Banking: Betting on reforms, tax waivers
Radhika Merwin
The banking sector has been grappling with a host of challenges in recent years. The year 2017 was no different. Sluggish loan growth, rising bad loans and weak earnings continue to plague the sector.
However, there has been one silver lining — the Insolvency and Bankruptcy Code (IBC) — that has set the ball rolling for efficient and quicker resolution of stressed assets.
All eyes are now set on the first set of 12 big defaulters that the banks sought to resolve under the RBI’s directive in June. Constituting a fourth of the system’s bad loans, the deadline for reaching a resolution plan is fast approaching (by March).
While bidders are emerging for some of the steel accounts, some others may find it difficult to draw buyers. Hence the biggest challenge for banks, is the huge haircut they may be forced to take on most of the stressed accounts.
Including the first list of big defaulters, there are a little over 500 cases admitted by the National Company Law Tribunal (NCLT) under the IBC, currently.
In as far as streamlining the resolution process under IBC goes, there have been a slew of amendments over the past year.
But fast tracking of resolution has brought to fore a larger issue. Capital-starved public sector banks are caught in a sort of catch 22 situation. If they do get a buyer, the haircut could be enormous. If they don’t, then the company goes into liquidation, which leaves them with virtually nothing on the table.
The Centre’s recapitalisation plan is a key proposal awaited in the Budget every year, to address the issue of capital. But the cat has already been let out of the bag, with the Centre announcing the big bang recap plan of Rs 2.1 lakh crore over next two years.
The manner in which these funds will be apportioned to individual banks has also been recently announced. What will be awaited in the Budget is the roadmap laid out for governance reforms. Also, industry players are awaiting more clarity on the waiver of MAT on the notional profit arising out of debt waiver under IBC.
These aside, higher tax concessions on bad loan provisioning continue to be on bankers’ wishlist this year as well. If implemented, most of these expectations will have a positive impact all banks, corporate lenders in particular such as SBI, BOB, Axis Bank, PNB and ICICI Bank. For some of the retail focussed banks and new format payments banks, tax concession on digital transactions will be a positive. Above all, a pro-growth Budget, stimulating investments will no doubt benefit the entire banking sector.
Direct benefit to farmers
Rajalakshmi Nirmal
The agriculture sector is likely to get top priority in the Budget. Slowing agri-GDP growth has shaken the roots of the rural economy. For the full year 2017-18, CSO estimates agri-GDP growth at 2.1 per cent, which is less than half of 4.9 per cent registered for 2016-17.
The annual increase in farm income needs to be around 10 per cent between 2015-16 and 2022-23 for the Prime Minister’s dream of doubling farmers’ income to come true. But, at the current pace, it looks a challenging task.
In the Budget, the Finance Minister is expected to increase the total allocation to the farm sector significantly.
In 2017-18, the total allocation to the Ministry of Agriculture and Farmers Welfare was ₹51,026 crore — an increase of 6 per cent from the revised estimates of 2016-17. But given the thrust to Modi’s pet schemes — the Pradhan Mantri Krishi Sinchayee Yojana (allocation last year – ₹7,377 crore), the Pradhan Mantri Fasal Bhima Yojana (₹9,000 crore), the electronic National Agriculture Market and others, there is likely to a bump-up in allocation this year.
It is also expected that the government may increase the agriculture credit further from the record level of ₹10 lakh crore set for 2017-18. There may be interest subvention on long-term agri loans to promote investments into warehouses and cold storages. Currently, interest subvention is only available on short-term crop loans payable within one year for amount up to ₹3 lakh. There may be news on also extending direct benefit transfer (DBT) for fertiliser on a pan-India basis.
If the Budget moves to help farmers earn better returns, minimise their costs and give them cheaper credit, it will be good for companies in the agro chemical, fertiliser and seeds space. Rallis India, Insecticides India, Coromandel International, Bayer Cropscience, Monsanto India and Kaveri Seed Company are some that may stand to benefit. If DBT in fertiliser will come-up on a pan-India basis, the Centre may clear-off all outstanding dues to fertiliser companies first. Chambal Fertilisers and National Fertilisers may also stand to benefit. Once implemented, the DBT scheme promises to disburse the subsidy in seven days after sales. This will reduce working-capital requirement of fertiliser companies.
However, investors need to note that the above stocks have been rallying for some time now, expecting positive measures in the budget. So, even if the budget turns out to be positive, there may not be much rally in these stocks.
Power sector: More power for major schemes
Nithya Palani
Budget allocation has been increasing over the years for the power sector. This Budget is expected to increase the allocation towards schemes such as Deen Dayal Upadhyaya Gram Jyoti Yojana (electrification of villages) and Saubhagya Scheme (rural household electrification). Power-generating companies like NTPC, Tata Power and Adani Power stand to benefit through the increased demand, as these schemes expand the reach of electrification in the country.
DDUGJY is targeted to be completed by May 2018 and Saubhagya scheme by December 2018. Demand for power is likely to increase with implementation of these schemes. Since the completion target is close, speedier execution could see the order books of transmission companies like Power Grid Corporation and Adani Transmission increase.
Even though there is increase in installed capacity, the plant load factor remains low. The new schemes are also expected to increase the plant load factors (PLFs) of power generating companies like NTPC, Tata Power and Adani Power, which are unable to utilise their installed capacities due to lower demand. Overall plant load factor of our country has reduced to 59.7 per cent as of November 2017, from 70 per cent in FY13.
As per the Paris agreement to reduce the CO2 emissions, India has targeted to install 175GW of renewable capacity by 2022, for which fund allocation is expected from the Budget. Power-generating companies like NTPC have started increasing their renewable power capacity in moving towards green energy by adding around 510 MW of renewable energy in FY17 to the existing 110MW capacity. Transmission lines also need to be strengthened and upgraded to receive the renewable power.
In a move towards reducing the coal imports to zero by 2020, import duty on coal is expected to increase. Increase in import duty on coal will increase the operating cost of thermal power generating companies like Adani Power, NTPC, Tata Power. Adani Power is the major coal importer in India whose operating cost can be increase if import duty on coal is increased. Imported coal used for power generation between April and December 2017 is 43.6 million tonnes, which is around 27 per cent of total coal imports.
Housing for All
Meera Siva
To revive its fortunes quickly, the real-estate sector is looking beyond the usual sops — for a magic bullet. The sector’s nearly decade-long request has been to get infrastructure status, which will enable it get lower cost of funds. This will benefit smaller players such as Ashiana Housing and Puravankara.
Among the key policy measures last year, GST has been a bone of contention for the developers. There are multiple issues that the industry has been pointing out, including the fact that Stamp Duty and Registration charges are outside the ambit of GST. Developers want these to be included in GST to reduce the overall cost for the buyer. They also want rates to be lowered.
Another long-standing request has been to implement single window clearances, to speed up approval process and reduce paperwork. This becomes more important as delivery times must be met strictly under RERA.
Given the low sales and lack of buyer interest, it is widely believed that home buyers will be given tax incentives. The deduction limit for housing loan may be raised from INR 2 lakh. The tax incentive for first-time home buyers under Section 80EE could be hiked from INR 50,000. This will benefit nearly all residential developers, including Prestige Estates and Sobha.
The affordable housing segment has been a bright patch in the otherwise bleak housing market. To achieve the mission of ‘Housing for all by 2022’, the focus on the affordable housing segment would continue.
The credit-linked interest subsidy scheme under the Pradhan Mantri Awas Yojana (Urban) could get more funds. And given the hassles and delays in affordable housing and infra projects to acquire land, policy measures to enable tapping Government’s land bank are also being mooted. These will benefit players such as Mahindra Lifespaces.
Higher allocation to infrastructure is considered almost a given. A wide range of infrastructure development – irrigation, urban infrastructure, Sagar mala, Bharat mala, inland waterways projects, Smart Cities, roads and railways – are expected to get larger funds. Road developers such as Ashoka Buildcon, waterway developers such as Dredging Corporation of India and irrigation and urban infrastructure developers such as KNR Construction, stand to gain.
Auto: Electric vehicles may get a leg-up
Parvatha Vardhini C
The auto sector witnessed multiple challenges last year from the after-effects of demonetisation in late 2016, the changeover to BS IV emission norms from April 2017 and the implementation of GST from July 2017.
Sales volumes have however bounced back from these hiccups, with the industry recording an overall volume growth of 11.28 per cent in the April-December 2017 period. Favourable budget moves will keep the momentum going in all major segments.
A scrappage scheme for old vehicles, especially trucks and buses, is among the major expectations for the auto sector.
Listed truck and bus makers such as Tata Motors, Ashok Leyland and Volvo-Eicher could gain from any announcements on this front as it will boost new CV sales further.
If the massive thrust to rural India expected in the Budget comes through, two-wheeler manufacturers such as Hero MotoCorp, whose commuter bikes are a big draw in rural areas, will benefit.
TVS and Bajaj Auto may not be far behind too. There is also a demand to stick to only two GST rates and cess for cars instead of the multiple ones now based on parameters such as the size of the car, engine capacity, fuel type, etc. Expectations are running on allocations and concessions for EVs.
The government plans to have a 100 per cent electric vehicle (EV) fleet in public transport and 40 per cent electric mobility in private transport by 2030.
But so far, allocations for the FAME scheme (Faster Adoption and Manufacturing of ( Hybrid &) Electric Vehicles ) under the National Electric Mobility Mission Plan 2013, has been meagre at about ₹75-175 crore each year.
This is expected to go up steeply, considering the need to set up an ecosystem for mass use of EVs such as providing incentives to manufacturers and setting up charging stations.
While EVs now enjoy a concessional GST rate of 12 per cent, there are demands to further reduce it to 5 per cent.
Also, reduction in basic customs duty for import of critical components such as electric motors, lithium ion batteries is being sought. These components are now levied a basic customs duty of 7.5-10 per cent.
Many listed players will benefit from doles for EVs, if any. M&M already manufactures the Reva ( through a group company) and an electric version of the Verito.
Tata Motors has rolled out the electric version of the Tigor for supplies initially to the Government of India.
Maruti Suzuki will launch its EV in 2020. Two-wheeler and truck and bus manufacturers are also investing heavily in EV technology, given the Government’s 2030 target.
Oil & Gas: Rationalise cess on crude oil
Anand Kalyanaraman
The oil and gas sector will be hoping for the Budget to rationalise cess on crude oil, cut import duty on liquefied natural gas (LNG) further, reduce excise duty on compressed natural gas (CNG) and provide incentives for domestic production.
It will also be expecting a roadmap on the subsidy sharing mechanism. Consumers will be hoping for a cut in excise duty on petrol and diesel. Two years back, Budget 2016 had changed the cess calculation on crude oil produced from blocks allotted outside the erstwhile NELP mechanism, from ₹4,500 per tonne to 20 per cent ad valorem. This was to provide relief to producers reeling under the oil crash that saw prices go down to about $30 a barrel. But with oil recovering sharply from those lows and now about $70 a barrel, the 20 per cent cess has meant higher burden for oil producers. The industry will be hoping for relief from cess rationalisation, a wish that went unfulfilled in Budget 2017. This move will benefit explorers such as ONGC and Cairn India.
Budget 2017 reduced customs duty on LNG from 5 per cent to 2.5 per cent. There are hopes that Budget 2018 will exempt LNG from import duty altogether to add to the clean fuel’s cost-competitiveness. Similarly, the industry is hoping for excise duty cut on compressed natural gas (CNG) and piped natural gas (PNG), a thrust area for the government.
These cuts could benefit players across the gas value chain from importers such as Petronet LNG, transmitters such as GAIL (India), and city gas distributors such as Indraprastha Gas, Mahanagar Gas and Gujarat Gas.
The sharp rise in oil prices since June 2017 has the potential to upset the subsidy-sharing apple-cart. This could impact the public sector oil marketing companies (Indian Oil, HPCL and BPCL) and hydrocarbon producers (ONGC and Oil India) unless the government decides to pull more weight. Oil players will be hoping for clarity on the subsidy sharing mechanism. The industry will also be hoping for incentives to increase domestic production such as market-based prices for gas, and tax breaks on exploration and production.
The ongoing debate about if and when the key petroleum products should be brought under the GST could also find a mention in the Budget speech, though this vexed issue is likely to be eventually decided by the GST Council. The industry will be hoping for some indications, since the products being outside the GST cause many problems such as denial of input tax credits and increase in costs.
There is increasing disquiet amongst consumers about the steady and sharp rise in the price of petrol and diesel. The common man would be looking forward to a cut in excise duty on these products. With oil prices rising sharply, the steep tax hikes effected earlier have not been rolled back. The government could find itself in a tight spot, with its heavy dependence on revenue contribution from the oil and gas sector and the need to provide relief to consumers.
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