By Jimit Harde
The latest Union Budget has been woven around 3 themes 1. Aspirational India 2. Economic development 3. Caring society.
The FM has done well in abiding by the fiscal prudence principles for FY21. The fiscal deficit target for FY20 has been recalibrated to 3.8% of GDP compared to the Budgeted target of 3.3% of GDP. The deviation has been necessitated on account of the structural reforms such as reductions in corporation tax taken by the Government.
The targets set by the FM by and large look achievable. But it will be crucial for her to stick to it for FY21; else the international rating agencies may not be happy about a second consecutive miss.
or FY20, the 3.8% fiscal deficit target depends on achieving direct tax collections at Rs.11.7 lakh cr till March 2020 compared to Rs.7.3 lakh cr collected till Jan 25, 2020.After growing @7.5% in FY20, the nominal GDP is expected to grow at a rate of 10% in FY21 to Rs.2,24,89,420 crore.
The FM has also continued the process of cleanup and making structural changes in the Budget without getting disillusioned by the negative political outcome of the previous measures. Other themes in the Union budget show a clear thrust towards improving the competitiveness of Indian businesses and Indian citizens while providing liquidity in the hands of individuals. Whether and how soon this will result in consumption revival will be interesting to watch. Interest rates may not come down in a hurry.
Given the rising dependence of the Govt on National Small Savings fund (Rs.10.67 lakh cr borrowing in FY20RE vs Rs.8.80 lakh cr in FY19) and the absence of incentive to save in the alternative personal tax system proposed in the Budget, the Govt may not be able to afford to cut interest rates in a hurry. The transmission of interest rates in the economy may, therefore, take a little longer. Govt borrowings rose 18% in FY20 to Rs.766,846 cr and is projected to grow only 3.8% in FY21. However, the Budget includes provisions to incentivize foreign investments in Infra projects.
At the same time, a reasonably anchored gross bond supply, some visibility on a bond index inclusion plan and the underlying global environment where a global growth dynamic may be impacted with the Coronavirus outbreak could mean that the interest rates may not rise much from here and we may see intermittent minor dips. From out of the eligible taxpayers not many may opt for the new alternative system proposed as their net gain would either be minuscule or even negative. Hence the worry that inflows into savings or insurance monies may fall sharply looks misplaced.
Disinvestment target of Rs.2.1 lakh crore for FY21 looks tall given that as per the FY20RE, we could end FY20 with divestment receipts of Rs.0.65 lakh cr vs the initial target of Rs.1.05 lakh cr. However the roll-over of the divestments of Air India, Concor, BPCL, SCI into FY21 and the proposed LIC and IDBI stake sale could help.
Measures to attract foreign capital, undertake disinvestment (including LIC stake sale via an IPO), and offer relief to MSMEsare some of the green shoots. It remains to be seen if such announcements are backed by an equally robust execution.
The Govt seems determined to dissuade outflows of foreign exchange by levying 5% TCS on remittance of over Rs.7 lakhs in a year and levying 5% TCS on travel agents who receives money for overseas tour packages. It also has raised customs duties / rationalized exemptions / concessions across categories; in the process, it has dissuaded unnecessary imports and given protection to Indian businesses including MSMEs. It has levied health cess on imports of specified medical equipment to give an impetus to the domestic industry and to generate resources for health services.
On the negative side one can argue that there is no meaningful stimulus to infrastructure, manufacturing, real estate, and rural spending. Issues pertaining to unemployment and weakness in the financial system have not been addressed satisfactorily either. No elaboration on power reforms and lack of details in the Budget on privatization/divestment/monetization also disappointed.
Real estate companies could be hit unintentionally as HRA deduction, section 80C deductio for home loan repayment and section 24 deduction for interest on borrowed monies for self-occupied property would no longer be available for taxpayers who opt for the new personal tax scheme. The alternative tax system discourages investments which market participants do not seem to be comfortable with.
The initial reaction of the equity markets to the Union Budget suggests a few disappointments. No abolition of LTCG, confusion about the impact of the removal of DDT and taxing dividends in the hands of recipients and the alternative provided to individuals for a lower rate of tax, provided they do not claim exemptions/deductions, all led to the initial knee jerk negative reaction.
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The abolition of dividend distribution tax and taxing dividends fully in the hands of the recipients will mean we could see a lotof companies preponing their dividend payments for FY20 before end of March 2020. Dividend-paying Mutual fund schemes could also look at doing similarly.
Whether the provisions of the Union Budget will succeed in reviving the much-needed growth is not fully clear. International rating agencies may form an opinion on the rating of India based on their perception about how long the growth slowdown will continue. Foreign investors will look for signs of a revival of growth before they commit funds to India in a big way.
While the Economic Survey and the Budget documents make mention of the economy has bottomed out, one will have to wait for the next few months to check whether that has happened. The markets will come over the effect of the Budget in the next few days and in case the coronavirus situation stabilizes, we may even see a bounce in the markets in the near term
(The author is Senior Account Manager at HDFC)
