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Fiscal deficit and PSU recap positive; higher taxes to marginally impact demand
Budget FY20 has surprised positively in terms of bringing down the fiscal deficit to 3.3% of GDP against expectations of a slippage. Dip in fiscal deficit along with the government’s intention of tapping overseas bond market for its borrowing needs, resulted in a decline in bond yields.
* Dip in the fiscal deficit is largely on account of high growth in receipts (tax and nontax) budgeted for FY20.
* Higher non-tax receipt growth has been driven by higher dividends and profits (including RBI dividends of Rs900bn), and higher disinvestment receipts (Rs1.05trn).
* Higher taxes on HNIs (higher surcharges) and indirect tax hike on fuel prices (in excess of Rs2/litre) will have a dampening impact on sentiment and marginal impact on aggregate demand.
* Allocation of Rs700bn towards bank recapitalisation is a positive step for reviving growth. Focus on infrastructure, affordable housing and agriculture continued.
* Sector impact:
* Positive: Cement, paints, real estate, building materials, roads and highways (infrastructure and affordable housing push), PSU Banks (Recap);
* Negative: Consumer discretionary (high-end consumption - taxes on HNIs), autos (increased duty on fuel prices and incentives for EVs)
* No impact: Cigarettes
* Major focus areas and related announcements:
* Disinvestment target hiked by Rs150bn; Rs700bn set aside for PSB recapitalisation: Strategic disinvestment of select CPSEs would continue to be a priority and the government would reinitiate the process of strategic disinvestment of Air India. Government will offer an investment option in ETFs on the lines of ELSS to encourage retail participation in the disinvestment programme. On the back of these decisions, the government enhanced its disinvestment target to Rs1.05trn. The budget provided Rs700bn for PSB recapitalisation via recap bonds, post which the banks will be in a better position to fund higher credit growth. o Direct taxes for HNIs hiked: A surcharge was levied on individuals with taxable income of Rs20-50mn, and >Rs50mn. The effective tax rate for these categories will increase by around 3pps and 7pps, respectively.
* Indirect taxes hiked on certain goods: As part of a bid to shore up revenues, the government has proposed increases in: a) customs duty on gold and other precious metals to 12.5% from 10%; b) Special Additional Excise Duty and Road and Infrastructure Cess each by Re1 per litre on petrol and diesel; c) 5% customs duty on imported books and increase in duty on auto parts, synthetic rubber, PVC, vinyl flooring and tiles; d) withdrawal of duty exemption on certain electronic items now manufactured in India. Customs duty was reduced on certain raw materials used in artificial kidney, disposable sterilised dialyser, and fuels for nuclear power plants. Legacy dispute resolution for GST cases was announced. Export duty on raw and semi-finished leather was rationalised.
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