This year’s budget was the one to forget and move on. The eagerly awaited budget of 2020 pressed on many buttons (which came with a lot of caveats) but fell short of expectations to drive consumer demand and bring the economy back to a high growth path. Investors took it as a non-event and punished the markets in-line with global cues that are under pressure from the widening reach of the Coronavirus. The budget carries several hits and missed out opportunities, which are precisely listed down in points below.
Changes to personal income tax rates benefiting individuals having incomes below Rs 15 lakh with the caveat of giving up on benefits from several deductions and exemptions. This entire episode changed nothing for the rich population.
The finance minister in her budget speech abolished the Dividend Distribution Tax (DDT) in the hands of corporates. But now, this has been completely taxed in the hands of recipients at a marginal tax rate.
There have been no changes in the Long-Term Capital Gains (LTCG) tax structure or Securities Transaction Tax (STT) nor rationalisation of tax treatment across asset classes.
The budget made no big stimulus for real estate except the one-year benefit extension for affordable housing developers and buyers.
No action is taken to boost the credit growth by setting up a bad bank or fund on the lines of the Troubled Asset Relief Program (TARP), which was earlier done by the US during the 2008 financial crisis or recapitalization of public sector banks.
Amendment to tax resident definition for Non-Resident Indian or Person of Indian Origin residing outside India but visiting India.
Though the FM categorised the budget under three schemes of aspirational India, economic development for all and a caring society, the announcements seem more lopsided in favour of ‘Bharat’ and necessities of water, sanitation, health and education.
Budgetary allocations only favoured the agro, rural development, education and infrastructure within which roads, shipping, urban development, and water were in primary focus.
As anticipated, FY20 fiscal deficit target has been revised upwards by 50 bps to 3.8 per cent from 3.3 per cent and FY21 now stands at 3.5 per cent. FY21 budgeted expenditure spends look achievable as it is to be funded by doubling of disinvestments from Rs 1.05 lakh crore to Rs 2.1 lakh crore which would include Rs 90,000 crore from divesting government stake in IDBI Bank and listing of LIC.
Equities reacted sharply negatively across the board. The “simplification” of taxes has clearly been viewed as ironically negative and complicated as the fine print of assessing which deductions or exemptions matter most will weigh on the minds of taxpayers. The budget seemed disconnected from reality just like the equity markets have been in CY19. The absence of any measures to revive consumer and business confidence appears to have disappointed markets. Had some fiscal stimulus package in the form of direct spending been announced, the fiscal multiplier on the economy would have been much more positively pronounced as it would have boosted consumption and employment. High dividend-paying companies (PSUs, MNCs & IT companies) would benefit from abolishing DDT.
Agriculture and Irrigation have undoubtedly been the go-to sector for the Government in terms of spending push. FM announced measures to incentivize the usage of organic fertilisers over chemical fertilisers. The credit target for agriculture has also been upped meaningfully to Rs 15 lakh crore from Rs 12 lakh crore. These measures could impact rural consumption, agriculture input companies, and Banks.
There has been a humungous allocation of Rs 3.6 lakh crore for the Jal Jivan mission. This decision has undoubtedly boded well for water pipe companies and possibly, water treatment companies. The expansion of the National Gas Grid would also be positive for pipes and gas companies.
There are plans for five new smart cities and expansion of BharatNet augur well for equipped IT product companies as well as select communication network companies.
The rationalization of deductions or exemptions from prior 100 to now 70 has created some uncertainty for life insurers and asset management companies which arguably had been selling certain products (ULIPs/ ELSS) banking on the tax-saving angle for their customers.
Now that the event has passed, the market focus will again shift back to macro fundamentals and global cues. Corporate earnings continue to be fragile (with some exceptions) and valuations are not cheap. While, most recent growth indicators like auto volumes, PMI, core industries growth index suggest an economic slowdown is close to the bottoms, we think it is too early to call the bottoms. Hence, we continue to remain cautious and advise to invest in a gradual manner. Near term, volatility could be used to build portfolios.
On the fixed-income side, high government borrowing and the fiscal deficit continue to be a cause for concern, and most of the issuances are at the long-dated securities. This could continue to keep benchmark 10YR G-Sec yields higher and volatile. The credit environment too is still some time away from stability. Hence, we continue to suggest investors focus on short to medium duration funds, PSU and bank funds, and corporate bond funds.
With headline inflation breaching RBI’s comfort levels and real rates entering a negative territory, we consider it is unlikely that RBI will cut rates at its February 6 meeting.
The author is the Chief Investment Officer of Validus Wealth