Government commits to double farm income in five years, Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) allocation at Rs48,000 crore versus FY17 revised estimate of Rs47,499 crore. Total rural allocation up by 24%, under various heads.
Reduction in personal tax rates for individuals in the Rs2.5-5 lakh income bracket to 5% from 10%.
Revenue expenditure kept under check, estimated at 6% in FY18 versus 12.8% in FY17.
Excise duty on filter cigarettes has been hiked by 6%. Duty on pan masala up from 6% to 9%, and on unmanufactured tobacco from 4.2% to 8.3%. Excise on beedis has increased—fourfold for machine-made ones from Rs21 per thousand pieces to Rs78 per thousand and by one-third for handmade ones to Rs28 per thousand pieces.
Rural consumption has been worst affected in recent years, with demonetisation making it worse. MGNREGS allocation just above the FY17 revised estimate, so no additional boost. No direct benefit from the budget for rural consumers, but higher allocation could trickle down eventually.
Middle-class consumers will be happy as they will have more money in their hands. The tax cut is expected to cost the government Rs15,500 crore, some of that could boost consumption while the rest could be saved. Discretionary spending could get a boost to some extent.
The government’s approach seems to allow consumption to revive by itself, without creating inflationary pressures, on the back of improving economic conditions. That means a more gradual recovery for the consumer sector, especially those reliant on rural markets.
Cigarettes have been tapped for revenue with a 6% increase, which is milder compared to increases in previous years. The increase on other tobacco products is higher, which levels the playing field to some extent. While this is good, once the goods and services tax (GST) comes into force on 1 July, the new rates are what will really matter.
Stocks in focus:
Hindustan Unilever Ltd’s shares declined 0.2%, possibly because a direct boost to rural consumption is not visible. Dabur Ltd and Marico Ltd’s shares were flat. Those with more exposure to discretionary consumption, and urban markets, such as Godrej Consumer Products Ltd, Britannia Industries Ltd and Nestlé India Ltd saw gains.
ITC Ltd gained by 4.5% as the mild increase in excise duties and the recent increase in cigarette prices should see its performance benefit. A higher tax on competing tobacco products is also useful to nudge the beedi smoker to move to cigarettes. But note that cigarettes are expected to be hit with a sin cess for funding compensation to states under GST. That’s likely to be an unkind blow, so investors should not get carried away. A mild tax hit now might be a case of applying a salve before inflicting a wound.