Quick Take

Why the markets were miffed with the Budget

Aarati Krishnan | Updated on February 01, 2020

Nirmala Sitharaman, Union Finance Minister. Photo: Kamal Narang   -  Kamal Narang

After beginning the Budget session on a mildly positive note and seeming indifferent for the first hour and a half of the Finance Minister’s speech, the stock market seemed to suddenly lose patience at the fag end of the exercise. The Sensex 30’s 100 point gain at 11 am when the speech began, had morphed into a 900-point decline for the day after the speech wound down. 

The reasons for the market’s disappointment with the Budget seem to be threefold. One, while the markets were primed for big measures in the Budget to stimulate consumption, very little has been forthcoming in the Budget. On the rural side, given that food prices are already looking up, all eyes were on the Budget giving non-farm employment a leg-up through higher allocations to the MNREGA and flagship infrastructure schemes such as the PM Awas Yojana and PM Gram Sadak Yojana. These have bagged only modest increases in the Budget. MNREGA allocations are pegged at Rs 61,500 crore for FY21, actually below revised estimates of Rs 71,000 crore for FY20. The PM Awas Yojana has bagged Rs 27500 crore, about 9 per cent higher than the revised estimates for FY20. The Gram Sadak and Krishi Sinchai Yojana’s have received material increases of about 40 percent, but in their case the incremental allocations add up to no more than Rs 9000 crore, hardly sufficient to make a big dent on rural demand. 

On the urban side, hopes were primed for a substantial lowering of personal income tax rates. But the googly from the Budget, which forces taxpayers in higher brackets to give up their exemptions to avail of the lower slab rates, makes the stimulus effect of this giveaway a little iffy. The FM’s expectation of a revenue foregone of just Rs 40,000 crore from this measure is a drop in the ocean in terms of boosting urban consumption. To provide context, India’s total private final consumption expenditure for FY20 is estimated at about Rs 123 lakh crore.  In fact, here, the condition that investors must give up on 80C and other tax concessions to avail of the new tax slabs may even adversely impact the domestic flows channelled into markets via ULIPs, ELSS, NPS and market linked schemes.  

Two, with fiscal deficit targets in mind, the Budget doesn’t contemplate a big government spending boost either, with its total expenditure for FY21 estimated to be 12.7 percent higher than this years’. 

Three, the capital market proposals in the Budget aren’t particularly friendly to equity investors either. The shifting of the tax incidence on dividends from companies to individuals actually pegs up the tax incidence on dividends for folks in the 20 and 30 per cent tax brackets. Nor have optimistic demands for doing away with LTCG and STT on equities been met. 

However, while the stock market had no reason to revise its outlook for the economy or corporate earnings after the announcement, the bond market will perhaps take a more favourable view of it, when it reacts on Monday. The Centre’s decision to rein in the deficit at 3.8 per cent this fiscal, as expected by the market, and plans to keep net market borrowings at Rs 5.35 lakh crore while routing a lot of the funding through the NSSF and extra budgetary resources, reduce crowding out risks for bond investors. The decision to substantially raise the FPI investment limit in domestic bonds may be viewed positively too, provided the markets believe in the credibility of the deficit numbers. 

Published on February 01, 2020

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