Union Budget 2017: Good on Macro; Not Populist

Key Highlights of the union budget 2017


In what many call it a period of transition for the economy, the Union Budget 2017 was presented by the Finance Minister. On the one hand, the economy is recovering from the effects of demonetization. On the other hand, there is the impending rollout of the GST which promises to completely transform the indirect tax regime in the country. It is a great positive that the FM has chosen to stay away from the populist path.

This year’s budget had some firsts:

1. Unlike previous years when it would be presented at the end of February, this year it was presented on the 1st of February;

2. For the first time after independence the Railway budget and General budget were combined into one.

The government has sharply reduced inefficient subsidies and opted for more targeted allocation, focus on the farmer’s income and housing sector reforms. All in all the government’s thought process in budget was largely consistent with its long standing agenda emphasizing fiscal discipline, boosting growth and spending. GST implementation and demonetization being the policy eventful initiatives.

Key Highlights of the Union Budget 2017 are as below:

Fiscal Front

  • Fiscal deficit target set at 3.2% for FY 18 and 3.0% for the subsequent two years
  • Net borrowing announced at 3.48 lakh crores


  • Corporate tax rate for SMEs with turnover of less than 50 crores lowered to 25%
  • Personal Income tax rate for the 2.5 – 5 lakh slab reduced to 5% from 10%
  • Not many changes to excise duties and service tax since GST will be implemented soon
  • Minimum Alternative Tax (MAT) can be carried forward for 20 years
  • Surcharge on income bracket Rs 50 lakh and 1 crore

Foreign Investors

  • Foreign Investment Promotion Board (FIPB) to be abolished
  • Concessional withholding tax rate will be extended to 30 June 2020

Real estate & Housing

  • Real estate sector long term capital gains tax is applicable at 2 years holdings in place of 3
  • Affordable housing to be given infrastructure status

Push from Cash to Digital transactions, widening tax net

  • Limit of 3 lacs on cash transactions
  • Additional push for digital transactions
  • Clean-up of funding for political parties

Union Budget 2017 : Impact on Capital Markets

Impact on Fixed Income Markets

Largely in line with market expectations the government kept the borrowing programme in check which was a positive. There was a more structural change however, to bring down the debt to GDP ratio to 60% over the next few years.

The budget was largely a non-event for the FI markets as the gross borrowing number at 5.8 lakh crore was in line with expectations. Bonds rallied marginally post the Finance Minister’s statement on adhering to the path of fiscal consolidation. Inflation within comfort zone and a tight fiscal target spell good news as the RBI can deliver more rate cuts going forward.

Last but not least, the announcement on buy back of approx. 75000 crore of securities maturing over the next 2-3 years is a positive for the short end of the curve. Not to mention abundant liquidity post demonetization is already helping shorter term bonds.

Impact on Equity Markets

Contrary to market expectation of a Long Term Capital Gains tax on Equities, there were no such negative news for equity markets. The Budget was positive for foreign investors owing to the FIPB becoming defunct and withholding tax extension.

The Budget is seen as being largely positive for sectors directly or indirectly dependent on housing and real estate such as cement, building materials, and lenders in housing finance. Further, listed companies have been able to navigate the demonetization aftermath smoothly and earnings growth can bounce back as a result. Organized players will benefit disproportionately due to level playing field against erstwhile pure cash players.

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