Consumption boost for corporate India

Budget provides mild stimulus at bottom of the pyramid but not enough for turnaround in capex cycle

The Budget proposals tried to take some sting out of the demand hit that corporate India took after demonetisation. Proposals such as a higher allocation for agriculture and the rural sector, a cut in tax rate for payers in the lowest slab and a fiscal impetus for affordable housing are likely to boost overall demand. And, aid corporate India’s revenue growth in 2017-18. 

The biggest beneficiary would be manufacturing companies in the building material space, such as cement, paints and allied industries. Among individual companies, it would be positive for UltraTech Cement, ACC, Shree Cement, Asian Paints, Kansai Paints, Kajaria Ceramics, Havells India and Bajaj Electricals, among others. 

A higher disposable income in the hands of low-income earners in the formal sector and people in rural areas are also likely to boost the consumption of lower-priced consumer goods. This helps entities in sectors such as personal products, processed foods and beverages, consumer durables, two-wheelers and farm equipment. It will lessen the demonetisation impact currently faced by companies such as Hindustan Unilever, ITC, Dabur, Nestle, Hero MotoCorp, TVS Motor and Bajaj Auto. 

A higher allocation for the infrastructure sector is also likely to generate more revenue growth for construction and engineering companies, such as Larsen & Toubro, Hindustan Construction, NCC, IRB Infra, GMR Infra, GVK Power and Ashoka Buildcon. 

On the downside, the Budget has created two classes of companies, creating an imbalance between large ones and small & medium enterprises (SMEs). The proposal to lower the corporate tax rate for entities with annual turnover of up to Rs 50 crore, to 25 per cent from 30 per cent earlier, provides an incentive for entrepreneurs to remain small or divide family-owned businesses into multiple entities with turnover of Rs 50 crore or less.  

“Demonetisation has disproportionately impacted the SMEs in the informal sector. Less tax on them is the government’s way to lessen the blow. However, it could create some inefficiency and distortion in the system,” says Devendra Pant, chief economist, India Ratings. 

Others, however, say the tax arbitrage is too low for entrepreneurs to split family-owned enterprises into smaller units. “The compliance cost of managing multiple legal entities against one large company will exceed the five per cent rebate on corporate tax,” says G Chokkalingam, head of Equinomics Research & Advisory.

More, the tax rebate for smaller companies won’t have a material impact on companies in the listed space. Companies with annual turnover of Rs 50 crore or less accounted for only 0.27 per cent and 0.53 per cent of combined net sales and market capitalisation, respectively. Together, these smaller companies reported a net loss of Rs 6,209 crore in 2015-16. 

Experts say the Budget doesn’t provide a specific measure of policy direction to revive the investment cycle. “There is no great innovation. Not much has been done to boost sagging private and public investments,” says Chokkalingam.

Others, however, say the lack of negative surprises is itself good news. “It’s a stable Budget that has tried to balance a stimulus while maintaining fiscal prudence,” says CARE Ratings’ chief economist Madan Sabnavis.

MAT carry-forward to help large firms

The long-standing demand for reduction of Minimum Alternate Tax (MAT), impacting the information technology/information technology enabled Services (IT/ITeS) sector and large companies, has been deferred in the Union Budget, though with a limited relief of increase in MAT credit period from 10 to 15 years.  

“While the expectation was to also reduce the MAT rate from 18.5 per cent, the extended carry-forward of the MAT credit is welcome, as it will enable companies to off-set their future tax liabilities once the profit-linked investments are phased out,” said Abhishek Goenka, partner at tax & regulatory services, PwC.