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Budget 2019: Fiscal prudence takes precedence over growth
The union budget 2019 was awaited by the general public as well as the markets with great expectations amidst macroeconomic challenges like overall economic slowdown, fiscal deficit, and unemployment. However, walking a tightrope between stimulating economic growth and maintaining fiscal discipline, the Modi 2.0 government chose to focus on laying out a growth roadmap for the next five years rather than focusing on short term measures to stimulate the economy. Also, contrary to the interim budget, fiscal discipline seems to have emerged as a priority over growth for the government.
Emphasis on rural and MSME segment for long-term growth
Over the last few years, rural income has taken a hit in the backdrop of farm distress, GST and demonetization. Hence, keeping up with the past trend, this budget too focused more on rural and social schemes to increase rural income. Further, measures to stimulate micro, small and medium enterprises (MSMEs) were also proposed (allocation of Rs 350cr @2% interest subvention for fresh or incremental loans). Several welfare schemes such as Pradhan Mantri Gram Sadak Yojana (PMGSY), Pradhan Mantri Awas Yojana – Gramin (PMAY-G - 1.95 cr houses to be built over FY20-22), and MGNREGA will continue to provide rural economy a much needed boost . The government's plan to establish clusters/incubators to encourage more participation will also stimulate agriculture growth in the long run. These announcements clearly reflect government's continued emphasis on job creation and supporting MSMEs and labour-intensive industries.
Fiscal discipline and strengthening financial sector – Top priorities
The government's focus on reining fiscal deficit is clear as it cut its FY20 target to 3.3% from 3.4% earlier. From the budgetary announcements it appears like the government aims to achieve the same through raising taxes on the wealthy. Notably, surcharge on income tax slabs between Rs 2 - 5cr and over Rs 5cr was increased, hence, raising the effective tax rates by ~3% and ~7% respectively. The disinvestment target too has been moderately increased to Rs 1.05 lakh cr (Rs 90,000 cr in interim budget 2019). The government also expects higher RBI dividend and payout from the central bank and state-owned lenders. Nonetheless, we believe it would be a tall task for the government in achieving its fiscal deficit target of 3.3% as it has set an ambitious target for its revenue. Apart from these fiscal measures, recapitalization of PSUs, placing NBFCs under RBI's regulation and provision of partial guarantee to pooled assets of sound NBFCs will go a long way in strengthening the financial sector. Further, increase in investments by enabling FDI inflows in insurance intermediaries is also a good step for the long term.
From stock market point of view
As far as the stock market is concerned, the budget is not likely to be a big game changer in the near term. In the long run, however, the measures taken would clearly increase disposable income in the hands of a large section of the economy i.e. farmers (through boost in rural economy) and middle-income group. This bodes well for agriculture and consumer centric sectors like FMCG, Auto, Consumer Staples, etc. Additionally, government's announcement to recapitalize PSU banks would ensure better compliance with RBI's capital requirement and promote higher credit growth. Further, the proposal to move regulation of HFCs from National Housing Board to RBI is positive for the sector as it would bring in long term financial stability. The proposal to increase minimum public shareholding in listed firms to 35% from 25%, if implemented, might negatively impact the market sentiments. However, no announcement w.r.t. increase in long term capital gains tax (LTCG) was a big relief as that would have hurt the sentiments of investor community.
The budget 2019 has clearly laid emphasis on fiscal prudence over aggressive growth measures. Undoubtedly, the government is facing a daunting task of getting the economy back on track in the backdrop of domestic as well as global challenges. However, a comprehensive roadmap for the long term has set the path for India to become a US$ 5trillion economy by 2025, at an estimated GDP growth of ~8%.
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