Budget Impact on Construction Sector

By Akshay Chaudhury

Challenges faced by the Industry:

  • Low-cost finance via FDI, ECB, and domestic banking assistance: Both the Centre and state must work together to remove bottlenecks for faster implementation of the reform measures in order to promote FDI in real estate. The ECB route should be opened for developers and FDI must be permitted in limited liability partnership (LLP) realty firms
  • A little clarity on land titles: Cross purchase shouldn’t suffer tax. So if the proceeds from the sale of commercial property are used to buy residential property or vice versa, capital gains tax shouldn’t apply. This exemption should be extended to cases where properties in both categories, residential and commercial, are from the proceeds of a single property.
  • The tedious process of getting project approvals: The red tape and time involved to approve real estate projects has caused the sector much grief. This issue can be addressed by a single-window clearance mechanism that will not only reduce the gestation period of projects but will also insulate them from cost escalations and delays in handing over possession.

Expectations from the Budget:

  • Industry status to the sector which contributes almost 15% to the Indian GDP
  • Clarity on GST and a raise in HRA deduction allowance
  • Single-window clearance mechanism which would ramp up supply and help rationalize prices and ensuring construction quality norms are not compromised
  • Clarity on entry and exit norms of FDI and reduce the lock-in period
  • Digitize all land records
  • Confidence-boosting measures to put more money in people’s hands in order to bring back the sales to pre-demonetisation levels

Budget Announcements:

  • 64,000 crore allocated for highways
  • A total allocation of Rs. 39,61,354 crore has been made for infrastructure
  • ‘Infrastructure’ status for Affordable housing aligned with the government’s agenda of ‘Housing for All by 2022’
  • PM Awas Yojana allocation raised from Rs. 15,000 crore to Rs. 23,000 crore
  • 27,000 crore on to be spent on PMGSY; 1 crore houses to be completed by 2017-18 for homeless
  • PM Kaushal Kendras will be extended to 600 districts; 100 international skill centers to be opened to help people get jobs abroad
  • National Housing Bank will refinance individual loans worth Rs 20,000 crore in 2017-18
  • Dispute resolution in infrastructure projects in PPP mode will be institutionalized
  • Trade Infrastructure Export Scheme to be launched in 2017-18; total allocation for infra at record Rs 3.96 lakh crore
  • Holding period for immovable assets reduced from 3 years to 2 years and indexation to be shifted from 1.4.1981 to 1.4.2001
  • Abolition of Foreign Investment Promotion Board (FIPB)
  • Dairy processing infrastructure fund to be set up

Trends after Announcements:

  • The BSE Realty index gained 4.7%, the highest among sectoral indices for the day.
  • Realty stocks such as Godrej Properties Ltd, Housing Development and Infrastructure Ltd and Prestige Estates Projects Ltd rose by around 6% on easier access to low-cost funds.
  • DLF rose by 6.7%, although it has little exposure to the affordable housing category.
  • Construction firms with a greater exposure to roads, such as IRB Infrastructure Developers Ltd, rose by 2.5%.
  • GMR Infrastructure Ltd gained due to the sops for roads and airports.
  • Larsen and Toubro Ltd gained as it is the largest player in infrastructure.

Conclusion:

Overall, it was a positive budget for the sector and the government has done well to create awareness for the need to increase tax compliance. Demonetisation was a temporary setback and the economy must bounce back. In particular, we look forward to the gains once GST is rolled out later this year.

Budget Impact Analysis – Auto Sector

By Dhanyakumar M H

Expectations from Industry:

  • Cut in corporate tax from 30 to 25%
  • Implementation of the vehicle scrappage scheme
  • Incentives for hybrid and electric car production to be extended
  • Removal of connection between size of car and tax
  • Push for infrastructure to offer a quality road in the long run

What Budget has to offer?

  • Personal Income tax:
    • Increase in zero income tax slab from 2.5 lakh to 3 lakh
    • Reduction in income tax from 10% to 5% for income between 2.5 to 5 lakh

Increases in household disposable income. Provides a boost to first-time auto buyer preferably two-wheeler or entry level car.

  • Infrastructure development:
    • Better the infrastructure in the country, is an incentive and encouragement for Auto Industry
    • Budget is seen as a pro-development and this would boost the sales of MHCV, HDCV and heavy equipment
  • Goods and Service Tax:
    • Implementation of GST is confirmed, but there was no message to Auto industry regarding the removal of the link between size and taxation.
  • Rural Income and Agriculture:
    • Mission of doubling farmer income would help increase the disposable income
    • Interest waiver for 60 days due to the impact of demonetization is a welcome move
    • Expected to see a 4.1% increase in Agri output

Increase in rural income would help two wheelers, tractor and entry level car manufactures. It may also help an LCV segment of commercial vehicles.

  • Market Reaction: Advance in stocks
    • Bajaj Auto, Hero Motocorp and TVS Motor
    • M&M, Maruti Suzuki, Eicher Motors, Tata Motors and Ashok Leyland
    • Escorts and VST Tillers
    • Auto Ancillaries are also shown an advancement in stock prices

Conclusion:

Overall the budget has not met the expectation of the auto industry and there was no surprise as well. But the move towards reducing personal income tax and push for rural India is welcomed. As this would increase the disposable income, industry expects an increase in sales of two wheelers, tractors, entry level cars and finally MHCV & HDCV because of push to infrastructure development. Industry is hoping to see more revival post GST implementation as there will be zig-zag in tax structure.

Budget Series 2017-18 #7 Impact on IT Sector

By Anil Shankar & Divya Ramesh

The famous Greek scholar Heraclitus one said: “change is the only constant”. There was a perception that nothing can hinder the phenomenal growth of Indian IT sector. But for the past couple of years, that image has taken a dent due to various factors. In this article, we analyze major factors that have affected the Indian IT sector and the effects of the same.

BREXIT

The volatility in the British pound was one of the major points of concern which the IT sector had post BREXIT. Also, there is a lot of uncertainty regarding the structure of the financial and banking sector. One of the early victims of BREXIT was the deal between Infosys and RBS to float a new standalone bank called Williams and Glyn. The move to abandon this project forced Infosys to shift nearly 3000 of its employees to other projects. It also affected their bottom line and also had to reduce the revenue guidance subsequently. On the other hand, if structural changes are to be carried out on financial sectors, then this might actually result in more contracts.

TRUMP PRESIDENCY

The uncertainty revolving around the Trump presidency is one of the main factors which might have a detrimental effect on the Indian IT sector. More than 60% of the revenues that the IT industry generates comes from the US. Recently, a bill was introduced in the US House of Representatives which seeks to double the minimum wage of H1B visa holders to $130,000. If passed, the Indian IT companies would be forced to hire more Americans than Indians and thereby affecting their bottom line.

During the campaign, Trump made his intentions clear about the possible repeal of Obamacare. Since healthcare has been one of the areas which have been growing fast for the IT sector, implementation of such actions would have a negative impact. Also, Trump has plans to cut back on regulations and compliance related spending by Banking and Financial services sector. Since about 40% of the revenue is generated from these clients, lowering the regulations would have an adverse impact on the revenue generated.

BUDGET 2017

From the graph below, we can observe that 35% of the domestic revenue that the IT sector makes comes from government projects followed by the banking and financial sector. With the Budget 2017 containing schemes to digitalize India, the domestic IT sector would witness a lot of government opportunities knocking on its door. The Government’s motive to weed out corruption through digitalization has been shown in the Budget 2017 with a push to a digital economy. Budget 2017 has acted as a foundation for India to technologically transform and evolve into a digital economy.

picture1

Fig 1: Shows the contribution of various sectors to the domestic IT Revenue

The e-governance portal’s traffic has been on the rise from 2060 million transactions in 2013 to 4940 million transactions in 2016 which is a 140 % increase. TCS, Infosys, Mind-tree and few other players in this sector have been handling government projects like automation of immigration system by TCS, application development and maintenance of unique identification authority of India by Mindtree and implementation of GSTN by Infosys which is crucial for the implementation of GST which was also a highlight of the Union Budget 2017. The programs like:

  1. BHIM app promotional schemes
  2. Aadhaar pay app for cashless transactions
  3. Political parties entitled to receive donations through digital mode
  4. Aadhaar based smart cards to monitor health for senior citizens
  5. High-speed internet for gram panchayats

have provided a platform full of government IT projects.

AUTOMATION

There has been a big emphasis on automation by the IT industry in the recent past. The idea is to improve efficiency and productivity of firms. Automation can lead to a smaller workforce and more revenues. Although there is a point of debate as to whether this move is good for the economy in the entirety, big companies are going all out to automate their products. Some companies build their own products to realize this goal while others take the route of inorganic expansion to acquire these capabilities. For example, Infosys acquired US based automation technology company Panaya to bring about automation in several of Infosys’s service lines. Automation, hence, would play a big role in the IT companies profitability in the coming future.

Budget Series 2017-18-#4 Impact on Consumer Durables Sector

Anuprash Baruah & Abraham Mathew

“And more than the quality of its institutions, what distinguishes a developed country from a developing one is the degree of consensus in its politics, and thus its ability to take actions to secure a better future despite short-term pain.” – Raghuram Rajan – Fault Lines

This quote sums up India’s direction with demonetization, our balancing act of a budget and no change in the repo rate as of yesterday.

Consumer durable goods are purchased with the intention of keeping them for a long duration. The consumption of durable goods is considered similar to an investment. This is so because they are bought every few years. In this insight, we try to evaluate the near future outlook for the industry in the light of the Union budget.

Industry Size (2016-17)
The industry is divided into two major segments:-
• Household appliances – 66,620 Crore INR
• Gems and jewellery
o Export – 2,39,600 Crore INR
o Domestic – 2,70,000 Crore INR

Major impacts:

  1. Decrease in taxable income for 2.2-5 Lakh INR bracket: This will lead to an increase in discretionary income, thus increasing demand for jewellery and household appliances. There are 2 Crore people that will benefit from this reduction.
  2. 2% increase in employment generation activities like MNREGA: The government is cushioning the demonetisation through subsidies. They are using employment as a sustainable way to boost consumption.
  3. Increase in capital expenditure: The 10.7% jolt in capital expenditure will have positive impacts on employment and income multipliers. Increases : Power(51%), Road transport(31%), Rail(19%), Shipping(16%).
  4. Increase in power expenditure: More access to power will also boost household appliances demand in the long run.
  5. Rural sector support: This includes increasing coverage under crop insurance (to 40%) along with increasing the base of subscribers. Also, there is continued support for rural road construction and MNREGA. According to CRISIL: “A study on the consumption patterns of workers benefitting from the rural roads program shows workers tend to allocate a larger proportion of their discretionary spending on durable goods (new and second hand), education, paan, tobacco, intoxicants, toiletries, and household commodities. The sectors producing them, therefore, can expect some boost due to budgetary measures”. Therefore we can expect a boost in demand. According to Godrej appliances, they are focusing on releasing more entry level products as this is the area with high demand and growth in the rural sector. We can expect other players to target the same segment.
  6. Pent-up demand from demonetisation impact: There is a current pent-up demand from demonetisation, it is expected to be satisfied in FY2018. Being a durable good, the decrease in income will only delay the consumption and not eliminate the demand.
  7. Growth of organized players (only gems and jewellery): Due to demonetisation, the gems and jewelry unorganized sector took a hit. This will strengthen the market standing of the organized players.
  8. GST implementation: If and when GST is implemented, it will result in up to 30% savings on logistics costs to consumer durable companies. This industry is said to be the biggest gainer from GST. Overall, it is a positive outlook for consumer durables. We can also see more of a rural focus entering the industry.

Budget Series 2017-18-#2 Impact on Auto Sector

Roshan Raghuram & Jananee R Chandran

A look at the Union budget

Transform, Energise and Clean: the three-point agenda of the Union budget has very well reflected in its focus on job creation, rural spending, digitization, and GST. Some of the highlights are:

  • Total allocation to agriculture up by 24%, to double the farm income in five years
  • Infrastructure spending up by 11%, against the sluggish private sector investment
  • Housing for all by 2022-being the main job creator to help in demand revival
  • Disincentives on cash transactions to help in the retention of bank deposits, which will bring down market interest rates further
  • Widening of tax base and compliance, a significant medium-term positive to support quality spending

Auto sector: An introduction

Indian automobile sector is one of the largest and most dynamic in the world, resisting and growing positively through economic changes. India has emerged to be the 2nd largest two-wheeler maker, 6th largest car manufacturer and the 8th largest commercial vehicle manufacturer in the world. The 92 billion dollar industry contributes 7.1 % of the country’s GDP and is responsible for the employment of 19 million people in the country.

Recent news in the industry

  1. A shift in paradigm in the industry: IT and e-commerce industries have reshaped the way the industry operates.
  2. Fuel emission norms and safety norms: In the era of global standards, we see India getting in line with the Euro emission norms. This translates into shorter product life cycle for the vehicles and an increase in the frequency of new models. The compulsory air bags regulation coming in the year 2017 would increase the demand for the auto ancillaries in the country.
  3. The impact of GST: There are broadly two kinds of prices in front of a car buyer: showroom price and on-road price. Prior to GST, excise duty levied on showroom price was 20% and a sales tax of 12.5 % (average of all states) was levied on on-road price. With the advent of GST, the common tax rate would bring down the effective tax rates for automobile companies which will improve their operational efficiency. This would mean reduced consumer prices as there is no cascading tax effect.

Effect of demonetization on Auto sector

Sales are reported on a monthly basis in the Auto sector. Post demonetisation it was seen that the sale volume of the auto companies dipped by around 5.48%. The rural demand for the sector would be affected in the coming quarter or two, mainly because a lot of NBFCs and banks refrain from giving auto loans to the rural population. This means most of the payment for the purchase of automobiles is made by cash, and this cash crunch would have an impact on the top lines of the companies for a shorter term but this is expected to improve once the effect of demonetization subsides.

Impact of Budget on Auto sector

The budget overall has been consumption positive. Reduction in income tax rate for a taxpayer with income INR 250000-500000 translates into increased disposable income. The spending on agriculture and crop insurance scheme will benefit the tractor and the 2-wheeler segment. Increased spending on infrastructure, on the other hand, will benefit the commercial vehicle segment. However, the decrease in the total outlay of AMRUT will lower demand for buses and would adversely affect urban players.

Proposal Impact Major players
Spending on agriculture and crop insurance Positive for tractor and 2W Hero
Bajaj
Decrease of  6% outlay on AMRUT Negative for urban players Eicher Motors
Ashok Leyland
Tata Motors


Market reactions of companies to Budget

Company Pre-budget price Post-budget price Change % change
M&M 1255 1260 0.40%
Eicher Motors 23174 23385.9 0.91%
Ashok Leyland 92.32 94.5 2.36%
Escort 362 379.5 4.83%
Bajaj Auto 2819 2808 -0.39%

Market reactions have been positive for four out of the above five companies. The Auto sector is likely to be positively impacted both by value and volume. And the Union budget is expected to be a helping hand to the demonetization affected Auto players.

Which of the following events of 2016 would have a significant impact on Indian economy in 2017?