Union budget proposals may force India $2 trillion M-Cap slides further
Mumbai, July 8:After returning to power with a much stronger mandate in May 2019, Bhartiya Janata Party (BJP) led-National Democratic Allinace (NDA) 2.0 Government has once again tried to change the public discourse from the basic economic issues to setting ambitious targets for the economy.
This time Prime Minister (PM) Narendra Modi-led government has rolled an idea of achieving $5 trillion economy as its next target. Currently, India’s Gross Domestic Product (GDP) is at around $2.3 trillion.
The central theme of the union budget presented in the Lok Sabha by finance minister Nirmala Sitharaman was also to fast-track economic development and put India into elite list of the top performing economies in terms of GDP. Market participants and leaders though have welcomed the spirit, intent and some of the budget proposals but capital market experts and their reaction to these proposals suggests that India’s ranking may slip further in terms of market capitalisation from current $2.02 trillion to further 3-4 steps from the current level.
Welcoming the budgetary proposals, Rajneesh Kumar, chairman, SBI said, “Enhanced investment in infrastructure, affordable housing, augmenting lending capacity of public sector banks and NBFCs are major initiatives unveiled in the Budget. Measures to boost flow of foreign capital and deepening of corporate bond market as well as formation of an expert committee to look into long-term financing for infrastructure are all aimed at enhancing the investment in infrastructure, which is expected to play a critical role in bolstering India into a $ 5 trillion economy in the next 5 years. Measures aimed at simplification of processes like interchangeability between AADHAR and PAN, pre-filled income tax returns, faceless assessment will reduce the burden of tax compliance on an ordinary citizen. Simplification of labour codes is another major announcement. On the whole, the Budget will boost demand with many enablers for augmenting the flow of domestic and foreign capital.
Commenting on the Budget, Garima Kapoor, economist at Elara Capital said, “Modi Government’s first full budget after being voted back to power tries to strike a healthy balance between ‘welfare for the poor’ and ‘growth’ by throwing some novel ideas to attract capital while continuing to spend for the lower strata of the economy. If the measures announced in the Budget in form of divestment of government stake below 51%, foreign currency government borrowing, liberalisation of FDI in select sectors among others are indeed executed, it has the potential to unleash significant capital for funding growth towards $ 5trillion. The Budget provides a fresh narrative by recognising that the cost and availability of capital are key constraints for India’s growth.”
Mayuresh Joshi, Portfolio Manager, Angel Broking was of the view that the markets got jittery on three counts. “One about the increase in effective tax rates for High Net Worth Individuals (HNIs) investors played down on market sentiment; two, the announcement related to increase in public shareholding from 25% to 35%, if implemented, will roughly add Rs 3.60 Lakh crore of paper hitting the market and three, buy back to attract 20% tax, to close the loophole on DDT”, he said.
Amar Ambani, President & Research Head, YES Securities also echoed similar views. He said, “High disinvestment target of Rs. 1.05 lakh crore and increase in public shareholding will squeeze liquidity from secondary market”. The secondary market will be deprived of roughly more than Rs 4.65 Lakh crore (3-4 % of the total market cap of Rs 142 Lakh crore) of liquidity.
Ambani said the proposal to tax the super rich has also impacted the sentiment. Following the proposed hike in surcharge of Income tax paid by HNIs the effective tax rate on biggest bracket goes to 42%, he added.
The big surcharge tax on the high-income group and possible liquidity squeezing of secondary market liquidity due to disinvestment and increased public shareholding is biggest negatives for the stock market. These proposals are expected to have its impact seen on the market till the time next budget is presented, opined market players.
Elara Capital in a note to its clients warned that deficient monsoon is likely to curtail growth. The crucial Southwest monsoon is at a deficit of 36% as on June 26, 2019. By now, it should have covered the whole country. According to Skymet, rainfall is likely to be below normal for the third consecutive year at 93% of the long-period average (LPA). Indian Meteorological Department forecast a better monsoon at 96% of the LPA. The late arrival of monsoon is sentimentally negative for the markets and could impact earnings of companies exposed to rural India, in our view.
Market observers pointed out that unless new capital investment is made in manufacturing sector to increase the production capacity (put thrust on Make in India in a big way) and to meet the additional supply, if no demand is created (consumption push), the economy cannot be fast-tracked as envisaged by policy makers. This is the salient point for India’s economic growth at this stage, which they should keep in mind.
For the Make in India campaign to gather momentum, the private capital formation has to pick up, which has stagnated for last several years. There is another interesting angle to this problem that why it is not picking up. Most entrepreneurs in India’s manufacturing sector belong to the old generation. These groups are currently facing huge problem of paying and restructuring their old debt. On the other hand, new generation entrepreneurs do not have the risk appetite to enter the manufacturing sector and majority of them prefer service industry with innovative ideas. The older generation of promoters needs to be incentivised but the current dispensation is not in favour of the proposal and this is one of the important reasons why no new industry has come up in last decade and in Modi 1.0 in particular, added market sources.
Modi 2.0 faces this huge challenge of creating enterprising spirit for, which he needs to find the solution. Answers to these challenges will lead him to fulfill his dream of achieving $5 trillion economy.