Budget Series 2017-18-#4 Impact on Consumer Durables Sector

Anuprash Baruah & Abraham Mathew

“And more than the quality of its institutions, what distinguishes a developed country from a developing one is the degree of consensus in its politics, and thus its ability to take actions to secure a better future despite short-term pain.” – Raghuram Rajan – Fault Lines

This quote sums up India’s direction with demonetization, our balancing act of a budget and no change in the repo rate as of yesterday.

Consumer durable goods are purchased with the intention of keeping them for a long duration. The consumption of durable goods is considered similar to an investment. This is so because they are bought every few years. In this insight, we try to evaluate the near future outlook for the industry in the light of the Union budget.

Industry Size (2016-17)
The industry is divided into two major segments:-
• Household appliances – 66,620 Crore INR
• Gems and jewellery
o Export – 2,39,600 Crore INR
o Domestic – 2,70,000 Crore INR

Major impacts:

  1. Decrease in taxable income for 2.2-5 Lakh INR bracket: This will lead to an increase in discretionary income, thus increasing demand for jewellery and household appliances. There are 2 Crore people that will benefit from this reduction.
  2. 2% increase in employment generation activities like MNREGA: The government is cushioning the demonetisation through subsidies. They are using employment as a sustainable way to boost consumption.
  3. Increase in capital expenditure: The 10.7% jolt in capital expenditure will have positive impacts on employment and income multipliers. Increases : Power(51%), Road transport(31%), Rail(19%), Shipping(16%).
  4. Increase in power expenditure: More access to power will also boost household appliances demand in the long run.
  5. Rural sector support: This includes increasing coverage under crop insurance (to 40%) along with increasing the base of subscribers. Also, there is continued support for rural road construction and MNREGA. According to CRISIL: “A study on the consumption patterns of workers benefitting from the rural roads program shows workers tend to allocate a larger proportion of their discretionary spending on durable goods (new and second hand), education, paan, tobacco, intoxicants, toiletries, and household commodities. The sectors producing them, therefore, can expect some boost due to budgetary measures”. Therefore we can expect a boost in demand. According to Godrej appliances, they are focusing on releasing more entry level products as this is the area with high demand and growth in the rural sector. We can expect other players to target the same segment.
  6. Pent-up demand from demonetisation impact: There is a current pent-up demand from demonetisation, it is expected to be satisfied in FY2018. Being a durable good, the decrease in income will only delay the consumption and not eliminate the demand.
  7. Growth of organized players (only gems and jewellery): Due to demonetisation, the gems and jewelry unorganized sector took a hit. This will strengthen the market standing of the organized players.
  8. GST implementation: If and when GST is implemented, it will result in up to 30% savings on logistics costs to consumer durable companies. This industry is said to be the biggest gainer from GST. Overall, it is a positive outlook for consumer durables. We can also see more of a rural focus entering the industry.

Budget Series 2017-18-#3 Impact on Railway Sector

Isha Varma & Suneet Unni

The 4th budget by our Finance Minister Arun Jaitley was presented on 1st February 2017, one month before the usual Budget date. There were apprehensions that the Railways sector may be understated as this is the first time the Railway Budget is merged with the Union Budget and is not a separate statement. However, Railways was given significant representation in the Budget and was welcomed by the Railway Minister Suresh Prabhu.

The Budget allocated a total of Rs 1, 31,000 crores for capital and developmental expenditure on Railways which includes Rs 55000 crores provides by the Government. The other major recommendations were as below:

Rashtriya Rail Sanrakshan Kosh

The finance minister proposed the setting up of Rashtriya Rail Sanrakshan Kosh (RRSK), a railway safety fund with Rs 1 lakh crores for a five-year safety upgrade. This fund would be utilized for track improvement, bridge rehabilitation, rolling stock replacement, human resource development and improved inspection system. He also proposed that expert international assistance would be harnessed to improve safety preparedness and maintenance practices in railways. Moreover, unmanned level crossings will be eliminated by 2020.

Upgradation of identified issues

Mr. Jaitley stated that railway lines of 3500 kilometers will be commissioned in 2017-18, as against 2800 kilometers in 2016-17 and dedicated trains will be launched for tourism and pilgrimage. The throughput is expected to rise up to 10% within the next 3 years. He further mentioned about the joint ventures with 9 State governments and 70 projects that have been identified by the Railways.

Development of Stations

It was announced that a minimum of 25 stations is expected to be awarded for station redevelopment. The budget is expected to help provide lifts and escalators in 500 stations and thus making it differently-abled friendly. Also, 7000 stations are expected to be fed with solar power.

Emphasis on Cleanliness

The budget focused on Swacch rail, under which an SMS-based ‘Clean my Coach Service’ has been initiated and another ‘Coach Mitra facility’ has been proposed for any coach related complaints and requirements. All coaches would be fitted with bio-toilets by 2019. Pilot plants for environment-friendly disposal of solid waste and conversion of biodegradable waste to energy are being set up at New Delhi and Jaipur railway stations.  Five more such solid waste management plants are in progress.

Transformational steps

Railways intend to implement end to end integrated transport solutions for selected commodities through a partnership with logistics players, who would provide both front and back end connectivity.  Rolling stocks and practices will be customized to transport perishable goods, especially agricultural products. Railways will offer competitive ticket booking facility to the public. The service charge on e-tickets booked through IRCTC is withdrawn. Cashless reservations have gone up from 58% to 68%. The finance minister assured that it will be their continuous endeavor to improve the Operating Ratio of the Railways.  The tariffs of Railways would be fixed, taking into consideration costs, quality of service, social obligations and competition from other forms of transport.

Metro Rail

Metro rail is emerging as an important mode of urban transportation.  A new Metro Rail Policy will be announced with a focus on innovative models of implementation and financing, as well as standardization and indigenization of hardware and software.  This will open up new job opportunities for the youth of the country. A new Metro Rail Act will be enacted by rationalizing the existing laws.  This will facilitate greater private participation and investment in construction and operation.

The Impact

This was the first time in 92 years that railway budget was announced on the Budget day in combination with the Union budget. The investors did not seem delighted with the allocation to railways as the rail stocks fell by 6% after the announcement. Titagarh Wagons fell as much as 6.6%.  However, this budget is expected to make the railways safer and cleaner. There are many issues like trains being late, need of doctors in trains and women safety that have not been raised. But this budget is reasonable enough to be a stepping stone towards transforming the Indian Railways.

Budget Series 2017-18-#2 Impact on Auto Sector

Roshan Raghuram & Jananee R Chandran

A look at the Union budget

Transform, Energise and Clean: the three-point agenda of the Union budget has very well reflected in its focus on job creation, rural spending, digitization, and GST. Some of the highlights are:

  • Total allocation to agriculture up by 24%, to double the farm income in five years
  • Infrastructure spending up by 11%, against the sluggish private sector investment
  • Housing for all by 2022-being the main job creator to help in demand revival
  • Disincentives on cash transactions to help in the retention of bank deposits, which will bring down market interest rates further
  • Widening of tax base and compliance, a significant medium-term positive to support quality spending

Auto sector: An introduction

Indian automobile sector is one of the largest and most dynamic in the world, resisting and growing positively through economic changes. India has emerged to be the 2nd largest two-wheeler maker, 6th largest car manufacturer and the 8th largest commercial vehicle manufacturer in the world. The 92 billion dollar industry contributes 7.1 % of the country’s GDP and is responsible for the employment of 19 million people in the country.

Recent news in the industry

  1. A shift in paradigm in the industry: IT and e-commerce industries have reshaped the way the industry operates.
  2. Fuel emission norms and safety norms: In the era of global standards, we see India getting in line with the Euro emission norms. This translates into shorter product life cycle for the vehicles and an increase in the frequency of new models. The compulsory air bags regulation coming in the year 2017 would increase the demand for the auto ancillaries in the country.
  3. The impact of GST: There are broadly two kinds of prices in front of a car buyer: showroom price and on-road price. Prior to GST, excise duty levied on showroom price was 20% and a sales tax of 12.5 % (average of all states) was levied on on-road price. With the advent of GST, the common tax rate would bring down the effective tax rates for automobile companies which will improve their operational efficiency. This would mean reduced consumer prices as there is no cascading tax effect.

Effect of demonetization on Auto sector

Sales are reported on a monthly basis in the Auto sector. Post demonetisation it was seen that the sale volume of the auto companies dipped by around 5.48%. The rural demand for the sector would be affected in the coming quarter or two, mainly because a lot of NBFCs and banks refrain from giving auto loans to the rural population. This means most of the payment for the purchase of automobiles is made by cash, and this cash crunch would have an impact on the top lines of the companies for a shorter term but this is expected to improve once the effect of demonetization subsides.

Impact of Budget on Auto sector

The budget overall has been consumption positive. Reduction in income tax rate for a taxpayer with income INR 250000-500000 translates into increased disposable income. The spending on agriculture and crop insurance scheme will benefit the tractor and the 2-wheeler segment. Increased spending on infrastructure, on the other hand, will benefit the commercial vehicle segment. However, the decrease in the total outlay of AMRUT will lower demand for buses and would adversely affect urban players.

Proposal Impact Major players
Spending on agriculture and crop insurance Positive for tractor and 2W Hero
Decrease of  6% outlay on AMRUT Negative for urban players Eicher Motors
Ashok Leyland
Tata Motors

Market reactions of companies to Budget

Company Pre-budget price Post-budget price Change % change
M&M 1255 1260 0.40%
Eicher Motors 23174 23385.9 0.91%
Ashok Leyland 92.32 94.5 2.36%
Escort 362 379.5 4.83%
Bajaj Auto 2819 2808 -0.39%

Market reactions have been positive for four out of the above five companies. The Auto sector is likely to be positively impacted both by value and volume. And the Union budget is expected to be a helping hand to the demonetization affected Auto players.

Expectations from Union Budget 2017-18

Union Budget 2017 is the most looked forward issue for everybody associating with the Indian economy. This year budget will be announced one month earlier compared to the traditional practice of declaring it on the last day of February, because, Government wants to complete the spending and tax proposal before starting of new financial year.

Here are the major expectations from NDA’s budget:

  • Change in Tax Administration:

Data shows that only 1% of the Indian population pays income tax, whereas only around 2% filed income tax return. So, to take more people into taxpayers’ net, Government might increase the tax level from Rs. 2.5 lakh per annum to Rs. 4 lakh per annum. Along with that corporate tax may get reduced to boost economy. Also, according to the CEO of Mindtree, Rostow Ravanan, Government needs to streamline and update the process of incentives given to individual taxpayers to have more inclusion. GST’s implementation schedule may also be announced in this budget.

  • Encouraging Digital Payments and Proper Implementation:

In the process of creating a supposedly cash-less economy, this budget is expected to incentivize digital payments via plastic money. In a country of 1300 million, banking penetration is only 55% (although 19% of them are dormant), which translates to people having 700 million debit cards but only 24.5 million credit cards. So, the budget is expected to address the huge opportunity. To promote cashless transaction, applications are expected to be part of this budget. Benefits of banking through payment banks are also expected. Infrastructures are expected to be more developed to incorporate SMEs in digital India.

  • Real Estate:

Due to demonetisation and Real Estate Regulatory Act, 2016 was not smooth for major GDP contributors of India’s real estate sector, because, cash crunch made problem for buying material, construction etc. Relaxation in income tax rate, hike in HRA deduction is expected from this budget.

  • Revival of Private Investment:

The government is expected to take major steps to address the issue to decreasing private investment. Demonetisation may not affect the private investment directly, but it has kept the investment in abeyance, which will delay the recovery in private investment. So, domestic consumption, purchasing power and cash-driven transaction in the rural economy need to be boosted by the policies taken by the Government in this budget.

  • Agriculture:

Farmers were not able to sell their khariff crops due to unavailability of notes after demonetisation. So, they are expected to get some benefit from this budget under Pradhan Mantri Fasal Bima Yojana. It is also expected to provide a measure for cashless transactions and digital payments in the farming sector so that seeds, fertilizers, and other necessary equipment can be easily be purchased by farmers. Also, import duty on vegetable oil needs to be increased to help domestic refining industry, which is currently facing a crisis of under-utilization. The government can also think of introducing FDI in the agriculture sector to boost the investments and technical expertise. The budget is expected to introduce a framework for more transparent procurement of grains by official agencies. It may include the system of direct procurement from farmer to prevent exploitation by placing suitable safeguards.

  • Housing Loan:

The government announced Pradhan Mantri Awas Yojna (PMAY) aiming for housing for all. Then, it is expected that government would increase the tax deduction on the interest paid on housing loan. An extra benefit is expected beyond the interest payment of Rs. 2 lakhs per annum.

  • Social Sector:

Gross enrolment ratio in India is only 23%, which is well below the world average. So, to address that, the government is expected to have more allocation (more than 3% of GDP) in the education sector. Increasing the internet coverage would be an effective step to address this gap to educate the students of rural India. Along with that, the learning gap between academic curriculum and practical arena needs to be addressed by imparting more technology and collaboration in between educational institutes and industries.

This budget may announce a new cess for social security of around 20000 railway coolies. It is expected that every railway ticket would cost 10 paise more to generate around Rs. 4.4 Crores per year to provide the basic minimum facilities like PF, pension etc. for the coolies.

  • Railway:

Ending the 92 years-old tradition, the Government decided to merge railway budget with the union budget. Railways is expected to get around . 1.3-1.4 Trillion rupees this year to spend in building over-bridges, under-bridges, track renewal, freight corridors etc.

At last, the share of India in global GDP has increased from 4.8% in 2001-07 to 7.0% in 2014-15 according to the Economic Survey 2016. So, it is very critical for the finance ministry to make a roadmap to achieve the country’s goal – to be a global economic power with sustainable growth rate.

rooptejaRoopteja Tamatam, a student of Shailesh J. Mehta School of Management, IIT Bombay, is a finance enthusiast and an avid follower of western classical music and is looking to carve a unique career path amalgamating both of his passions.

sayanSayan Poria, a student of Shailesh J. Mehta School of Management, IIT Bombay, is a finance enthusiast, opinionated and avid follower of recent political and socio-economical affairs.

Rise of Bitcoin in India

By Sachit Modi

Bitcoin – World’s Best Performing Currency

Bitcoin, one of the most famous cryptocurrency, has become the world’s best performing currency for 2016, with rates hovering at around $970 per bitcoin (as of 28/12/2016), which is almost a rise of 120% as compared to the start of the year. In India, since the last 2 months, it has been trading at a premium of 10% as compared to the international markets.

Several factors have been attributed to the steep rise of this investment vehicle in the international markets, one of them being the need for currency stability in the highly volatile geo-political scenario of China and U.S. Also, Bitcoins have a relatively lower correlation with international assets classes, thus giving them the status of being an entirely different class.

The Indian Context – Demonetization and Black Money

In India, the monumental move of removing almost 86% of country’s currency out of circulation, taken by the GOI on 8th Nov’ 16 lead to the rise of this lesser known currency.  Demonetization may not have had a direct impact, but it has triggered an interest in the citizens towards everything which is cashless and digital, including bitcoins. Also, since bitcoins act as an attractive and viable option of sending remittances from abroad, it has seen a huge spike in demand. Due to these factors, bitcoins are facing demand-supply mismatch, which is being reflected in its trading prices.

There has been a widespread belief that Bitcoins are being used as an alternate option to park cash, post the ban on Rs. 500 and Rs. 1000 currency notes. However, chances of this happening are remote as all bitcoin transactions are completely cashless and are only possible through linked bank accounts and KYC procedure.

Future Prospects

In India, there are 4 major Bitcoin exchanges – Zebpay, Unocoin, Coinsecure and BTCXIndia. All of these have seen an increase in queries in the last couple of months and have now been adding 50000 users per month on an average, owing to which they have levied a premium on the prices of bitcoins. However, bitcoins enjoy the benefit of having lower transaction costs (almost 90% less than a typical credit card transaction), which has worked heavily in its favor.

This year has been one of the most successful in the eight-year history of the crypto-currency, and this trend is expected to continue. There has been a widespread increase in the knowledge of bitcoin among the general public, and in India, demonetization has already set the stage for its popularity. It is just a matter of time before Bitcoin emerges as the mainstream payment and investment alternative.