Market Outlook February 2018 1 Equity Markets 2 Key Events - PowerPoint PPT Presentation

Market Outlook February 2018 1

Equity Markets 2

Key Events – January 2018 • In its latest outlook, the IMF raised its forecasts for global growth to the fastest since 2011, upgrading projections for major economies including the U.S., Germany and China. India to reclaim its tag as the fastest growing major economy at 7.4% and 7.8% in FY 18 and FY 19 respectively. • Government announced the much awaited details of the Rs2.11tn bank recapitalization plan unveiled in Oct- 17 with capital infusion of ~Rs880bn (~$13.8bn) into public sector banks in this fiscal year. • GST Council cut tax rate on 29 goods, including second-hand vehicles, confectionery and bio-diesel, while veering around to simplifying return filing process for businesses. • The government collects Rs 86,703 crore as GST for December as against Rs 80,808 crore in November. • Nov IIP surged to 8.4% vs 2.2% in Oct led by manufacturing sector. Capital goods output improved further to 9.4% vs 6.6% in Oct. Electricity production inched up to 3.9% vs 3.2% and mining also rose marginally to 1.1% in Nov • Dec trade deficit rose to 3 year high to $14.88bn vs $13.8bn in the previous month led by rally in crude, and gold prices. • Indian equities (+4.7%) started the year on a strong note with Nifty crossing the 11100 mark 3

Union Budget: Rural development and ‘Make In India’ Fiscal deficit roadmap: 3.3% in FY19E, 3.1% in FY20E; 3% in FY20E Key budget themes • Rural and agriculture focus: The budget focuses on the revival of the rural and agricultural sectors and gives a boost to social sector spend; Hike in Minimum Support Prices; Announcement of a National Healthy Scheme • Make in India : There is a significant support for “Make in India” in terms of increase in custom duties in selected products. The products have also been selected, where Indian Industry already has or can develop manufacturing capacities in reasonably short time. • Infrastructure thrust: Public spend on infrastructure continues (mainly in the areas of road and railways) • Fiscal consolidation but only over the medium term : The budget tries to strike a midway path between fiscal prudence and the needs of the economy. The fiscal deficit target of 3.3% of GDP for FY19E signals a 20bps reduction over FY18RE; Budget also lays out a path towards reaching 3% fiscal deficit by 2021. • Revenue assumptions: Net tax revenue growth in FY19BE has been assumed at 16.6%YoY with Indirect tax growth at 19.2%; GST revenue collections remains the key • Nominal GDP growth assumptions appears reasonable: Assumes a nominal GDP growth of 11.5% in FY19E Challenges • Long term capital gains tax : The imposition of long term capital gains tax (LTCG) of 10% (without indexation) on equity markets and equity mutual fund units is a negative for market sentiments. The impact of LTCG however, could be contained due to the grandfathering clause which exempts long term capital gains on purchases upto Jan 31, 2018.

Infrastructure : Higher Spending Continues Focus on roads, railways and social infrastructure Sustained Focus on Infrastructure • Government’s estimated budgetary and extra budgetary expenditure on infrastructure for FY19 is being increased to INR5.97t against estimated expenditure of INR4.94t in FY18. • Railways sector investment target is increased to INR1.46t, up 22% YoY. Key plans include a) 18,000 kilometers of 2/3/4 lining and 5000 kilometers of gauge conversion works, b) procure 12000 wagons, 5160 coaches and 700 locomotives, c) electrify 4000 km of tracks, d) 3600 km of track renewal in FY19, elimination of 4267 unmanned crossings on broad gauge in next 2 years and e) Redevelopment of 600 major railway stations. • Targeted spend under Pradhan Mantri Awas Yojana (PMAY) of INR525b, vs INR290b for FY18. This comprises of PMAY-Rural spending down from INR230b to INR210b. PMAY-Urban spending at INR315b, vs INR60b. This includes INR5b increase in GBS and off-budgetary resources at INR250b(vs NIL in FY18 RE). • Urban Infrastructure development GBS is up from INR418b from FY18RE to INR550b, though same as FY18BE. While allocation to Smart Cities project (up 22%) and AMRUT (up 10%) has gone up, allocation towards Metro project is down 16.7%. Capital Outlay (INR Bn) FY16A FY17A FY18RE FY19BE Incr. Railways 350 450 418 551 31.8% National Highways 230 196 239 297 24.1% Metro 93 99 180 150 -16.7% Thrust to build infrastructure Rural & Border Roads 205 209 169 190 12.4% continues, Irrigation 79 58 74 94 27.6% execution is key Affordable Housing 116 201 290 275 -5.1% Power 55 85 149 151 0.9% Urban development 42 294 349 326 -6.6% Telecom 22 27 271 358 32.1% Total 1302 1759 2139 2396 12.0% Source: Budget documents

Rural : Focus On Agriculture And Rural Infrastructure Significant increase in allocation towards many specific schemes/purposes Positive Implications for agriculture/rural sectors – key highlights – Adequate provisioning for fertiliser subsidy at INR 700bn to take care of estimated FY19 requirement of INR 600Bn as well as past backlog of INR 100Bn. This number is unchanged from previous year. – Significant increase in allocation for MGNREGS to INR 550bn as compared to last years budget number of INR 480bn – Increase in coverage of Crop insurance with FY19 allocation of INR 130bn for the same vs FY18 allocation of INR 90bn – Articulation of MSP strategy to get farmers to realise 50% more than the cost of produce. The coverage of National Agricultural Market(e-NAM) to be expanded to enable farmers to get better prices for their produce. In addition the goal of doubling farmers income by 2022 has been reiterated. – Increase in the volume of institutional credit for agriculture sector from INR 10 trillion in 2017-18 to INR 11 trillion for the year 2018-19. – Setting up of a Fisheries and Aquaculture Infrastructure Development Fund (FAIDF) for fisheries sector and an Animal Husbandry Infrastructure Development Fund (AHIDF) for financing infrastructure requirement of animal husbandry sector. Total Corpus of these two new Funds would be INR 100bn. Increased Outlay Towards Rural And Agriculture Provision/Allocation for Rural Sector, Agriculture and Farmer's welfare FY18BE FY18RE FY19BE % Change YoY Allocation towards MGNREGS 480 550 550 15% Allocation to Pradhan Mantri Krishi Sinchai Yojana 74 74 94 27% Allocation to Pradhan Mantri Gram Sadak Yojana 190 169 190 0% Allocation to Green, White and Blue revolution 157 131 167 6% Allocation under Pradhan Mantri Fasal Bima Yojana 90 107 130 44% Allocation under Pradhan Mantri Kisan Sampada Yojana 7 6 13 81% “In the year 2018-19, for creation of livelihood and infrastructure in rural areas, total amount to be spent by the Ministries will be `14.34 lakh crore, including extra-budgetary and non-budgetary resources of `11.98 lakh crore. “ Shri Arun Jaitley, Finance Minister Source: Budget documents

Make In India : Increase In Custom Duty To Support Manufacturing Focus on consumer electronics, food processing, tyres, batteries and automobiles Focus on Make in India to reduce imports • Government has increased custom duties for products where India has capability to become a large scale manufacturer but still dependent on imports • Custom duty increased for Truck and Bus radial tyres increased from 10% to 15%. • Increase in custom duty for CKD imports increased to 15% from 10% and for CBU imports from 20% to 25%. This should incentivize manufacturing of luxury cars in India. • Increase in custom duty for Lithium ion batteries other than those used for mobile phones increased from 10% to 20%. Lithium ion batteries would be the largest component of an EV in terms of value. Manufacturing of Lithium ion batteries in India would significantly reduce import dependence going forward. • Custom duty on mobile phones increased to 20% from 15% and on TVs increased to 15% from 10%. Consumer electronics is one of the biggest imports for the country. India has a very large and fast growing market for consumer electronics with cheap skilled labour making it ideal location for manufacturing. • Custom duty has been increased on fruit and vegetable juices from 30% to 50%. This would boost domestic production and also improve farm incomes • Custom duty on crude edible vegetable oils increased from 12.5% to 30% and on refined edible vegetable oils increased from 20% to 35%. This should encourage domestic production of oil seeds in India and aid in improving farm income. Source: Budget documents