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Budget 2020: Good Attempt, but fell short of expectations
The FM’s budget speech started on a promising note with an aim to ‘boost income and enhance purchasing power’. However, as the announcements came in, it became evident that the government had not loosened its purse strings enough to meet the high expectations. In fact, the expectations were way too high this time, considering the immediate need to boost growth and consumption. But, we’re not surprised by the budget announcements as the government hardly had any headroom due to lower tax collections owing to the economic slowdown. In our opinion, the government did make a good attempt to cater to the needs of all sections of society and at the same time provide fiscal stimulus to key social sectors in the budget.
Fiscal stimulus for key sectors to revive growth
The budget focused on achieving the government’s goal of doubling farmers’ incomes by 2022, with its 16 action points for the agriculture sector. There was an emphasis on modernising the agriculture sectors, making farmers more independent (providing solar pumps to 20 lakh farmers under PM-KUSUM scheme), facilitating viability gap funding via public-private partnership (PPP) for stimulating agriculture growth and increasing agriculture credit target. Overall, agriculture and allied activities, irrigation and rural development received a total allocation of ~Rs 2.83 lakh cr. Similarly, infrastructure and 'Housing for all' by 2022 was also a key focus encompassing all the key segments. However, low allocation in sectors like defense and rural development was a let-down.
Slippage in fiscal deficit target; ambitious disinvestment target for FY21E
As widely anticipated by the markets, the government increased the fiscal deficit target to 3.8% for FY20, a deviation of 0.5% from earlier target resorting to the trigger mechanism as per the FRBM Act. It also set the FY21 target lower at 3.5%. The fiscal deficit target came in higher than our estimate of 3.6%. We believe that this may lead to prolonged pause in interest rate cuts by the RBI as theoretically, higher fiscal deficit usually leads to higher interest rates in the economy. However, the government plans to stick to its fiscal consolidation trajectory and has therefore has lowered its fiscal deficit target for FY21E to 3.5%. In order to achieve the fiscal balance in FY21, the government has set an ambitious disinvestment target of Rs 2.1 lakh cr. This is the highest-ever divestment target and the government wishes to achieve this largely by selling a partial stake in its insurance behemoth - Life Insurance Corporation of India (LIC) through an initial public offering (IPO).
On the taxes front, couple of hits but few misses
Keeping up with the expectations, the government introduced a new tax regime with reduced tax rates but with the caveat of having to forego earlier exemptions and deductions. Therefore, the individual tax payers has an option of either having more disposable income by adopting the new tax regime or continuing to avail deduction and exemptions under the current regime. In our opinion, the new tax regime has the potential to revive consumption growth to a certain extent, however it remains to be seen how the tax payers adopt to the changes. Further, abolition of dividend distribution tax (DDT) for companies (currently DDT is at 20.6%) seems to be positive for MNCs and PSUs. At the same time, it means that the shareholders will have to pay tax at their end. While this will encourage companies to pay more dividends or increase investments, individual investors may have to shell out more tax and that could have a mixed impact on the market sentiments. However, abolition of DDT was being demanded since long by the FPIs due to non-availability of credit of DDT in their home jurisdiction. Hence, this could lead to more foreign fund flows in the markets. Contrary to the expectations, no relief on the long term capital gains tax disappointed the markets.
We had stated in our pre-budget note that while expectations of investors/taxpayers would remain high, the government had limited scope to dole out many positive surprises given the present health of the economy. Despite the constraints, the government did try to appease all the sections of the society as well as the capital markets. Hence, overall the FM has done a decent balancing act in the backdrop of a challenging economic environment. In addition, the growth measures introduced earlier should also start bearing the desired results in terms of demand and consumption growth. We opine that the budget 2020 is a step in the right direction and should stimulate the economic revival in the medium to long-term and help achieve the estimated GDP growth of 6-6.5% in FY21E.
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