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Key highlights
Gross Domestic Product (GDP)
• Nominal GDP for financial year 2016-17 (FY17) is projected to grow at 11% year-on-year (YoY) vs
7.2% for FY16
• GDP deflator expected to turn positive with uptick in Wholesale Price Inflation
• Real GDP growth for FY16 accelerated to 7.6%
Revenue and expenditure
• Gross tax revenues are budgeted to grow 11.7% in FY17 vs 17.2% in FY16 - buoyancy in Excise
duty expected to continue
• Seventh Pay Commission - Under provisioning in the budget; referred to committee for
implementation
• Defence One Rank One Pension (OROP) - expenditure towards pension to increase
• Receipt from telecom and communications budgeted higher @ INR 990 billion
• Reduction on dependence on market debt; Gross market borrowing stable at INR 6.0 trillion and Net
market borrowing reduced marginally to INR 4.25 trillion
• Divestment target maintained at elevated levels at INR 565 billion notwithstanding the under-
achievement previously
Source: Indian Union Budget Document, February 2016
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Key highlights
Source: Indian Union Budget Document, February 2016
The Budget mostly lays out realistic numbers and a roadmap for long term growth
Fiscal consolidation
Fiscal deficit target maintained at 3.5% for FY17, primarily to provide credibility to Government’s
commitment
− Committee to be formed to provide Fiscal Responsibility and Budget Management (FRBM)
range instead of exact number going forward
Provisional estimate of the FY16 fiscal deficit is 3.9% of GDP, in line with the budget
Fiscal consolidation to continue in the medium term; target deficit 3.0% in FY18 and FY19
Subsidies
Budgeted at INR 2.5 trillion – food subsidy to form bulk of it
− Lower petroleum subsidy given the expectation of lower crude prices
− Government to implement ‘direct transfer benefits’ for fertilisers as well
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Key highlights
Other key announcements
• Goods and Service Tax (GST) bill to be introduced in the second half of current
budget session
• General Anti Avoidance Rule (GAAR) - prospective applicability from FY18
• Increased focus on agriculture, rural sector and social sector namely health, education
and skill development
• Introduction of 10% tax on dividend income if total dividend income crosses INR 1
million
• Bank capitalisation budgeted at INR 250 billion for FY17
Source: Indian Union Budget Document, February 2016
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The debt markets perspective
• Commitment to fiscal deficit target is positive - over estimation of telecom receipt and
under provision for Seventh Pay Commission may create roadblock
• Greater discipline required to meet dis-investment targets
• Increase in centrally funded planned expenditure and more funds to the states
• Sticking to fiscal roadmap could provide the much needed room for monetary easing
by the Reserve Bank of India (RBI) over a period of time
• Expect government securities (G-sec) yields to remain range bound
• Balanced duration funds may provide an attractive opportunity over a one year horizon
as demand – supply dynamics continue to be negative for the upcoming fiscal
*Source: Indian Union Budget Document, February 2016
Budget
Estimates
Revised
Estimates Growth
2016 - 17 2015 - 16
INR Crs INR Crs
GDP at current prices 15,065,010 13,567,192 11.04%
Fiscal Deficit as % of GDP 3.5% 3.9%
Net Borrowings 425,181 440,608
Maturities 174,819 143,595
Gross Borrowings 600,000 584,203
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The equity market perspective
Lack of major negatives is the biggest positive:
There were pre-budget fears about
• Increase in Service Tax
• Introduction of LTCG on equities in some form
• Change in the definition of ‘long term’ for taxation of equities
• Slip-up in the FRBM targets
• Irrational increase in populism
Source: Indian Union Budget Document, February 2016
None of the above was announced - this is the biggest positive from the Budget 2016
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The equity market perspective
Key Positives:
• Fiscal Discipline - roadmap retained at 3.9% for FY16, 3.5% for FY17
• Rural and social sectors - Increase in outlay (highest ever allocation for MNREGA and ~INR 150
billion for interest subvention to farmers)
• Road development - Budgetary outlay of ~INR 550 billion.
• NHAI to raise ~INR150 billion
• Centre and State outlay of ~INR190 billion and ~INR 80 billion for PMGSY
• Relaxation in FDI policy in Infrastructure, Pension, ARCs, Exchanges
• Introduction of comprehensive Bankruptcy Code
• Expansion of Direct Benefit Transfer and usage of Aadhaar
Key Negatives:
• PSU Bank recapitalisation outlay of INR 250 billion – lower than street expectation
• Hike in Securities Transaction Tax (STT) for Options (from 0.017% to 0.05%)
• No cut in Corporate tax rate except for small units – government committed to reduce it to 25% by
2019
• Levy of Infrastructure cess on Diesel, SUVs, and bigger cars
• No increase in personal income tax slabs
• Sunset clauses for accelerated depreciation, R&D etc.
Source: Indian Union Budget Document, February 2016
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Key sectoral impact
Source: Indian Union Budget Document, February 2016
Sector Measure Impact
Increase allocation to various sectors like Road, Irrigation, Rural
Electrification, Feeder separation for Power distribution.Positive for power and infrastructure companies
Distribution made out of income of SPVs to the REITs and INVITs
will not be subjected to Dividend Distribution Tax Positive for infrastructure and real estate companies
10 year tax holiday for any new infrastructure projects & SEZs set-
up beyond 01-Apr-2017 has been withdrawnNegative for Infrastructure companies
Accelerated depreciation capped at 40% wef 01-Apr-2017 Negative for Renewables sector
Capital infusion of INR 250 billion for PSU banks
Initial outlay for capital infusion seems inadequate but the
government will likely increase this amount if required. This
will improve capital adequacy of the PSU banks and help them
tide over the near term asset quality issues
Deduction for additional interest of INR 50000 for home loans up to
INR 3.5 million for first time buyers
This move is targeted towards boosting affordable housing and
should benefit housing finance companies
A comprehensive Code on Resolution of Financial Firms will be
introduced as bill in Parliament in 2016-2017
To provide resolution mechanism to deal with bankruptcy
situations in banks, insurance companies and financial sector
entities
Increase in FDI and ownership of sponsors in ARCsThis will enable ARCs to raise more capital and enable them to
buy more stressed assets and thereby help the banking system
Infrastructure
& Real Estate
Financials
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Key sectoral impact
Source: Indian Union Budget Document, February 2016
Sector Measure Impact
Rate of Oil Industries Development Cess on domestically produced
changed from flat INR 4500/MT to 20% ad-valorem
Positive for upstream in current scenario, though market
expectations were that ad-valorem rate to be lower
Clean energy cess on coal increased from INR 200/T to Rs 400/TPositive for gas utilities and will be negative for coal users like
metals, cement and utilities
Increase in import duty non-ferrous metals and alloysPositive as it will Improve domestic realisations for non-
ferrous companies
Reduction in export duty on bauxite and low grade iron ore to 15%
and 0% respectively
Increases input costs for domestic aluminum producers in case
of bauxite and will improve profitability of iron ore exporters
Increase in excise duty / cess for Jewellery, branded readymade
garments, passenger cars & Cigarettes
These measures would be slight negative for demand /
margins of the impacted companies
Thrust on significant increase in rural spends could act as a demand
driver for companies focused on rural economyPositive for rural economy focused companies
Healthcare
Lower exemption available on R&D spends could lead to higher tax
rates in the medium term, though this could be offset to an extent
by the roadmap for overall corporate tax reduction
Slightly negative for Pharma companies
Energy
Materials
Consumer
Sector
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To summarise
• Lack of Major Negatives is the biggest Positive, despite challenging macro environment
• The focus areas of the budget seems to be on Agriculture & Farmer welfare, Rural
sector development and Social sector
• Underpinnings of the policy document seem to be execution rather than grandeur
announcements. Eg: DBT extension to fertiliser sector, expanding the scope of
Aadhaar, highest ever allocation to MGNREGA, PMGSY, etc.
• Fiscal prudence, adherence to FRBM targets & lack of unpleasant taxation proposals
would be well received by the markets
• Risks – Revenue mobilisation through non-tax measures is welcome though the targets
for telecom spectrum auction & disinvestments appear stiff. Another risk emanates
from legal sanctity of the domestic black money disclosure scheme.
• Overall, Budget 2016-17 is a departure from the past as thought & resources are being
put where the heart is i.e., Rural, Social, Agriculture, Bottom of the pyramid, job
creation
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Equity: Look ahead
• India further elevates its “sweetness” amidst global turmoil: India is believed to be
one of the fastest growing economies in the world and growth is likely to accelerate in
the coming quarters.
• Investments: Slow pick up, but a gradual return of capital and an enabling
environment can unleash a multi-year cycle
• Supportive macro indicators: Growth revival, manageable twin deficits (fiscal &
trade), declining inflation, easing interest rate cycle and steady progress on reforms are
pillars of our sound economy
• Earnings revival and valuations: Expected to revive from 2HFY16 and its growth to
normalise valuation ratios to long term averages
• Risks: Risk of volatility from weak economic data from China, fear of impending US
Federal Reserve interest rate hike, geo-political risk, delays in reforms roadmap and
political logjam
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Equity markets – Themes 2015
Gross Domestic Product (GDP) growth Capital expenditure trends- New investment
cycle in nascent stage
Current Account Deficit - Narrowed Inflation likely to remain low
Source: CEIC, RBI, Morgan Stanley Research
E = Morgan Stanley Research Estimates.
Source: CEIC, HSBC Global Asset Management, data as of December 2015. Source: CEIC, RBI, Morgan Stanley Research .
Note: core CPI* = headline CPI ex. food & fuel. Source: CEIC, HSBC Global Asset Management, data
as of December 2015
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Earnings growth - Still higher compared to the rest of the world
Source: FactSet, MSCI, Morgan Stanley Research as of December 2015. For illustrative purposes only and does not constitute investment recommendation to buy or sell in the above-
mentioned index. Past performance is not indicative of future returns. E = Morgan Stanley Research Estimates
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Equity market – Valuations and Liquidity
1 year forward Sensex Price/Book
Return on equity set to rebound
Source: Motilal Oswal Securities Ltd data as of February 2016.
1 year trailing MSCI India Price/Earnings
Source: Morgan Stanley Research .
Foreign Institutional Investors (FII) have remained negative
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India outperforming Global Emerging Markets (GEM)
Source: RIMES, MSCI, Morgan Stanley Research as of January 2016
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Disclaimer
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should not be construed as an offer or solicitation of an offer for purchase of any of the funds of HSBC Mutual Fund. All information
contained in this document (including that sourced from third parties), is obtained from sources, which AMIN/ third party, believes to
be reliable but which it has not been independently verified by AMIN/ the third party. Further, AMIN/ the third party makes no
guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of such
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taxation applicable at the time of publication, which are subject to change from time to time. Expressions of opinion are those of
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