Rs.1000 cr for assured irrigation. Rs. 500 Cr rural Power Supply ... irrigation. 25,000 crore in 2015-16 to Rural. Infra
Market Update - January 2018
Markets | Beyond Markets | AMC Focus | Expert Talk | Conference | Book Summaries 24th January 2018
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Setting the Pitch for 2019 CUP
MARKET UPDATE PRE 2018 BUDGET Only for Distributors and Advisors
6 Balls – One Match February 1st 2018 is Last Full Budget for Government. 6 balls on which the Government has focused are key for the 2019 CUP. Focus on Removing Poverty
Unemployment Issue
Rural Spending
Youth Focus
Lack of Inadequate Infrastructure Basic Amenities
Infrastructure Development
Financial Sector
Sabka Sath Sabka Vikas
Sustainable Growth
Taxation
Prudent Fiscal Management
One CUP 2019 2 Teams | 29 States - 6 Balls MODI on Strike
Rural and Agriculture.. What Happened till now? Union Budget 2014-15 Rs. 8 Lakh crore for agriculture credit. Rs. 30000 cr to RIDF Rs. 50000 cr for short term cooperative Rural Credit Rs.1000 cr for assured irrigation. Rs. 500 Cr rural Power Supply Rs. 14,389 Cr. for Roads in rural Rs. 8000 for National Housing Bank for Rural Housing. Small allocation for Agri- research, infra, to meet vagaries of climate change, Village Entrepreneurship and island fishers
Source: Union Budget Document for respective years
Union Budget 2015-16 Rs. 5,300 crore to support microirrigation. 25,000 crore in 2015-16 to Rural Infrastructure Development Fund Rs.15,000 crore for Long Term Rural Credit Fund Rs. 45,000 cr for Short Term Cooperative Rural Credit Refinance Rs.15,000 crore for Short Term RRB Refinance Fund. Target of Rs. 8.5 lakh crore of agricultural credit during the year 2015-16. Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs. 20,000 cr, and credit guarantee corpus of Rs. 3,000 proposed.
Union Budget 2016-17 Rs. 35,984 cr. allocation for Agriculture and Farmers’ welfare Rs. 19000 cr. for rural road development. Rs. 87765 cr. For rural sector Rs 2.87 lakh cr. Aid for Gram Panchayats and Municipalities. Allocation under Prime Minister Fasal Bima Yojana Rs. 5,500 crore. A sum of` Rs. 38,500 crore allocated for MGNREGS.
Youth and Education.. What happened till now? Union Budget 2014-15 Rs. 28635 crore is being funded for Sarv Shiksha Abhiyan(SSA) Rs. 4966 crore for Rashtriya madhyamic Shiksha Abhiyan (RMSA) 10 IITs and IIMs. Small Allocating of around 500 Cr. For promoting Sports
Source: Union Budget Document for respective years
Union Budget 2015-16 National skill mission to consolidate skill initiatives spread accross several ministries IIT in Karnataka and Indian School of Mines, Dhanbad upgraded in to a full-fledged IIT. AIIMS in J&K, Punjab, Tamil Nadu, Himachal Pradesh, Bihar and Assam Focus on make in India and self sufficiency create more employment.
Union Budget 2016-17 Rs. 1,51,581 crore Allocation for social sector including education and health care. 62 new Navodaya Vidyalayas to be opened Regulatory architecture to be provided to ten public and private institutions to emerge as world-class Teaching and Research Institutions Allocation for skill development–Rs. 1804. crore. 1500 Multi Skill Training Institutes to be set-up GOI to pay contribution of 8.33% for of all new employees enrolling in EPFO for the first three years of their employment. Budget provision of Rs. 1000 crore for this scheme.
Infrastructure Development.. What happened till now? Union Budget 2014-15 Shipping: Rs.11635 cr allocated for the development of Outer Harbour Project in Tuticorin Roads: An investment Rs. 37,880 cr in NHAI and State Roads Some Focus on New and Renewable energy
Source: Union Budget Document for respective years
Union Budget 2015-16 Sharp increase in outlays of roads and railways. National Investment and Infrastructure Fund (NIIF) with an annual flow of Rs. 20,000 cr. Target of renewable energy capacity revised to 175000 MW till 2022, comprising 100000 MW Solar, 60000 MW Wind, 10000 MW Biomass and 5000 MW Small Hydro.
Union Budget 2016-17 Rs. 97,000 cr Total investment in the road sector, including PMGSY allocation. Approval of 10,000 kms of National Highways. Allocation of Rs. 55,000 crore in the Budget for Roads. Additional Rs. 15,000 crore to be raised by NHAI through bonds. Total outlay for infrastructure Rs. 2,21,246 cr.
Financial Sector.. What happened till now? Union Budget 2014-15 Government to promote FDI selectively in sectors PSUs to invest through capital investment a total sum of Rs. 2,47,941 cr. Rs. 7060 cr provided for the project of developing “100 Smart Cities’ Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector. Annual ceiling enhanced to Rs.1.5 lakh p.a. from Rs. 1 lakh In PPF
Source: Union Budget Document for respective years
Union Budget 2015-16 Foreign investments in Alternate Investment Funds to be allowed. Proposal of Public Debt Management Agency (PDMA) bringing both external and domestic borrowings under one roof to be set up. Government to bring enabling legislation to allow employee to opt for EPF or New Pension Scheme. For employee’s below a certain threshold of monthly income, contribution to EPF to be option without affecting employees’ contribution. Sovereign Gold Bond, as a alternative to purchasing metal gold scheme to be developed
Union Budget 2016-17 RBI to facilitate retail participation in Government securities. Allocation of Rs. 25,000 crore towards recapitalisation of Public Sector Banks. Target of amount sanctioned under Pradhan Mantri Mudra Yojana increased to Rs. 1,80,000 crore Promoting Affordable housing by many measures.
Taxation Union Budget Direct: 2014-15 Income-tax exemption limit raised from Rs. 2 lakh to Rs. 2.5 lakh in the case of individual taxpayers, Exemption limit raised from Rs 2.5 to Rs. 3 lakh for senior citizens. Investment limit under section 80C raised to Rs.1.5 lakh Rate of tax on long term capital gains increased from 10 percent to 20 percent on transfer of units of Mutual Funds, other than equity oriented funds.
Indirect: To boost domestic manufacture and to address the issue of inverted duties, basic customs duty (BCD) reduced. Reduction in basic customs duty from 10 percent to 5 percent on forged steel ring. Source: Union Budget Document for respective years
Direct:
Union Budget 2015-16
Focus on Fight against the scourge of black money. Proposal to reduce corporate tax from 30% to 25% over the next four years, starting from next financial year.
Indirect: Excise duty on chassis for ambulance reduced from 24% to 12.5%. Service-tax plus education cesses increased from 12.36% to 14% to facilitate transition to GST.
Direct:
Union Budget 2016-17
Raise the ceiling of tax rebate under section 87A from Rs. 2000 to 5000. Increase the limit of deduction of rent paid under section 80GG from `24000 per annum to Rs. 60000. Withdrawal up to 40% of the corpus at the time of retirement to be tax exempt in the case of NPS Additional tax on dividend income in excess of Rs.10 lakh per annum. Surcharge to be raised from 12% to 15% on persons,
Indirect: GST Focus New manufacturing companies to be given an option to be taxed at 25% + surcharge and cess 100% deduction of profits for 3 out of 5 years for startups setup during April,2016 to March,2019.
Pitch for upcoming 2019 Cup
The backdrop of Union Budget: a) macro stability moving from favourable to neutral; b) growth to improve as disruptions fade, but private sector dynamics still weak; and c) election cycle catching up – 8 states to go to polls before General Elections in April/May 2019. Fiscal policy stance – room for maneuvering shrinking: The case for fiscal expansion, which was quite strong in the past 4 years amid falling inflation/narrowing CAD, is now turning weak. FY18 fiscal slippage likely: Fiscal deficit is likely to slip by ~30bps led by tax collection shortfall of ~0.30.4% of GDP (although high uncertainty persists over GST collection). FY19 fiscal headwinds and tailwinds: The oil tailwind is fully behind, but the headwind of Pay Commission implementation (wage/HRA hikes) is also over. Further, incremental gains from non-tax revenues and savings from squeeze on defence capex (seen since 2012) may be reaching limits. Thus, spending revival essentially depends on rebound in GST collection in FY19.
Source: Edelweiss research
Macro-vulnerabilities – From Favorable to Neutral Best of inflation is now behind
...best of CAD is also behind
6.0
(10)
5.5
(20) (30)
(%)
(USD Bn)
5.0
4.5
(40)
(50)
4.0
(60)
3.5
(70) FY15
FY16
FY17
FY18E
India CPI inflation
FY19E
FY15
FY16
FY17
FY18E
FY19E
Current account deficit (USD Bn)
RBI inflation target
60
40
45
30
(%, YoY)
30
20
15 10
0
0
(15) (30) Dec 09
(%, YoY)
Growth in balance sheets of ECB and Fed to slow simultaneously
(10) Jun 11
Dec 12
Jun 14
ECB balance sheet (%, YoY)
Source: Bloomberg, CMIE, Edelweiss research
Dec 15
Jun 17
Dec 18
Fed Balance sheet (%, YoY, RHS)
India’s best phase of inflation and CAD is now behind. CPI inflation to hover over RBI’s target through FY19 and CAD to average 2.0-2.5% of GDP – highest since FY15. Global liquidity is likely to see synchronous withdrawal in 2018, which can potentially push global rates higher.
Economic Growth: Recovering, but week Real GDP to improve due to fading impact of GST/demonetisation
However, capacity utilisation still low
8.0
80
7.5
78 (%, 4QMA)
(%, YoY)
7.0 6.5
76 74
6.0 72
5.5 5.0 FY13
FY14
FY15
FY16 Real GVA
FY17
FY18 E
FY19 E
70 Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Capacity Utilization (%, 4QMA)
Wage bill growth remains subdued 25
Growth to see some rebound as the effect of GST/demonetisation-related disruptions fades. Exports are no more a drag.
(%, YoY)
20
15
However, domestic private sector dynamics still weak—debt resolution underway, capacity utilisation low and wage growth anemic.
10
5 Sep 07
Sep 09
Sep 11 Sep 13 Sep 15 BSE 500 Private sector wage bill growth
Source: CMIE, Capitaline, Edelweiss research
Sep 17
Last Session before the 2019 Finals In Gujarat elections, BJP lost mainly in rural areas... 45
...and eight more states set for assembly elections in 2018
Number of BJP seats locality wise
44
Total rural
Total semi-
State
Total urban
40 36
36
35
35
33 30
30
25 Rural
2012
Semi-Urban
2017
Urban
Election month Lok Sabha Seat
Meghalaya
February '18
2
Tripura
February '18
2
Nagaland
February '18
1
Karnataka
April '18
28
Madhya Pradesh
Nov-Dec '18
29
Rajasthan
Nov-Dec '18
25
Chhattisgarh
Nov-Dec '18
11
Mizoram
Nov-Dec '18
1
April '19
545
General Elections
Election cycle catching up – 8 states to go for polls before General Elections in 2019. Rural distress seems to entail political costs as was evident in Gujarat polls. MP, Rajasthan, Chhattisgarh – more rural than Gujarat – will go for polls in late 2018. Lessons from NDA1 defeat in 2004 – rural distress cannot be ignored.
Fiscal Policy: Room for expansion behind; slower consolidation likely Central government’s expenditure hovering near multi-year lows
Interest rates are on rise, making fiscal push difficult 9.0
17
8.5 8.0 15
Spending close to 30 year low
14
(%)
(% of GDP)
16
7.5 7.0
6.5 13 FY93
FY98 FY03 FY08 FY13 Central govt. spending (adjusted for finance commission transfer)
FY18
6.0 Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
India 10Y bond yield
Source: CMIE, Bloomberg, Edelweiss research
Central government has followed a pro-cyclical fiscal policy in the past few years, i.e., slowdown in spending even as private sector was weak. Macro vulnerability is now moving to neutral zone (from favourable). Hence, room for fiscal expansion is behind. Yet, a slower path of consolidation likely—3.5% in FY18 and 3.2% in FY19. In addition, interest rates are on rise, making fiscal expansion difficult.
Fiscal math FY18: Tax revenue shortfall likely; FD to be ~3.5%
Significant uncertainty persists with regards to the GST tax collection on several fronts: Recent fall in GST collections has been sharp.
Uncertainty persists with regards to tax credits and transition credits. Uncertainty around compensation to states. Assuming: a) compensation cess collection is adequate; b) no tax credits pending; and c) Centre will share 50% of GST collection with states, we believe the potential tax revenue shortfall for central government could be ~INR600-700bn in FY18 (assuming direct tax revenue and non-tax revenue are broadly met). Also, some expenditure scale back is likely in balance FY18. Overall, we expect fiscal deficit to be 3.5% of GDP in FY18.
FY19: Oil tailwind gone, but Pay Commission headwind too over Oil tailwind: Is now behind, infact likely to be headwind
Pay Commission: Impact is now largely behind 2.4
0.8
Net oil revenues are likely to be negative for exchequer
0.4 0.2 0.0
2.3 (% of GDP)
(% of GDP)
0.6
Impact of pay commission
2.2 2.1 2.0
(0.2)
1.9 FY15
FY16
FY17
FY18E
FY19E
Windfall from oil (higher taxes+lower subsidies, % of GDP)
FY12
FY13
FY14 FY15 FY16 FY17 FY18 (EE) FY19 (EE) Wages+pension (% of GDP)
In FY18, there was no tailwind from oil. At the same time, there was burden of hike in HRA allowances under Pay Commission, thus making fiscal management challenging. In FY19, oil tailwind is actually acting in reverse, although burden of Pay Commission implementation also over. Source: CMIE, Bloomberg, Edelweiss research
FY19: Not much scope to create fiscal space from other levers Defence capex: Squeezed a lot already
Non-tax revenues: Reaching limits?
0.8
2.3 2.2
(% of GDP)
0.7
2.1
0.6 2.0 0.5
1.9
0.4
1.8 FY 07
FY 09
FY 11
FY 13
FY 15
Defence capital expenditure (% of GDP)
FY 17
FY 19 (EE)
FY12
FY13
FY14
FY15
FY16
FY17
FY18 (EE) FY19 (EE)
Non-Tax revenue (% of GDP)
Source: CMIE, Edelweiss research
Scale back in defence capex and ramp up in non-tax revenue have been important levers for government in recent years. These may be reaching their limits now. This means that revival in tax revenue, especially on GST front, is critical to sustain development spending in the coming year.
FY19: Tax collections to rebound as GST stabilises
Tax revenues likely to ramp up as disruptions fade and compliance improves 10.5
Gross tax revenue ex Oil (% of GDP)
(% of GDP)
10.2 9.9 9.6 9.3
9.0 FY14
FY15
FY16
FY17
FY18 (EE)
FY19 (EE)
Source: Edelweiss research
After significant shortfall in GST-related tax collections in FY18, we expect a rebound in FY19 as compliance picks up amid implementation of e-way bill. Some recovery in nominal GDP growth to also assist in rebound in indirect tax collections. However, the benefit of service tax hike seen from FY15-17 is behind. Direct tax collections growth to moderate (as benefits of voluntary income tax disclosures fade), but still likely to remain healthy (12-14% growth), helped by improved compliance.
FY19: Creating space for development spending Development spending accounts for ~32% of total govt. spending... FY18 central govt. expenditure (INR21trn)
FY18 development spending break up (INR6.8trn)
Interest payments 25%
Development related 32%
Others 7%
Others 31%
Rural 22%
Infra 24%
Police/pensions/ defence 23%
Subsidies 13%
...with rural, social sector and infrastructure each accounting ~25%
Social sector 23%
Development spending likely to ramp up in FY19 25
Oil tailwind
Development spending was squeezed in FY18 as oil tailwind faded, tax collections slowed and lingering Pay Commission burden.
20
(%, YoY)
15 10 5
But in FY19, development spending to rebound as we expect GST collections to revive.
0 (5) FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18 Development spending growth (%, YoY) (EE)
FY19 (EE)
Source: Budget documents, Edelweiss Research; Note: Others includes finance commission grants, postal deficit, GST compensation to states, etc Note: For FY16 development spending has been adjusted for additional grants transferred to states owing to finance commission recommendations
FY19: Development spending to tilt towards rural
Rural spending has been scaled back sharply and needs to be boosted
Government should rely on off balance sheet sources to boost capex
2.2
3.5
Rural spending has been scaled back sharply
Govt. should use nonbudgetary resources to boost capex
3.0
1.6
(% of GDP)
(% of GDP)
1.9
1.3 1.0
2.5 2.0 1.5
0.7 FY10
FY11
FY12
FY13
FY14
FY15
FY16
Central govt. rural spending (% of GDP)
FY17 (RE)
FY18 (BE)
1.0 FY06
FY08 FY10 Central govt. capex
FY12
FY14 FY16 Central PSU capex
FY18 (BE)
Source: Budget documents, Edelweiss research Note: Rural spending is the sum of agriculture, irrigation and rural development ministry Note: Central government PSU capex is the capex done by PSUs such as coal India, NTPC, etc. and also additional borrowing done by NHAI, IRCTC, etc..
Within development spending, we see rural sector getting a significant push be it terms of NREGA, rural roads, irrigation or rural housing. The infrastructure sector is likely to be pushed through off-budget sources such as NHAI, railways or other PSUs.
Ignoring rural distress cost NDA1 Rural wages were subdued even during NDA 1 regime
During NDA1 regime (1999-04), rural economy was similar to what it is today – subdued wage growth, low international food prices and farm distress.
20
(%, YoY)
NDA 1: Rural UPA: Rural prosperity distress Rural wage growth 16 Rural wage growth CAGR: 11.7% CAGR: 3.8%
NDA 2: Rural distress revisited Rural wage growth CAGR: 5.4%
12 8
However, despite rural distress NDA1 did not ramp up spending in rural areas or increase MSPs sharply to support farm incomes.
4 0 FY00
FY02
FY04
FY06
FY08 FY10 FY12 Rural wage growth
FY14
FY16 FY18td
…so was spending by government
12
20
10
17
8
14
(CAGR, %)
(CAGR, %)
MSPs were kept subdued during NDA1 regime...
6
11
4
8
2
5 FY94-99
NDA1 UPA1 UPA2 Avg. Of rice+wheat MSP (CAGR, %)
NDA2
Sharp slowdown in spending
FY94-99
NDA1 UPA1 UPA2 Total govt. rural+social sector spending (CAGR, %)
Source: CMIE, Edelweiss research; Note: Rural spending is the sum of agriculture, irrigation and rural development spending Note: Social sector spending is the sum of education, health, child development, drinking water and sanitation ministries
NDA2
FY19 fiscal math: Fiscal deficit likely to be ~3.2% of GDP
Particulars (as a % of GDP) TOTAL REVENUES Tax revenue (net) Gross Tax revenue Non-Tax Revenue TOTAL EXPENDITURE Revenue Interest payments Police/Pensions/Defence Subsidies Development related Others Capital Defence Development related PSU Bank re-capitalization FISCAL DEFICIT Source: Edelweiss research
FY19 (EE) 9.2 7.1 11.4 2.2 12.5 10.6 3.1 2.3 1.5 2.9 0.8 1.9 0.4 1.4 0.1 3.2
FY18 (EE) 9.2 7.0 11.3 2.2 12.7 10.9 3.1 2.5 1.6 2.8 0.9 1.9 0.5 1.3 0.1 3.5
FY18 (BE) 9.5 7.3 11.3 2.2 12.7 10.9 3.1 2.3 1.6 3.1 0.9 1.8 0.5 1.2 0.1 3.2
FY17 9.5 7.3 11.3 2.2 13.0 11.1 3.2 2.5 1.5 3.0 0.9 1.9 0.5 1.2 0.2 3.5
FY16 9.2 6.9 10.6 2.3 13.1 11.2 3.2 2.2 1.9 2.9 1.0 1.8 0.6 1.1 0.2 3.9
Markets Sentiments Positive.. 2017 in a Glance
AUM of equity MFs has risen 376% since September 2013 compared with 150% between 2004 and 2007. MF equity collections in 2017 are nearly 80% of collections in the past Decade Sensex touched a new high 62 times in 2017 compared with 51 times in 2007. India’s market cap rose 52% the highest among 20 biggest economies to $2.38 trillion.
Small Cap index has returned 380% since September 2013 compared with 232% in 2005-2007 Scrips of only 72 cos tripled during 2004-2007, 851 stocks tripled during Aug 2013-Dec 2017. Shares of 533 companies saw 5 fold jump. Retail investors made a profit of 280% during 2004-2007 compared with 175% in current rally.
700 companies had $1 billion plus market cap in December 2007, this number rose to 1039 in 2017. 220 capital raising transactions in 2017 – almost 40% higher than previous peak in 2010. The amount raised was Rs. 1.9 lakh cr., 50% higher than in 2010
Source: Economic Times
Commentary Box - Equity
Structural reforms – GST, RERA and Demonetization took a toll on growth for quarter, creating a wide spread skepticism around the much elusive earnings growth. A bit of cheer came with India’s rating upgrade by Moody. India is going through its second Grey Revolution—an era of massive infrastructure capacity creation, with vast planned expenditure on a wide spectrum of infrastructure activities encompassing roads, railways, urban transportation (especially Metros), ports and Affordable Housing.
Rural economy on serious mend; post Gujarat results, love for the rural sector is overflowing Private capex to gain momentum gradually; Most corporates across sectors have started equipping themselves for growth as their capacity utilization is rising. 2017 delivered 28% returns, almost two-thirds of which were due to rerating and only one-third due to earnings growth On the earnings front, I believe, the worst is over and disruptions due to painful, but much-needed reforms, (demonetisation, GST, RERA) are starting to fade. Thus, base for a broad-based earnings growth has been built.
Commentary Box – Fixed Income Yields of government bonds continued to harden amid declining level of market participation and prospects of additional borrowing in the last quarter of FY18. The benchmark 10Y government bond yield hardened by around 27 basis points to close the month at around 7.33%. It touched an intra-month high of 7.40% on December 28, 2017 – an important technical level. The government announced its intention for additional borrowing worth Rs. 73,000 crore in the last quarter of FY18. We believe that this may be an enabling amount to bridge gap in revenue collection through the rest of the year. That said, the true picture of overall impact on FY18 fiscal deficit will take more time to emerge. Yields of corporate bonds also hardened in December. However, yields of AAA rated PSU bonds inched up more than yields of non-AAA PSU bonds amid cyclical redemption pressures on quarter-ends. Yields of 3Y AAA PSU bonds hardened by around 28 basis points to around 7.50% while yields of 5Y AAA PSU bonds inched up by around 47 basis points to around 7.66%, according to Bloomberg data. Banking system liquidity surplus turned decisively negative in December 2017 for the first time since November 2016. Tight liquidity conditions are likely to result in upward trending money market yields in the near-term. With yields testing their technical levels, we expect government bond yields to consolidate at current levels in January and wait for further cues in the Union Budget due on Feb 1, 2018. We are cautiously optimistic on government bonds as well as 2-3-5Y AAA PSU bonds. We believe that value has begun to emerge in these bonds at current levels for investment horizon of at least one year.
Disclaimer
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