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Key messages
Economy

Realistic fiscal targets, but slippage possible in disinvestment: The government has stuck to a realistic target of
fiscal deficit at 3.9% of GDP for 2015-16 as opposed to the Finance Commissions recommendation of 3.6%. It has
managed to increase allocation for capital expenditure (to go up by 25.5% to Rs. 2,414 billion) because of the
headroom created from savings in oil subsidies and hike in excise duties on petrol and diesel. As a share of GDP,
capital expenditure will increase from 1.5% in 2014-15 to 1.7% in 2015-16. Even though tax collection targets look
achievable, there are chances of slippage in capital (disinvestment) receipts, which might bloat the fiscal deficit to
4.2% in the absence of any expenditure cut.

Getting public sector to revive investments: The budget lays focus on public investments, which will have large
spillovers on growth if implemented effectively. Despite pressure on fiscal consolidation, enough room has been
created for infrastructure spending through the governments own resources and by nudging PSUs to invest more.
Focus clearly is on four sectors -- roads, railways, power and rural development. This emphasis on strengthening
transportation infrastructure will also boost manufacturing. Overall, the budget is growth-enhancing as it supports a
mild pick-up in public investments, which can draw in private investments over time.

Fiscal federalism is an enabler: The government has raised states share in total divisible pool of tax revenues to
42% from 32% as per the recommendation of the 14th Finance Commission, recording the biggest-ever increase in
vertical tax devolution. This not only increases the pool of resources available to the states but also raises flexibility
to help states design, implement and finance programmes according to their specific needs. Total transfers from the
centre to the states have increased from 4.5% of GDP in 2013-14, 5.5% in 2014-15 to 6.0% in 2015-16.

Industry

Financial sector reforms a structural positive: Inclusion of NBFCs under the SARFAESI Act and new
bankruptcy code will provide a boost to recovery efforts and help rein in asset quality problems over the long run.
The setting up of autonomous bank board bureau for public sector banks is a step in the right direction. It is
expected to provide greater functional autonomy and pave way for bank holding company structure which will
optimise governments capital contribution.

Greater public funding and innovative financing schemes to support infrastructure: Higher government
allocations coupled with increase in funding availability for the infrastructure sector through National Infrastructure
Investment Fund, higher fuel cess for roads and rationalisation of tax on Infrastructure Investment Trusts will provide
significant opportunity for construction and capital goods companies.

Minor changes in tax rates, but glide path to lower rates and simplification: True to its promise, the finance
minister has avoided undertaking many sector/product specific changes in duties or exemptions. On the direct tax
front, too, in line with the Finance Ministers stated philosophy, the budget has provided a path towards lowering of
corporate tax rate and simultaneously doing away with multiple exemptions to simplify the tax administration and
reduce disputes.

CRISIL Budget Analysis

Capital Markets

Incentivising financial savings and social security: The Budget includes measures to promote financial savings
and enhancing coverage of pension and health insurance. Gold bond scheme is also intended to encourage shift
from non-productive to productive saving. However, the efficacy of the schemes needs to be watched - given the
countrys penchant for physical gold holdings.

Little to cheer for the bond markets: Tax-free infrastructure bonds, encouragement for insurance and pension
products, clarity of taxation for Alternative Investment Funds etc. will help channel more investment to the bond
markets. Also, given the ambitious plans for improving infrastructure, debt markets need to play a vital role.
However, measures to catalyse the bond markets continue to remain elusive.

Economy analysis
Indian Economy Outlook
2013-14

2014-15F

2015-16F

GDP (y-o-y %)

6.9

7.4*

7.9

CPI inflation (%, average)

9.5

6.5

5.8

Budget Impact
The budget supports a mild pick-up in public investments
which can crowd in private investments over time
Despite shifting the fiscal target by a year, commitment to
stick to fiscal consolidation is a plus for the downward
trending inflation and augurs well for further rate cuts by
RBI

Fiscal Deficit (% of GDP)

4.5

4.1**

3.9

Headroom created by savings on fuel subsidy bill and

increased income from duty hikes has allowed the
government to tread the fiscal consolidation path with
ease

10 year G-sec yield (%, March-end)

8.8

7.7

7.5

Rate cuts and a restrained market borrowing programme

of the government would make yields go further south

Note: F=CRISIL Forecast, *CSO advance estimate, ** Budget estimate

Source: RBI, CSO, Ministry of Finance, Ministry of Commerce and Industry, CRISIL Research

Is the fiscal arithmetic credible?

The fiscal arithmetic laid out in the budget for 2015-16 is a standout when compared with the previous ones for the
following reasons:
o

The government continues to follow the path of fiscal consolidation by aiming to bring down fiscal deficit to 3.9%
of GDP in 2015-16 from 4.1% of GDP in 2014-15. There is, however, a relaxation of 30 basis points when
compared with the 3.6% target set by the 14th Finance Commission (FFC). This is justified because:

Greater devolution to states will constrain central government finances.

Thrust on capital spending means additional money generated by relaxing the fiscal deficit target will be
used to improve the productive potential of the economy

Nominal GDP growth target is realistic at 11.5% for 2015-16, same as for 2014-15.

Revenue targets look achievable though scope of slippage remains on the disinvestment front.

Rationalisation of the overall subsidy bill is still not adequate, though the trend of carrying forward arrears has
been reduced substantially.

Do the numbers add up?

The government has stuck to a more realistic fiscal deficit target of 3.9% of GDP for 2015-16 compared with the
Finance Commissions recommendation of 3.6% so as to provide an impetus to investments.

Allocation to capex is made possible by savings in oil subsidies and hike in excise duties on petrol and diesel. Capex
in 2015-16 is budgeted to increase 25.5% to Rs 2,414 billion. As a share of GDP, it is slated to rise from 1.5% in
2014-15 to 1.7% in 2015-16.

We estimate that the extra revenue generated on account of excise duty hikes on petrol and diesel will be Rs 780
billion and savings in petroleum subsidies over last year account for another Rs 267 billion. Together, the headroom
created is of Rs 1,047 billion or close to 0.74% of GDP in 2015-16.

CRISIL Budget Analysis

Figure 1 & 2 : Headroom created on different accounts in FY16

Item

(% of GDP)

0.60

Revenue
accrued

0.55

(Rs. Bn.)

0.50

Hike in excise duty on petrol & diesel

0.40

Lower fuel subsidy bill due to fall in oil

prices

780
267

0.30
0.19

0.20

0.10

0.00
Petrol and Diesel Excise Hike

Lower oil Subsidies

Source: Budget documents, CRISIL Research

What could upset the applecart?

Tax collection targets are achievable, risk is on the divestment front

The overall tax collection target assumed in the budget appears manageable. Gross tax to GDP ratio increases
marginally from 9.9% in 2014-15 to 10.2% in 2015-16. The budget assumes a tax buoyancy of 1.4% for 2015-16
compared with 0.9% achieved in 2014-15 but this is largely due to structural changes such as higher excise on
petrol and diesel and increase in the service tax rate 12.36% to 14%

Figure 3: Tax buoyancy

1.8
1.6
1.6
1.4
1.4

1.3

1.3

1.2
1

0.9
0.8

0.8

0.7

0.6
0.4
0.2

0.2

FY09

FY10

0.2
0
FY08

FY11

FY12

Source: Budget documents, CRISIL Research

FY13

FY14

FY15 RE

FY16 BE

Figure 4: Tax collection targets

Rs billion

FY13

FY14

FY15RE

FY16BE

Average

Growth

growth

assumption for

during FY12-

FY16

FY15
Gross Tax Revenue

10,362

11,387

12,514

14,495

12.1

15.8

Corporation Tax

3,563

3,947

4,261

4,706

9.7

10.5

Income tax

1,965

2,429

2,786

3,274

19.3

17.5

Customs

1,653

1,721

1,887

2,083

8.2

10.4

Union Excise Duties

1,758

1,702

1,855

2,298

9.0

23.9

Service Tax

1,326

1,548

1,681

2,098

20.4

24.8

Source: Budget documents, CRISIL Research

Non-tax revenue collections are projected to rise from Rs.2,178 billion in 2014-15 to Rs.2,217 billion in 2015-16, growing
by 1.8% compared with 9.5% in the last fiscal. The slowdown in non-tax revenue growth has been on a high base
because government revenues were boosted by spectrum auctions. Non-tax revenue gains are a one-off.

For

sustainable increase in revenues, it is critical to adhere to the timeline for the roll out of Goods & Services Tax.
This apart, government has an ambitious target of Rs.695 billion through disinvestments. But past trend suggests that
government has always fallen short. The learning from this is that the government needs to frontload efforts and
capitalise on the current market buoyancy. If disinvestment proceeds are similar to last year, fiscal deficit would shoot up
to 4.2% of GDP.
Figure 5: Disinvestment proceeds (Rs billion) have mostly trailed targets
800
695
700

634

600

558

500
400

400

400
300
300
200
100
0
2010-11

2011-12

2012-13

Disinvestment Budgeted

2013-14

2014-15

2015-16

Disinvestment Actual

Source: Budget documents, CRISIL Research

CRISIL Budget Analysis

What is the quality of fiscal consolidation?

While expenditure on subsidies in 2014-15 at 2.1% of GDP was only marginally lower than 2.2% of GDP in 2013-14, it is
budgeted to reduce significantly to 1.7% of GDP in 2015-16 benefiting from lower fuel subsidy bill. At the same time,
capex would rise from 1.5% to 1.7% even though it remains below levels of the high-growth years such as 2.4% in
2007-08. Since the quantum of revenue slippage is expected to be much lower in 2015-16, the budgetary objective of
improving the expenditure mix, might well succeed, unlike in the last few years.

The government has managed to achieve its fiscal deficit target of 4.1% of GDP for 2014-15 by mostly cutting
productive expenditure (capex plus part of revenue expenditure that creates capital assets) because of lower
revenues. Governments receipts in 2014-15 fell short by Rs 952 billion out of which the cut in productive
expenditure was Rs 706 billion. Majority of shortfall was due to lower tax collections, which stood at Rs 9,085 billion
compared with budgeted Rs 9,773 billion. Rest of the shortfall was in capital receipts because of lower divestments.
Non-tax revenues, on the other hand, were a tad higher at Rs 2,178 billion compared with a budgeted Rs 2,125
billion. Over the years, shortfall in revenue collections have led to huge cuts in productive spending. Between 201112 and 2014-15, Rs 2,555 billion was cut in productive spending because of shortfall in revenues and persuasions of
lower-than-budgeted fiscal deficit.

Figure 6: Axe falls on productive spending

0
-100
-200

-113

-300

-400
-500
-600
-700
-706
-800

-900

-869

-867

FY13

FY14

-1000
FY12

Cut in productive expenditure (Rs. Billion)

Source: Budget documents, CRISIL Research

FY15

Figure 7: Direct benefit transfer can re-write the food subsidy script
Direct benefit transfer, or DBT, will likely prove to be a game changer in food subsidy. We estimate that DBT could help
the government save as much as 20% (or Rs 250 billion) in food subsidy expenditure by eliminating costs associated
with procuring, distributing and storing foodgrains. Moreover, DBT will help bring millions of poor households that
currently do not have access to PDS into the food subsidy net. We estimate that at fiscal 2016 prices, the cash transfers
under the DBT will amount to almost Rs 5,800 per year for a family of five, which will implicitly raise their disposable
income. At first glance, Rs 5,800 may seem small, but it is higher than the reported total annual expenditure (food +nonfood) of the poorest 5% of the rural households and more than half the annual expenditure of the poorest 10% of urban
households. Given the high marginal propensity to consume at lower income levels, such a significant unconditional cash
transfer will undoubtedly raise discretionary spending of the recipient households, providing a consumption boost the
economy.

Figure 8: After 8 years, capex will exceed subsidies

Capital Expenditure (% of GDP)

2.5
2.3

2.2

Major Subsidies (% of GDP)

2.6

2.2

2.2

2.1

2.4
1.8
2.0
1.4

1.8

1.7

1.7

1.6

FY08

FY09

1.7

1.7
1.5

FY10

FY11

FY12

FY13

FY14

FY15 RE

FY16 BE

Source: Budget documents, CRISIL Research

Will there be a boost to public investments?

Despite improving macros, India Inc remains cautious on fresh investments. A recent CRISIL survey of 192 listed,
private and public sector companies shows that planned capex by private companies surveyed is likely to decline in
2015-16. A revival in investments, therefore, hinges on increased public spending, especially on infrastructure
roads, power transmission/distribution and railways because of its significant multiplier effect of creating demand
for steel, cement, capital goods and commercial vehicles and spurring investments in the manufacturing space as
well.

What has the budget done to aid public investments and infrastructure creation?

The budget plans a 25% increase in capital expenditure in 2015-16, compared to 2.5% increase in 2014-15, taking
its ratio in GDP up by 20 basis points to 1.7%. Central plan outlay is budgeted to increase by 35.5% in 2015-16
compared to an average fall of 3.4% in the last three years. The budget lays focus on four sectors providing crucial
infrastructure - roads, railways, power and rural development.

CRISIL Budget Analysis

Focus on these sectors is important again because of the multiplier impact on output. For instance, the output
multiplier for rail equipment is 2.7. This means one unit increase in demand for rail equipment raises overall output
by 2.7 units. Similarly, the output multiplier for rail transport services is 1.9, while that for electricity is 2.2. The
Economic Survey said this government can now do for the neglected railways sector what the previous NDA
government did for rural roads. Such focus on strengthening transport infrastructure will also boost manufacturing.

Figure 9: Sectors with higher plan outlay (%, y-o-y) Figure 10: CPSUs shoulder most capital spending
%, y-o-y

% share in total capital outlay

174.5
60.6

61.1
56.4

66.5

43.6

53.0

39.4

38.9

2011-12

2012-13

55.5

44.5

55.0

45.0

15.5

11.1

7.3

-10.6
Roads and
Bridges

-30.6
Rural
Development

Railways

FY12 to FY15 average

Power

FY16 B.E.

2013-14

Budget support

2014-15 RE 2015-16 BE
I.E.B.R.

RE: Revised estimate, BE: Budgeted estimate

Note: Data is only for central plan outlay and taken as per Heads of Development. I.E.B.R.: Internal and extra
budgetary resources which are raised by central PSUs through profits, loans and equity
Source: Budget documents

Where will the money come from?

1. Direct spending from budget:

The relaxation of the fiscal deficit target for 2015-16 by 30 basis points directly releases Rs 423 billion for funding
projects. So, while total central plan outlay is budgeted higher next fiscal, much of it is due to an increase in
budgetary support, which is 37.3% higher on a weak base.
o

Road cess and taxes on petroleum products - The budget raised additional excise duty on petrol and diesel to
Rs 6 per litre from Rs 2 per litre, which is levied as road cess. This raises available funds for roads and railways
to Rs 431 billion in 2015-16 from Rs 232 billion in 2014-15. In addition, to fund infrastructure development
(particularly roads), the government had increased the basic excise duty on petrol and diesel by around Rs 7 to
8 per litre between October and January. Incremental revenues accruing from this is estimated at Rs 780 billion
in 2015-16.

Govts revenue collections In 2015-16, the budget plans to collect divestment revenues of Rs 695 billion on
account of stake sales and spectrum sale revenues of Rs 431 billion which can be utilised towards infrastructure
development.

2.

Larger onus on CPSUs to raise money:

The budget also envisages a sharp 34.1% increase in investments by central public sector enterprises (CPSUs)
compared with a 10% drop last fiscal. Their share in total central plan outlay is thus budgeted at nearly 55%. To fund
this, CPSUs will have to raise resources from the bond market. Of the total estimated to be raised in 2015-16, nearly
37.1% is to come from accruals (down to 49% from last year), 37% from capital market (up from 26%) and 26% from
external commercial borrowings and other sources. From the bond markets, PSUs in the roads and railways sector

are together slated to borrow Rs 803 billion in 2015-16 compared with Rs 208 billion last year. The budget allows for
a large part of this borrowing to be in the form of tax-free bonds.

3.

Crowding in private investment

Public investment in infrastructure (especially railways and roads) can create large complementarities for private
sector investments. In addition to increased spending, the budget also takes a few other measures to boost
infrastructure investments.

On infrastructure financing, the budget announced the setting up of a National Investment and Infrastructure Fund
(NIIF) where an annual budgetary flow of Rs 200 billion will be ensured. This will enable it to raise debt and further
invest as equity in infrastructure finance companies such as IRFC and NHB. The budget also proposed to permit
tax-free infrastructure bonds for roads and railway sectors where large investments are being planned. The budget
reiterates the governments intention to revisit the private-public-partnership.

Overall, despite the pressure on fiscal consolidation, the budget has managed to create room for infrastructure
spending through a mix of its own resources as well as by nudging CPSUs to invest more. However, though there is
an increase in resources available for funding infrastructure, the governments implementation capacity to ensure
efficient delivery remains a concern. This, therefore, should be the next area of focus for the government.

How fiscal federalism is an enabler

It is well understood that greater power to states is essential for local capacity building and efficient use of resources.
This power emanates through higher resources and flexibility in utilising these resources at the state level. The
government has taken steps in the right direction in this regard in the current budget. Total transfers as a percentage of
GDP from the centre to the states have increased from 4.5% in 2013-14, 5.5% in 2014-15 to 6.0% in 2015-16.

Figure 11: Increasing fiscal flexibility for states

2014-15

2015-16

5.5

6.0

Total Transfers

6,930

8,522

States Revenue share

3,378

5,240

Fully flexible/Untied

Central Assistance for State and UT plans

2,703

1,958

Restructured to make semi - flexible :

Total transfers % of GDP

Change in Flexibility

Rs billion

23 schemes fully supported by union,

13 supported on sharing pattern and 8
delinked from the union
Centrally Sponsored Schemes
Non - Plan grants and loans

46

239

803

1,086

Inflexible/tied

Note : Total transfers include grants and loans under the central assistance for state and UT plans, non -plan grants
and loans, revenue share of states and centrally sponsered scheme transfers.
Source: Budget documents, Crisil Research

CRISIL Budget Analysis

Budget implements Fourteenth Finance Commissions (FFC) recommendation

Greater resources for states
The Budget has raised states share in total divisible pool of tax revenues to 42% from 32% as per the recommendation
of the FCC, recording the biggest-ever increase in vertical tax devolution. In level terms, states share of the divisible pool
will rise to Rs 5.24 trillion in 2015-16 twice the share in 2011-12 from Rs 3.38 trillion in 2014-15. This money will
help states design, implement and finance programmes according to their specific needs. In addition, higher tax
devolution will also imply that any buoyancy in tax collections will benefit states to a greater extent as compared to
previous years.

Transfers under centrally sponsered schemes have risen

In order to ensure that the fiscal situation of the center remains preserved, with increasing transfers from the divisible
pool the central assistance to states has seen a decline. The total central assistance for State and UT plans has
moderated from Rs 2.7 trillion in 2014-15 to Rs 2 trillion in 2015-16. On the flipside, even as the centres position is
squeezed with higher devolution, the transfers under centrally sponsered schemes has risen substantially to Rs 239
bilion from Rs 46 billion in 2014-15. Allocations as per schemes has risen under MGNREGA ( rose by Rs 12 billion) and
in sectors such as agriculture, education, health, and rural infrastructure including roads.

But flexibility of transfers has also increased

Past data suggests that above 50% of the divisible pool is given to the states but a major portion of this goes under tied
or conditional transfers. In the last few years, plan transfers have moved away from the Gadgil formula to more
discretionary transfers resulting in lower flexibility. These are the conditional or tied transfers. As per the
recommendation of the FFC, the central assistance to state and UT plans has been restructured.The budget has
announced a changed sharing pattern between the centre and the state in terms of scheme implementation and
financing. The budget also proposes 8 centrally sponsered schemes (CSS) to be de-linked from the support of the centre
and 13 schemes ( for example, Urban Rejuvenation Mission 500, Development of 100 smart cities etc) to be run in a
sharing pattern between the centre and states. Details of the sharing pattern are yet to be disclosed.

Implementing capacity of states now needs attention

With an increase in fiscal flexibility of the states also comes the question of capability of the states to invest these
resources. In the past, states have not fully utilised the fiscal resources available to them resulting in insufficient capital
expenditure. Capital expenditure as a % of GDP has fallen from 2.8% in 2008-09 to 2.2% in 2012-13. As, recommended
by the FFC, the absorptive capacity of states needs to be enhanced to raise capital expenditure and boost growth.

Other measures at fiscal federalism

The government since June has also announced other changes that will result in greater benefit for states. One such
change is the revenue sharing on natural resources auctions. The auctions of 204 coal blocks a corrective measure
after the coal scandal will benefit state finances. So far, 18 blocks have been auctioned and will help raise over Rs 1
trillion over the next 30 years in states such as Jharkhand, Odisha, Chhattisgarh, Madhya Pradesh, Maharashtra and
West Bengal. This will contribute towards states fiscal resources.

10

Overall, this budget showcased a strong resolve towards encouraging cooperative federalism in India. That said, certain
sections of the transfers continue to be tied/conditional. Therefore, continued steps towards increased federalism will be
needed in the coming years. In addition, the ball is in the states court now and they need to use these resources
judiciously to enhance growth.

How will the budget boost manufacturing?

Manufacturing sector is a private sector enterprise with over 90% of the investments and output generated in the private
sector. Government can play a facilitative role in improving its prospects. The budget has taken many small steps to
support the manufacturing sector through indirect channels.

Support through forward and backward linkages : The government has taken measures to boost the
manufacturing sector by improving the domestic investment environment and raising the spending on physical
infrastructure which complements manufacturing activity. Spending on rail, road and ports will crowd in private
investment and support manufacturing activity via backward and forward linkages.

Improvement in ease of doing business: The above will be complemented by efforts to improve the ease of doing
business in India - its current rank is 142 out of 189 countries. Towards this regard, the budget announced reforms
in bankruptcy law to bring about legal certainity and speediness.

Reduction in custom and excise duty to support Make in India : The budget supports the Make in India
initiative through reduction in custom duty on certain inputs to address the problem of duty inversion and reduce the
cost of raw materials.

11

CRISIL Budget Analysis

Overall sectoral impact

There are five focus areas in the Union Budget and each will impact India Inc. Heres a look at how:

Enabling financial sector efficiencies: Setting up of autonomous bank board bureau marks the initial move
towards formalising a holding company structure for public sector banks. This will improve governance, optimise
capital contribution by government, and provide greater functional autonomy. Along with more stringent bankruptcy
laws, these are two key long-term positives. On the other hand, providing a mere Rs.79 bn towards capital support
for public sector banks is grossly inadequate. Elsewhere, the inclusion of NBFCs under the purview of SARFAESI
Act, along with the new bankruptcy code will improve recovery efforts for financial institutions and support their
capital position. The new Micro Units Development Refinance Agency (MUDRA) Bank for refinancing of
microfinance institutions will support micro credit. Proposals to promote financial savings are also a positive.

Enabling infrastructure investments: The intent to ratchet up public spending on infrastructure is clearly visible.
There is a sharp increase in allocation to roads, railways and rural infrastructure development. In addition, many
significant steps have been taken to improve the availability of funds for infrastructure. This includes higher
allocation for road cess, more funding through the National Infrastructure Investment Fund, tax-free bonds and
rationalisation of taxes for infrastructure investment trusts. However, timely implementation of projects remains a
key concern. The governments intent to salvage the broken public-private partnership model to attract investment is
also a positive. The deferment of GAAR and allowing foreign capital in alternative investment funds will attract
foreign capital.

Boosting power and renewable energy: The government has set an aggressive target for renewable energy of
close to 175 GW, including 100 GW of solar capacity by 2022. It has also announced five new UMPPs for
conventional power -- with all approvals in place to ensure faster execution. But the key concerns remain timely
implementation, resolution on fuel availability, clearances, transmission corridor availability and financial health of
distribution companies. The government continues increasing allocation towards transmission and distribution its
up 26% in 2015-16 compared with the current fiscal. Coal cess has also been increased a touch, which will
marginally lift tariffs. We expect generators to pass it on.

Marginal changes in taxes: The budget has proposed a marginal increase in excise duty from 12.36% to 12.5%
and in service tax from 12.36% to 14%. However, given the decline in input prices (both food and non-food), we
expect companies (manufacturers or service providers) to largely pass on the burden to customers and protect their
margins. Although surcharge on corporate tax has been increased for this fiscal, paving a structural path towards
lower rates by doing away with many exemptions is a positive.

Leg-up to rural income: With increased allocation to MGNREGA, rural incomes should rise. Add a good monsoon
and what you get is greater consumption of FMCG products and higher sales of consumer durables and twowheelers. Increased agricultural credit would also lead to higher sales of tractors and irrigation equipment. Better
volume growth and softer commodity prices will improve the margins of companies in this arena.

12

Industry

Impact

Automobiles: Marginally positive for tractors, neutral for other segments

Neutral

Key budget proposals:

Farm credit target increased by Rs 500 billion to Rs 8.5 trillion. Higher allocation to rural financing agencies such as
NABARD and RRBs, and to initiatives such as MGNREGA, micro-irrigation watershed programs, etc.

Allocation of Rs 750 million to promote manufacturing of electric vehicles (EVs). Concessional customs and excise
duties on hybrid and EV parts extended until March 2016.

Increase in customs duty on fully-built commercial vehicles (CVs) from 10% to 20%. Reduction in excise duty on
ambulance chassis from 24% to 12.5%.

Tax on royalty payments to foreign companies reduced to 10% from 25%.

Creation of a trade receivables discounting platform for medium and small enterprises (MSMEs).

CRISIL Researchs View

The increase in allocation to farm credit and rural schemes is likely to be favourable for tractor sales. Proposals on
electric and hybrid vehicle parts will not materially impact the sector given low population of vehicles in India (less than
1% share). The proposals will have a limited impact on the CV segment as imports of fully built CVs and sales of
ambulances comprise a small proportion of the CV industry. The reduction in tax on royalty payments to foreign
companies will be marginally positive for Indian companies who import technology. Creation of an electronic platform for
facilitating financing of trade receivables of MSMEs will help improve liquidity of auto component manufacturers.

Cement: Higher spending on infrastructure to benefit in the medium term

Positive

Key budget proposals:

Investments outlined under various infrastructure schemes related to areas such as roads, urban development and
irrigation indicate a targeted government spending of Rs 1,080 billion in 2015-16.

Duties and tariffs directly levied on cement have increased marginally. The effective excise duty on cement has
increased marginally from 12.4% + Rs 120 per tonne to 12.5% + Rs 125 per tonne.

The clean energy cess on coal (domestic and imported) has been hiked to Rs 200 per tonne from Rs 100 per tonne.

The rail freight rate for cement has been increased by 2.7% and for coal by 6.3%.

CRISIL Researchs View

The governments focus on infrastructure is evident with the total targetted spending in 2015-16 almost double the
revised estimates of 2014-15. This should result in a sustained recovery in demand, but the execution capability of
funding institutions/players has to be scaled up appropriately. Further, the rise in duties and tariffs is expected to have a
muted impact on total cost, which is expected to increase 0.8%. Power and fuel cost (~20% of cost of sales) will increase
2%. Freight cost, which accounts for 25-30% of cost of sales, will increase 1% with the rise in freight rates. However,
amid rising demand, players will be able to offset it with a rise in prices.

13

CRISIL Budget Analysis

Consumer goods: Little to savour

Neutral

Key budget proposals:

Basic customs duty on organic LED (OLED) panels removed.

Specific excise duty on tobacco and tobacco products increased 15-25%.

Excise duty of 2% without CENVAT credit or 6% with CENVAT credit levied on condensed milk and peanut butter.

Basic excise duty increased to 18% from 12% on mineral water and aerated water containing added sugar or other
sweeteners/flavours. Additional excise duty of 5% on the products exempted.

Excise duty on leather footwear with retail price exceeding Rs 1,000 per pair halved to 6%.

CRISIL Researchs View

Improvement in rural income, owing to increase in MNREGA allocation, to support consumer durable and FMCG sales.
Removal in customs duty on OLED to only marginally affect OLED TV sales as segment accounts for less than 0.5% of
panel TV sales. The excise duty hike will hurt the demand for tobacco-based products, but aerated beverages demand
will only be marginally impacted.

Financials: Setting up of holding company and bankruptcy code a positive

Positive

Key budget proposals:

The Union Budget has proposed to provide Rs 79.4 billion as capital support to all public sector banks (PSBs) in
2015-16.

NBFCs registered with RBI, having an asset size of Rs 5,000 million and above, may be considered for notification
as 'Financial Institution' under the SARFAESI Act, 2002.

Autonomous Bank Board Bureau and bank holding company to be set up to improve governance of public sector
banks.

Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs 200 billion and credit guarantee
corpus of Rs 30 billion, to be created.

MUDRA Bank will be responsible for refinancing all microfinance Institutions, which lend to small entities, and
focusing on scheduled caste/ scheduled tribe entrepreneurs.

CRISIL Researchs View

Allocation of funds (an average of Rs 111 billion has been infused over the past three years till 2014-15) for capitalising
PSBs seems inadequate, given the high capital requirements to meet Basel 3 commitments. In this context, the proposal
to create a holding and investment company and an Autonomous Bank Board Bureau would be a positive and improve
autonomy for PSBs and help them raise funds, as the holding company too can leverage.
Allowing NBFCs recourse to SARFAESI Act will help smoothen the asset recovery process. This, coupled with
establishment of the Bankruptcy Code would help improve asset quality within the banking and financial services
industry.
Setting up of MUDRA bank will help improve availability of funds for small business entrepreneurs.

14

Infrastructure: Investment boost through higher public funding

Positive

Key Budget Proposals:

Budgetary allocation: Total outlay for infrastructure has been increased by 1.5 times to Rs 2.8 trillion (roads,
railways and urban infrastructure the biggest beneficiaries).

Roads: Investments for development of national highways proposed to be hiked by 178% y-o-y to Rs 85,607 crore.
A major portion of this increase will be funded by a Rs 4 per litre increase in road cess on petrol and diesel.

Railways: Total outlay raised by 52% to Rs 1,000.11 billion. In the Railway Budget 2015-16, there have been many
announcements of PPP projects in areas of coastal connectivity, gauge conversion, dedicated freight corridors
(DFCs) and the Mumbai suburban rail.

Airports & Ports: No new project announcements. Exemption on service tax for constructing airports and ports has
been withdrawn.

Funding availability: A Rs 200 billion National Investment and Infrastructure Fund to be set up for infrastructure
finance companies to raise debt. The budget also provides for issuance of tax-free bonds for roads, railways and
irrigation projects, and aims to rationalise the tax regime for Infrastructure Investment Trusts.

Other measures: The government's intent to table a Public Contracts (Settlement of Disputes) Bill will help speedy
redressal of disputes in large public projects and create a conducive environment for PPP projects.

CRISIL Researchs View

At a time when private sector interest in infrastructure development is low, the increase in budgetary support holds the
potential to kick-start capital investments in the economy. Moreover, the significant increase in public funding for the
roads sector has the potential to boost execution of national highway projects by about 5,800 km annually and create a
robust construction opportunity for road engineering procurement & construction (EPC) companies.
The National Investment and Infrastructure Fund will create additional funding resources for private developers, over and
above the rise proposed in public funding. Moreover, rationalisation of tax regime for Infrastructure Investment Trusts
may help free up private capital currently locked in completed projects.
While the budget provisions are positive, it puts the execution capability of implementing agencies such as the National
Highways Authority of India (NHAI) at test. Addressing on-ground issues such as clearances and land acquisition
becomes extremely critical to ensure a sharp increase in project execution.

Metals: No big announcement

Neutral

Key budget proposals:

Basic excise duty increased to 12.5% from 12.36%.

Clean energy cess on coal doubled to Rs 200 per tonne.

Basic customs duty on metallurgical coke raised to 5% from 2.5%.

Special additional duty on iron and steel scrap reduced to 2% from 4%.

CRISIL Researchs View

The thrust on infrastructure is a long term positive. But in the near term, the budget proposals will have negligible impact
on the sector. Increase in basic excise duty will only slightly raise aluminium and steel prices by Rs 200 and Rs 50 per
tonne, respectively. Hike in clean energy cess will also have only a mild impact on sponge iron and aluminium players.

15

CRISIL Budget Analysis

Similarly, impact of hike in customs duty on metallurgical coke will be negligible as most Indian steel players import
coking coal and subsequently convert it into coke.

Oil & gas: Higher Govt share in under-recovery burden for 2015-16: positive for oil companies Positive
Key budget proposals:

Government announces oil subsidy of Rs 300 billion for 2015-16.

Change in excise duty structure on petrol and diesel: Reduction in CENVAT by Rs 3.5-3.7 per litre, increase in road
cess by Rs 4 per litre, removal of 3 per cent education cess levied on overall excise duty

Exemption of special additional customs duty on petrol and diesel, in excess of Rs 6 per litre

CRISIL Researchs View

The overall impact is marginally positive. The government's estimate of oil subsidies in 2014-15 and 2015-16 will wipe
out the subsidy rollover of Rs 90-100 billion from 2014-15, reducing working capital requirements of oil marketing
companies. With the government contributing Rs 300 billion towards fuel subsidies (including rollover), upstream oil
companies will see a 5% decline in their contribution to under-recoveries in 2015-16.
Increase in road cess on petrol and diesel has been completely offset by the decline in basic excise duty and removal of
education cess. Hence, there will be no impact.
As petrol and diesel imports are marginal, exemption in special additional customs duty will not have any major impact.

Power: Higher budgetary allocations and fund availability to boost investments

Positive

Key budget proposals:

Capacity additions: Installed capacity target for renewable energy set at 175 GW, led by additions of 100 GW of
solar power capacity by 2022. Setting up of five ultra-mega power plants (UMPPs), each of 4,000 MW, with preawarded clearances and fuel linkages envisaged.

Budgetary allocation: Allocation to transmission & distribution (T&D) segment increased by 26% to Rs 63.5 billion .
Funding to renewable energy sector has also been increased by 5% to Rs 61.6 billion.

Funding availability: Rs 200 billion National Investment and Infrastructure Fund to be set up for help infrastructure
finance companies to raise debt.

Duties and levies: Clean energy cess on coal doubled to Rs 200 per tonne in 2015-16; however, the rise in
generation cost of Rs 0.06/unit to be largely passed through. Moreover, steps have been taken to correct the
inverted duty structure in renewable energy for selected components. However, the overall impact on capital costs is
less than 5%.

Dispute redressal: Public Contracts Bill introduced for resolving contractual disputes to create a conducive
environment for PPP projects

Other benefits: Additional depreciation of 20% granted to new plant and machinery installed by a manufacturing unit
or a unit engaged in generation and distribution of power.

CRISIL Researchs View

The budget provides a thrust on investments in the power and renewable energy space, with a 16% y-o-y increase in
planned expenditure. We believe that a healthy growth in capacity additions and augmentation of T&D infrastructure will
reduce power deficit to about 1% by 2018-19. However, a favourable regulatory framework coupled with states
facilitating implementation of projects will be critical to boost investments.

16

While the provisions are positive, addressing fuel availability issues and improving the financial health of state distribution
companies is important to alleviate financial stress in the sector

Real Estate: Commercial real estate developers to benefit in the medium term

Neutral

Key budget proposals:

Rationalisation of capital gains tax for the sponsors at the time of listing of real estate investment trusts (REITs).

Service tax increased from 12.36% to 14%.

CRISIL Researchs View

Rationalisation of capital gains tax for the sponsors* exiting at the time of listing of REITs is positive for developers with a
significant exposure to rental yielding real estate assets. The increase in service tax will be marginally negative for the
real estate sector.
*As per the Securities Exchange Board of India, sponsor has been defined as any person(s) who set(s) up the REIT and
designated as such at thetime of application made to the Board

Textiles: Allocation under TUFS slightly reduced; No major impact

Neutral

Key budget proposals:

Budgetary allocation under the Technology upgradation Funds Scheme (TUFS) has been reduced to Rs 15.2 billion
for 2015-16 from Rs 18.6 billion in 2014-15.

CRISIL Researchs View

The government has been supporting the industry through TUFS, which enables players to expand/ modernise at lower
costs. Though the budgetary allocation under TUFS has been reduced slightly in 2015-16, it will not greatly impact the
industry given the existing demand-supply dynamics. Continuation of a zero excise duty will aid a 6-8% rise in domestic
sales volumes of apparels in 2015-16, vis-a-vis a 5-6% rise in 2014-15.

Technology, Media & Telecom: No significant impact of the Budget proposals

Neutral

Key budget proposals:

Mobile handsets: Excise duty on mobile handsets (costing above Rs 2,000) hiked from 6% (with CENVAT credit) to
12.5%.

Service tax: Service tax, hiked from 12.36% to 14%, will have a bearing on the bills of postpaid telecom
subscribers.

Telecom receipts: Budgeted receipts from spectrum auctions, one-time spectrum charges and other levies have
been estimated at Rs 429 billion for 2015-16, vis-a-vis Rs 432 billion for 2014-15.

Media: Service tax to be levied on tickets purchased for events such as concerts, pageants, sporting events and
award functions, if the admission amount exceeds Rs 500 per person.

IT: Rs 10 billion has been allocated towards the Techno-Financial Incubation and Facilitation Programme for
technology start-ups and self-employment activities. Also, input components used in manufacturing tablet computers
have been exempted from basic customs duty, countervailing duty (CVD) and special additional duty (SAD).

17

CRISIL Budget Analysis

CRISIL Researchs View

The proposals are unlikely to have a significant impact on the telecom and media sectors. The hike in excise duty on
mobile handsets would result in an increase in their prices, which would somewhat impact the rate of growth in
smartphone adoption. The hike in the service tax rate would inflate the bills of postpaid subscribers, who, however,
constitute only about 5 per cent of Indias wireless subscriber base. The budgeted receipts from telecom services
indicate that another round of spectrum auctions can be expected in 2015-16.
Service tax to be levied on event ticket prices exceeding Rs 500 is unlikely to have a major impact as organisers would
pass on the resultant price hikes to the ticket buyers.
The proposals will not have a significant impact on the IT industry. Allocation of funds for start-ups will help the IT
industry adopt new technologies and provide employment opportunities. Tablet computer prices are set to reduce with
the removal of custom duties.

18

Capital markets
Focus on social security a good augury for future
A. Enhancing coverage of pension and health insurance:
With an aim to expand pension and insurance coverage in India, Arun Jaitleys Budget seeks to include the
unorganized and the under-privileged. As per CRISIL estimates, about 65% of the old age population in India is not
covered by social security.
Increase in deduction (by Rs 50,000) under Section 80C for contributions to pension funds and National Pension
System (NPS), and under Section 80CCC for pension funds launched by insurance companies is expected to boost
interest in these products. An additional tax deduction of Rs 50,000 has also been provided for contribution to the
NPS under Section 80CCD.
Increase in tax incentives for health insurance is expected to enhance the coverage of health insurance products.
The budget has increased the available choices in pension and health insurance. Subscribers can plan for
retirement by choosing between asset classes and products offered by the Employees Provident Fund (EPF) and
the NPS. Likewise, products recognised by the Insurance and Regulatory Development Authority of India (IRDA) for
health cover are an option to Employees State Insurance Corporation (ESIC). These measures are expected to
encourage healthy competition in the insurance and pension funds sectors.

B. Funding infrastructure through alternative investment funds

The budget includes key measures to enhance investor interest in alternative investment funds (AIFs). Increased
asset flow to AIFs, especially Category I and II AIFs, will boost funding options for the infrastructure and real estate
sectors.
The introduction of pass-through status for taxation of Category I and II AIFs allows for tax to be levied on the
investors (unit holders) of these funds and not on the funds. This is expected to increase investor interest in these
funds.
Opening of AIFs to foreign investors will enhance the investor base for AIFs. This is expected to boost inflows and
energise start-ups and projects that may otherwise face difficulties in funding. Details are, however, awaited on the
tax implications for such foreign investments.

C. Channelling physical gold savings to financial savings

India is amongst the largest consumers of gold. Gold investments are predominantly held in a physical form, which
means the investment once made is not used productively. Further, the huge demand for gold increases Indias gold
imports, which adversely impacts the balance of payment and the rupee. The budget seeks to introduce schemes
such as Gold Monetising Scheme, Indian Gold Coin and Sovereign Gold Bonds, which address these concerns.
While these are steps in the right direction, the efficacy of the schemes - given the countrys penchant for physical
holdings - remains to be seen.

19

CRISIL Budget Analysis

D. New agency for government borrowings, yet very few measures for deepening debt market
The proposal to establish a Public Debt Management Agency for government borrowings is expected to facilitate
better planning and management of domestic and foreign market borrowings for the Centre. This will also reduce the
operational burden on the Reserve Bank of India and help it focus on core functions related to monetary policies.
Introduction of tax-free infrastructure bonds will help channnelise investments to the bond market. While provisions
for pension funds and AIFs are also likely to have a positive impact on asset flow to the debt markets, given the role
that the debt markets have to play in the realisation of several of the measures that have been announced in the
Budget, there is very little to cheer. No concrete measures have been announced for deepening or broadening the
markets.

E. Encouraging foreign investments

Continuation of the withholding tax rate of 5% and deferment in applicability of the GAAR are likely to maintain the
positive atmosphere for foreign investors. Modification to norms of Permanent Establishments (PE) and
rationalisation in Minimum Alternate Tax (MAT) are also positive. Details are awaited on the removal in distinction
between Foreign Portfolio Investors (FPIs) and Foreign Direct Investments (FDIs).

F. Very little for the mutual fund industry

The mutual fund industry could have done with a few more measures. Given the fact that mutual funds are expected
to be a key vehicle to channelise retail savings, this is a negative.
The only positive for the industry has been the proposal to provide tax neutrality on transfer of units in case of
mergers of schemes. This will enable mutual funds to consolidate similar schemes, which is important to retain
simplicity of products for retail investors.
Introduction of service tax for mutual fund distributors is likely to reduce the margins on distribution of schemes.
Given the challenges the industry faces with distribution, this is a negative. Increase in surcharge from 10-12% for
capital gains and distributed income will increase the effective tax rates for investors and may, in turn, impact
investor interest.

20

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