Positives
 For purchase of high rated pooled assets of NBFC, GOI to provide one time 6 months
partial credit guarantee for first loss up to 10% to PSU banks for a pool of INR 1 tn. This
would provide the necessary liquidity support to the NBFC sector
 Interest on bad or doubtful debts in the case of deposit-taking NBFC and systemically
important non deposit-taking NBFC shall be charged to tax on receipt basis. Would
provide a level playing field to NBFC and Banks
NBFCs & HFCs
 To enhance regulatory power of RBI over NBFC – would improve the credibility of the
sector
 Regulation of HFC’s to move to RBI from NHB
 Additional deduction of INR 1.5 lac (over & above INR 2 lac currently available) towards
interest paid on housing loan borrowed before Mar-20 for buying affordable housing
up to INR 45 lacs – would provide a stimulus to the housing market positive for HFCs,
Banks and Real estate developer
Insurance & Capital Positive
markets  100% Foreign Direct Investment (FDI) will be permitted for insurance intermediaries
Union Budget 2019-20
A Reasonable One
Sectors Impact
 To raise the foreign shareholding limits to maximum permissible sector limits for all PSU
companies which are part of Emerging Market Index.
Negative
 Investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS). This
would encourage long term investment in CPSEs, negative for flows in Mutual fund ELSS
scheme.
 Buy back of shares by listed entity would attract tax at the rate of 20%
Neutral
 No quick fix stimulus to revive rural consumption.
FMCG & Consumer
Durables
 Re-imposition of excise duty on cigarettes was at negligible rates.
 Increase in customs duty on split AC outdoor and indoor units likely to make ACs more
expensive.
Neutral
 Rise in customs duty on gold by 250 bps may put pressure on domestic demand for gold
Retail in the short to medium term.
 Easing of local procurement norms for single brand retail FDI may lead to higher FDI
investment in the sector.
Positive
Paper  Imposition of 10% customs duty on newsprint and other types of paper used by
newspapers / magazines is a positive for domestic paper manufacturers.
Negative
 EV Initiative
 Government has now recommended to the GST council that duties on EVs (2w or 4w)
will be at 5%.
 Thus in 2ws case the petrol 2ws are taxed at 28% and EV at 5%. This should encourage
Auto EV 2Ws in India.
 Income tax exemption on interest on E vehicles up to Rs1.5lakhs. This loan is to be taken
before 31st March 2023.
 Customs duty exempt on E Drive Assembly, on board charger, E Compressor and
Charging gun.
 Government encouraging lithium production in India.
Positive
 Allocation for railways is increased by 15% to Rs1599 bn in FY20 (vs Rs1388bn in FY19RE
and Rs1599bn in interim budget).
 Key focus has been emphasised on rolling stock (+64% YoY).
Railways  Capex requirement of Rs50trn between 2018 to 2030 to complete the sanctioned
projects to fulfilled by PPP route. Key project spends include rolling stock (Rs34,515
crores, +15%), track renewals (Rs10,120 crores, +19%), doubling of lines (Rs17,602
crores, +2%), electrification (Rs6,960 crores, -1%) and new lines (Rs7,678 crores, -8%).
 Metro Rail - Total support for metro rail space in FY20 will be Rs. 18400 Cr, up 18%
Neutral
 The financial outlay for the defence sector remained unchanged as it was in interim
budget. The defence budget is Rs3.1 trillion in FY20 against FY19RE of Rs2.9 trillion
(+5.3% over FY19RE).
Defence
 Out of total budget, the capital outlay is estimated to be Rs1034 bn, up 10% over
FY19RE.
 Import of defence equipment that are not being manufactured in India is being
exempted from the basic customs duty.
Union Budget 2019-20
A Reasonable One
Sectors Impact
Negative
Media
 10% basic customs duty on newsprint to impact Print media companies negatively.
Neutral
 LPG/Kerosene subsidy provision unchanged from the Feb-19 vote on account.
 Re1/tonne custom duty on crude oil import. Negligible - perhaps levied to have better
accountability of import.
Oil & Gas  SAD and road cess on petrol and diesel increased by Re 1/ ltr each resulting in
government revenue of ~Rs62bn for petrol and Rs153bn for diesel for the remaining 9
months for FY20 (annual is Rs287bn combined). Also, government has taken enabling
provision to increase tax by total Rs5/ltr each of which only Rs2/ltr has been taken in
the budget.
Neutral
Telecom
 No receipt from spectrum auction seems to have been factored.
Neutral
Aviation  India has no aircraft financing/leasing companies. Government to initiate regulatory
roadmap for making India a hub for aircraft financing and leasing activities
Marginally Positive
 Increased subsidy allocation for Urea from Rs 450bn in FY19 to Rs 536.3bn in FY20
(+19% yoy) to help better subsidy receipt by companies and may reduce the
Fertiliser
outstanding subsidy receivables as input costs have been declining.
 Fertiliser subsidy allocation rises by 6.7% from interim budget and 14.1% YoY to Rs
799.96 bn
Neutral
 Increase in allocation for North East Infra Development scheme by 286%
 Reinstating focus on ‘Housing for All’ and ‘Affordable Housing’ and incentivizing such
schemes by providing for additional tax deductions.
Cement
 All relevant schemes allocations put together, increased by 5%yoy
 Implementation of incremental cess of Rs1/litre each by way of Special Additional Excise
Duty & Road and Infrastructure Cess for both diesel and petrol to increase logistics cost
for cement companies.
Neutral
 Hints removal of barriers like cross subsidy surcharges, undesirable duties on open
access sales or captive generation for Industrial and other bulk power consumers.
Power
 Recommendations of the High Level Empowered Committee on retirement of old &
inefficient plants, and addressing low utilization of Gas plant capacity due to paucity of
Natural Gas, will be taken up for implementation
Positive
Roads
 Total road sector outlay for FY20 is Rs. 1.58 lakh Cr, up 12%.
 Gross Budgetary support has gone up from Rs. 68,564 Cr (R.E.) in FY19 to Rs. 72010 Cr
in FY20
 NHAI outlay is at Rs. 1.11 lakh Cr in FY20, up 13%. growth is primarily driven NHAI’s own
Infrastructure funds – from Rs 62,000 cr in FY19 to Rs. 75000 Cr in FY20.
 Rural roads: Pradhan Mantri Gram Sadak Yojana (PMGSY) is allocated Rs. 19,000 crore,
up 23%
 PMGSY (Rural roads) Phase III to be launched with target to develop 1.25 lac km at a
cost of Rs80250cr over next 5 years
Union Budget 2019-20
A Reasonable One
Sectors Impact
Affordable Housing
 PMAY Rural allocation declined marginally from Rs 19900 cr to Rs 19000 cr
 PMAY Urban allocation increased to 6853 cr (+5% yoy)
Urban Infrastructure
 Total outlay for AMRUT increased to Ra 7300 cr (+14% yoy)
 Smart Cities outlay increased to 6450 cr (+5%yoy)
Positive
Textile
 GST on job work in relation to textiles reduced to 5% from 18%
Neutral
Metals  Import duty increase on silver from 10% to 12.5% to aid domestic prices.
 Import duty increase on stainless steel products from 5% to 7.5% to aid domestic prices.

Economic growth outlook

The table below summarizes various macro indicators for the last five years and projections for the next year.

Improving macros FY14 FY15 FY16 FY17 FY18 FY19 FY20E

Real GDP at market price (% YoY) 6.4 7.5 8 7.1 7.2 6.8 6.8
Centre's fiscal deficit (% GDP) 4.4 4.1 3.9 3.7 3.5 3.4 3.6
Current Account Deficit (CAD) (% GDP) 1.7 1.3 1.1 0.7 1.9 2.1 2.1*
Balance of Payment 0.8 3.0 0.9 0.9 1.7 -0.1 0.3
Net FDI (% of GDP) 1.2 1.5 1.7 1.6 1.2 1.1 1.1
Consumer Price Inflation (Average) 9.4 6.0 4.9 4.5 3.6 3.4 3.7
Foreign Exchange Reserves (USD bn) 303.7 341.4 359.8 370.0 424.4 411.9 426.4^
Source: CEIC, Kotak Institutional Equities; CSO, Economic Survey, Union budget 2018-19, E-Estimates, ^ as of 21st June’19. na – not available; * average
crude price assumed at USD 70.0 per barrel.
 Growth is expected to stabilise in FY20 supported by revival in capex expenditure and stable consumption.
 Capex has been growing at higher pace than consumption in past two years and likely to accelerate in FY20.
 Signs of private capex reviving visible with increase in capacity utilisation and major announcements by Steel
and cement majors.
 Outlook of inflation remains benign led by food inflation and range bound crude prices.

%
Signs of capex reviving, consumption 80.0 Rising capacity utilisation driving capex
stable recoveryCapacity Utilisation
Real GDP Growth 78.0 Capacity Utilisation (SA)
15.0%
Consumption Long term Average
Gross Capital Formation 76.0
10.0%
74.0
5.0%
72.0

0.0%
70.0
Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18
Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

-5.0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Source: CMIE, RBI, Bloomberg

Union Budget 2019-20
A Reasonable One

Earnings Growth Outlook

Profit growth over the last few years was muted due to challenges faced in some large sectors such as corporate
banks, metals, capital goods, etc. However outlook for these sectors is rapidly improving and these sectors
should witness a sharp improvement in profitability. Overall earnings growth for the market should be
meaningfully better than the preceding two-three years, as shown in the table below

FY Sensex EPS Growth NIFTY EPS Growth

2012 1,125 10% 353 12%
2013 1,180 5% 377 7%
2014 1,331 13% 410 9%
2015 1,318 -1% 398 -3%
2016 1,290 -2% 384 -4%
2017 1,407 9% 439 14%
2018 1,379 -2% 453 3%
2019E 1,475 7% 480 6%
2020E 1,975 34% 614 28%
2021E 2,347 19% 723 18%
Source: Kotak Institutional Equities estimates

Equity Market Outlook

India’s market cap to GDP on FY20E is at ~65%, which is attractive.
India market cap to GDP ratio, calendar year-ends, 2000-20E (%) Mcap as of June 30, 2019
160 149 25
Mcap/GDP (%) P/E (X)
140
20
120
99 98
100 88 92
81 15
75 78
80 69 72 71 73
61 65 65
55 56 10
60 48
35 30
40 26 5
20

0 0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019E

2020E

Source: World Bank, Bloomberg, Kotak Institutional Equities

In P/E terms, markets are trading near 19.2x FY20(e) and 16.3x FY21(e) (Nifty Consensus PE, Source : Kotak
Institutional Equities) which are reasonable, especially given the low interest rates. In fact, as earnings growth
improves, the P/E's should look more reasonable and move lower.
In view of the above and expected recovery in earnings, equity market outlook is positive over medium to
long term.
Union Budget 2019-20
A Reasonable One

Debt Market Outlook

As against the expectations of a fiscal stimulus, Union Budget FY20 restricted fiscal deficit to 3.3% of GDP, slightly
lower than last year, came in as a positive surprise for the debt market. Further, announcement of issuance of
foreign currency denominated sovereign bonds overseas for part of government’s borrowing program will
reduce supply in domestic market. This was also viewed positively by the market and consequently Gsec yields
fell to 6.7%.
Going forward interest rate outlook continues to remain mixed as conflicting forces are at work. On the positive
side factors such as range bound oil prices (should ease pressure on CAD), high real yields in India, softening
global commodity prices, expectation of Fed rate cuts, trade war tensions and moderation of global growth
favour lower interest rates. However, on the negative side, optimistic revenue assumptions posing risk of fiscal
slippage, credit growth outpacing deposits growth, excess SLR within banking system, volatile FII flows,
possibility of unfavorable monsoon etc. might impact interest rates adversely.

With the plan to raise a part of the borrowings in foreign currency and recent change in stance by RBI to
accommodative from neutral, there is some scope for interest rates to fall further. However, given the optimistic
revenue assumptions resulting in risk of fiscal slippage, room for decline in yields, in our opinion, is limited.

Thus, in our assessment, the short to medium end of the yield curve offers better risk adjusted returns
especially post the recent rally in Gsec yields.
Union Budget 2019-20
A Reasonable One

Disclaimer

This document is dated July 05, 2019 and views expressed herein are based on 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 July 05, 2019 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
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