'Budget 2020 seems like a centrist shift, markets to move on quickly'

By Dolat Capital Research

The annual Union Budget, presented today by the FM, was in a nutshell neutral to negative overall. Neutral because it did not initiate anything exciting for us to revisit our growth and earnings outlook.

Negative because the expected tax breaks and push for growth did not come as forceful as expected. The markets witnessed a sharp selloff, in line with our expectations after the budget was presented. We expect this to continue for little bit more before the attention moves to global factors. However, the scenario at the global level does not look any better either.

The number of people detected with coronavirus has crossed another milestone, and may well continue to rise the next week as well. That will very likely lead to a downgrade in global growth projections and a downtick inequities in our view. This is quite a shift in view for consensus and us included –we were earlier of the belief that the sign up of US-China trade deal will play out in the form of a reflation cycle for the first half CY20! With the virus scare at its peak, we believe there has been a weakening of that case. Now with the India budget not throwing up anything exciting, we expect markets will move on from this rather quickly.

Fine Print –Nominal GDP growth at 10% not as aggressive as last year, but still has vulnerability projected telecom receipts and expense Reading through the fine print, the revenues are projected to grow by9% for FY21, while it is higher 12% for non-tax revenues. The big swing in non-tax revenues is led by the doubling of divestment target to `2.1 trn (+62% YoY). Against this, we see the key expenditure being projected much more muted with defense allocation higher by 2%, fertilizer subsidy (-10%), and food subsidy (+7%). The corporate tax is projected to grow by12% for FY21 to `6.81 trn –what is important to note here is that the projected levels, if materialized, will bring these tax kitty at the same level as FY19. This, in a way, reflects the impact of tax cuts and slower economic growth. We believe that achieving this estimate is not entirely out of the realm of possibility. GST collections are projected at `1.15 tons per month as per our calculations assuming growth of 12%.

The assumptions for this budget seem far more realistic versus the last July document. However, where we have an element of doubt still though is the muted growth in key expense items. For example, MNREGA allocation is projected to drop by 15% to `610 bn (US$8.3 bn), while there is a 40% spike to PM Gram Sadak Yojna, it has a much smaller scale. We see this as more of allocation to ‘favorite’ headings and showcasing the programs initiated by the NDA. NHAI budget is projected to rise by 10% to `425bn and if implemented well, it will aid better visibility to the road sector. The Big Positive and NegativePositiveNegativeDDT removes at the corporate level DDT taxable in the hands of individuals to impact the promoters and super-rich. Agriculture credit growth target growth set at 25%New proposed tax structure without exemptions to lead to a higher tax outgo. Focus continues on Rural Infra (Sadak, Pani, Ghar).