Fiscal numbers are based on bold assumptions

The Finance Minister was adversely positioned to present a landmark Budget, as Budget 2020-21 comes in the backdrop of rural distress, NBFC crisis, inadequate GST revenue collection, stagnating exports, liquidity crisis, ballooning imports and a tough global environment.

The Budget is woven around three prominent aspects: aspirational India, to boost the standard of living; economic development for all; and building a humane and compassionate society.

The stage was set just right to do all the right things to steer the economy to a higher growth path. The Budget has given priority to agriculture, MSMEs, NBFCs, infrastructure and affordable housing although the quantum of allocation is not enough.

Reviving business confidence, private capex recovery, real estate distress, addressing liquidity issues and manufacturing have not got the attention they deserve. The key thing to note here is the downward revision across most line items for FY20 (Revised Estimates) when compared with FY20 (Budget Estimates), reflecting slower execution or the lack of revenue.

However, FY21 (BE) is projecting healthy growth based on FY20 (RE). Like the cuts seen in FY20, the indicative expenditure increase in FY21 will be contingent on the government meeting its tax revenue and divestment targets.

Sovereign wealth funds

The disinvestment target of ₹2.1trillion looks a bit aggressive. And the fiscal deficit of 3.5 per cent looks credible only if LIC disinvestment goes through. The bond markets, however, are expected to remain stable in the near term. The Finance Minister has taken a major bet in trying to attract a lot foreign capital through sovereign wealth funds (taking advantage of the low yields in global markets) and deploying that capital in creating India’s infrastructure.

This is relevant in the backdrop in the infrastructure spend requirement of ₹100 trillion in the next five years. Capital gains tax exemption for a period of five years is a good enough incentive to achieve this. Raising the FPI limit in corporate bonds from 9 per cent to 15 per cent should help ease the tight liquidity conditions.

The key announcements in the Budget speech relevant for capital markets is the removal of the dividend distribution tax for companies, which would now be taxed in the hands of the recipient. This will be quite favourable for foreign investors as they don’t get double taxation tax benefits on dividends received in their home countries.

LTCG (long term capital gains) has not been touched, which is disappointing. The simplified personal income tax rules will lower tax liabilities in certain tax slabs, but the removal of 70 deductions in the Income Tax Act will dent the savings culture of the masses, in favour of current direct consumption.

Consumption stocks would be big beneficiaries of this Budget. High dividend paying companies would be big beneficiaries. The banking sector, particularly public sector banks, should see robust deposit flows as deposit insurance has been raised from ₹1 lakh to ₹5 lakh.

While the overall cost of deposit insurance will inch up for all banks, there will be higher uptick in the cost of deposit insurance for private banks, the impact of the increase in deposit insurance scheme could be up to 10-20 basis points on RoA for banks that have been targeting the emerging and the mass affluent segments.

Limit for NBFC SARFESI cut to AUM of ₹1 billion from ₹5 billion should benefit the NBFC sector in general from recovery standpoint. Extension of tax exemption for the housing sector on loans taken for the affordable housing sector should benefit housing finance companies. Raising the gas grid to 27,000 km from 16,300 km should be a positive for city gas distribution companies. The increase in excise duties on cigarettes by 8-9 per cent should impact volume growth of cigarette companies.

The writer is MD and CEO, Motilal Oswal Financial Services