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How will the stimulus package impact different sectors

| Updated on August 26, 2019

Finance Minister Nirmala Sitharaman.

The much-awaited stimulus package was announced by the Finance Minister, Nirmala Sitharaman, on Friday. How will it impact the market, banks and auto-makers?

Market: Removal of surcharge may not help

Lokeshwarri SK

The Finance Minister’s efforts to assuage foreign portfolio investors are likely to help lift the pall of gloom over the equity market. But the stimulus announced so far is unlikely to materially impact stock price moves.

The most significant part of the FM’s booster measures was the removal of additional surcharge applicable on capital gains on equity and equity mutual funds recorded by high-income earners. Since this surcharge impacted some FPIs, it had been widely perceived that the decline of close to 10 per cent in the Nifty 50 since the Budget had largely been due to this tax tweak.

FPIs had pulled out close to ₹12,400 crore from the equity market in July and followed it up with outflow of ₹12,105 crore in August. While it is true that FPI pull-out led to the market fall, the reason for FPI selling was not necessarily the additional surcharge.

Why are FPIs selling?

If we consider the data on FPI fund flows this year, they had net purchased ₹80,314 crore between February and May. It is obvious that the foreign investors with a short-term horizon who make event-driven bets were banking on Modi returning to power for a second term and were, therefore, pumping in money. Once the election outcome was known, they waited until the Budget to see if any big bang reforms were on the anvil.

But with most of the big announcements already made in the Interim Budget in February 2019 and against the backdrop of the fiscal constraints, the Budget 2019 was a dampener. This seems to have made the short-term FPIs, who had brought in money prior to the elections, hit the sell button.

Two, there has been excessive turbulence in global markets since late July when the Federal Reserve cut Fed funds rate. With the US President ratcheting up the trade war due to the Federal Reserve not cutting rates aggressively, and with China retaliating with currency devaluation and further tariffs, global risk aversion has spiked. In such situations, foreign portfolio money tends to move out of riskier assets such as emerging market equities.

It is seen that FPIs pulled out $1.9 billion from South Korean stocks, $2.5 billion from Taiwanese stocks, $1.6 billion from Thailand stocks and $2.6 billion from Brazilian stocks in the last one month. This is in line with the $1.5-billion outflow from Indian equity.

Three, it was observed that FPIs had been net buyers in the Indian bond market, net purchasing $2.4 billion of Indian bonds in this quarter. Since the surcharge on capital gains was applicable on debt investments as well, this contrary behaviour shows that the additional tax is not really a deterrent.

Four, the poor performance of the Indian equity market vis-à-vis other equity markets, the steep valuation, when compared with other emerging markets, and the poor earnings growth in recent quarters could have had a greater impact on FPI’s decision to invest or not in Indian equity rather than the additional surcharge.

How will market react

The gains in Indian equities on Monday morning are likely to be tempered with trade war resuming on Friday. China has decided to impose tariffs on $75 billion of US imports and Trump has retaliated by increasing the tariff on $250 billion of imports from 25 per cent to 30 per cent. All Wall Street indices sank more than 2 per cent on the news and the nervousness will spill over to trades in Indian markets on Monday morning.

Stability is unlikely to be restored in Indian stocks as long as the trade war continues.

That said, the measures announced for auto and banking sectors are likely to help the market sentiment to some extent. If the Centre fulfils its promises of easing the funding constraints for MSMEs, housing and consumer-oriented industries and the infrastructure space, it will be positive for the market from a long-term perspective.

Other tweaks

The FM has announced other tweaks for capital markets such as developing credit default swaps and deepening the Indian bond market and allowing aadhaar-based KYC for retail investors. This will help improve Indian equity and bond markets, but will be effective only in the long term.

Similarly, measures to allow rupee derivatives to be traded on the GIFT IFSC will help move the offshore trades in the rupee to onshore and, thus, give the RBI greater control over rupee movement. But these are also likely to have an impact over the long term only.

Banks, NBFCs: Better credit growth key to reviving investments

Radhika Merwin

At first glance, Finance Minister Nirmala Sitharaman’s announcements to boost the economy and the financial sector, have hit all the right chords on the optics. From front-loading capital infusion into PSBs, seeking to channel additional liquidity into cash-starved NBFCs/HFCs, one-time settlement for MSMEs and speeding up decision-making in public sector banks — the measures have certainly lifted the sentiment and kindled hopes of more reforms on the anvil.

But are they enough to pull the PSBs and NBFCs out of their gloom and kick-start lending?

Sure, front-loading capital infusion of ₹70,000 crore can help pull some weak banks out of the RBI’s prompt corrective action (PCA) framework and has the potential to expand credit, but that alone may not be enough to deliver the goods.

The performance of banks in the latest June quarter suggests that much of the capital infused could again go into provisioning in the coming quarters, and not necessarily to fund credit growth. Also, the manner in which the capital is allocated to the PSBs will be critical, as tier-1 capital of a few banks is already below the regulatory requirement.

What’s more, while the FM has sought to abate the fear of vigilance enquiries to speed up decision-making by bankers, it is unclear if banks would immediately start lending to industry and riskier segments.

Boosting credit growth — still languishing in single-digits — to industry will be key to reviving the investment activity in the economy.

Fund growth?

Despite the massive ₹1.9-lakh crore of capital infused into PSBs in the last two fiscals, credit growth remained in single-digits. In the latest June quarter too, credit growth for PSBs has remained at a modest 7-8 per cent. While the headline bad loan numbers have declined by about 5 per cent Y-o-Y, they have inched up sequentially compared with the March quarter. Hence, the uncertainty over NPA provisioning will continue to keep banks away from lending to riskier segments.

Lower rates to help borrowers

After a lot of prodding, PSBs have begun to lower lending rates. The FM reiterated that the banks’ move to lower MCLR and link loans to repo rate will bring down borrowing cost and boost lending.

While this may be true, it could also lead to earnings volatility for banks in the near term. This could hurt PSBs already grappling with weak core earnings.

For borrowers though, aside from lower lending rates, the FM announcing measures — mandatory return of loan documents within 15 days, online tracking of loan applications, one-time settlement policy and allowing NBFCs to use the Aadhaar-authenticated bank KYC — can ease up the lending process and reduce turnaround time. Proper implementation of these measures will, however, be critical.

Some NBFCs to benefit

The FM announcing additional liquidity support to HFCs — increasing funds to NHB for refinance facility from ₹10,000 crore to ₹30,000 crore — is welcome. Measures to alleviate home buyers' problems are expected next week; this could also boost real estate.

On the NBFC front, the FM reiterated commitment on the partial credit guarantee scheme and hoped that the co-origination of loans between PSBs and NBFCs would gain pace. While these and several other measures taken by the RBI and the Centre over the past year have helped ease flow of credit to NBFCs, they have only aided a few NBFCs.

This is because large NBFCs with sound backing and quality loan book have been able to raise funds from banks (may be at a higher cost). The problem lies with funding NBFCs with high exposure to stressed segments such as real estate (developer segment), infrastructure and LAP.

Automobiles: Low on action, more on optics

Parvatha Vardhini C

Several announcements have been made on the auto sector, but only a few are significant. The ongoing slowdown in the industry can be attributed to regulatory issues (BS- VI), financing issues (NBFC crisis) and a rise in transaction costs (hike in third-party premiums, for instance). That these issues came at a time when the sector was headed for a cyclical downturn worsened matters.

Tight liquidity situation and limited transmission of repo rate cuts by the RBI meant that customers found it difficult to obtain financing for their vehicle buys. In this context, it has been announced that to ease up borrowing costs, banks will pass on rate cuts to all borrowers through MCLR reduction and launch repo-rate/external benchmark linked retail (including vehicle) loans. Also, the liquidity infusion into public sector banks is expected to boost lending indirectly.

What could help sales is the doubling of depreciation rates to 30 per cent for vehicles (cars are depreciated at 15 per cent currently) bought until March 31, 2020. Given the upcoming festival season, this carrot may nudge the fence-sitters into biting the bullet. But it needs to be clarified if the enhanced rates are only for the first year and if purchases after September 30, 2019 qualify for full year’s depreciation.

Limited impact

Beyond these moves, many of Friday’s measures at best only assuage the negative sentiments in the hope that it will help kick-start a recovery in new vehicle sales.

The lifting of the ban on government procurement of vehicles — predominantly cars — may not mean much for the industry as the numbers are anyway too small. Companies such as Maruti Suzuki and Hyundai may marginally benefit from this.

The announcement that BS-IV vehicles purchased until March 31, 2020 will be allowed to be operational for the entire period of registration is only a clarification.

Managing inventory, a challenge

As was the case earlier, customers can buy BS-IV vehicles until end-March 2020. While the government may see the clarification as a trigger for improving the demand for vehicles now, the question remains as to whether BS-IV vehicles (which will be cheaper than BS-VI) will be available until that point in time. If April 1, 2020 is the date to begin sale of BS-VI vehicles, surely, auto manufacturers will need to scale down production of BS-IV vehicles much earlier. Managing the inventory of BS-IV and BS- VI vehicles will be a major challenge for auto- makers.

The statement that registration can be continued for both electric and fossil-fuel based vehicles — also a clarification — doesn’t do much to boost demand now, as the switch to EVs is still some time away and it is not that customers are postponing purchase of fossil-fuel vehicles due to the wait for EVs.

While the proposed hike in registration fee for vehicles has been deferred till June 2020, it must be remembered that this does not reduce transaction costs today. What could have helped reduce the costs is the bringing down of third-party insurance cover — which was recently made long term — back to a year. This has not been announced.

Besides, a scrappage policy for commercial vehicles over a certain age would have been ideal, but it continues to be in the works.

De-Tax: How rollback of surcharge works

Vivek Ananth

Anand Kalyanaraman

To douse the raging fire in the equity market, the Finance Minister announced a partial rollback of the enhanced surcharge introduced in the Budget.

The surcharge on tax had been increased from 15 per cent to 25 per cent for those whose taxable income is more than ₹2 crore and up to ₹5 crore. And for those whose taxable income is more than ₹5 crore, the surcharge had been increased from 15 per cent to 37 per cent. This change applied to individuals, HUF, association of persons, body of individuals and artificial judicial persons.

As per the announcement on Friday, this enhanced surcharge will not be applicable on long/short term capital gains arising from transfer of equity shares/units referred to in Section 111A and 112A respectively of the Income-Tax Act.

Enhanced surcharge

What this means is that, as an investor, you will not have to pay the enhanced surcharge (25 per cent or 37 per cent) on gains made on sale of equity mutual fund units and listed equity shares. Note that the original surcharge (15 per cent) continues even now; only the enhancement has been withdrawn. Also, this benefit of the withdrawal of the enhanced surcharge is applicable only on capital gains on sale of equity mutual funds/listed shares. The enhanced surcharge will continue on other capital gains, including on sale of unlisted equity shares and debt instruments. Besides, the enhanced surcharge will continue on other sources of income such as salaries, income from house property, business income and other sources.

The math

Here’s how the tax calculation will now be done. First, your total taxable income will be calculated adding up all sources of income, including capital gains on equity mutual funds and listed equity shares. If this total taxable income exceeds the specified thresholds (₹2 crore and ₹5 crore), the original surcharge (15 per cent) will apply on the tax on capital gains on equity mutual funds and listed equity shares, and the enhanced surcharge (25 per cent or 37 per cent) will apply on the tax on the remaining income.

Say, your total taxable income is ₹2.5 crore, comprising salary of ₹2.2 crore, short-term capital gains on listed equity shares of ₹15 lakh and long-term capital gains on listed equity shares of ₹15 lakh. As the taxable income exceeds the threshold of ₹2 crore, enhanced surcharge of 25 per cent will apply to the tax on salary income of ₹2.2 crore, but on the tax on short-term and long-term capital gains, only the original surcharge of 15 per cent will apply. Now, your total tax liability will be ₹87.85 lakh. Before the rollback of the enhanced surcharge, it would have been ₹88.24 lakh. That’s a benefit of ₹39,000.

New timelines for income-tax scrutiny

Parvatha Vardhini C

In recent times, there have been efforts by the Income-Tax Department to make life easier for tax payers. The Finance Minister’s announcement on this front such as pre-filling of IT returns, faceless scrutiny and centralised issue of notices is not new, but only a reiteration of what was told earlier. The timelines for implementation of these measures, however, have changed.

Follow-up on Budget move

The Budget made returns filing quicker by introducing pre-population of tax-return forms. While the personal information is usually auto filled in most cases currently, pre-filled tax returns with details such as salary income, capital gains from securities, bank interests and dividends, and tax deductions will also be available shortly.

Also, if your return is taken up for further scrutiny by the I-T Department, you needn’t fret or fear about being harassed. In the last few years, the government has been carrying out pilot e-assessments where assesses have the option to provide information requested either through email or by uploading it in the e-filing portal. The same means can be used for further communication.

After obtaining the necessary clarifications and verifications, the department posts the assessment order on the taxpayer’s login in the e-filing website.

The Budget announced that e-assessments will be carried out for cases requiring verification of certain specified transactions that have been entered into, or certain discrepancies that may be found in your returns. To reduce scope for harassment by officers, cases selected for scrutiny were proposed to be allocated to assessment units in a random manner. The FM has now announced that faceless scrutiny will be implemented from Vijayadashami, that is, October 8, 2019.

Centralised system

The Budget also said that notices to the assessee will be issued electronically by a central cell, without disclosing the name, designation or location of the assessing officer. The FM elaborated on this saying that from October 1, 2019, all notices, summons and orders from the I-T authorities will be issued through a centralised computer system and will contain a computer generated unique document identification number (DIN).

Any communication issued without a DIN will not be valid. All old notices will be decided upon by October 1, 2019 or uploaded again through the system. Also, from October 1, 2019 all notices will be disposed within three months from the date of response from the assessee.

MSME: Adressing the liquidity crunch

Satya Sontanam

The measures unveiled by the Finance Minister on Friday have come as a relief for the MSMSE sector that has been hit by consumption slowdown and liquidity crunch in the economy since demonetisation.

The decision to infuse ₹70,000 crore capital into PSBs to improve lending is expected to generate ₹5 lakh crore in extra credit.

Delayed payment to be addressed

The Trade Receivables Discounting System (TReDS) will be allowed to use the GSTN system in the medium term. This will help address the problem of delayed payment to MSMEs by government departments. Under TReDS, banks can release about 90 per cent of the value of the receivables of MSMEs from PSUs or other state-run companies.

Many companies, including some big names such as JSW Steel, have been indicating that delayed receipt in payments from the government and central public sector entities to contractors and vendors (customers of companies) have been leading to weaker demand, impacting sales in the sector.

The FM assured that the decision on implementing the recommendations of the UK Sinha Committee on ease of credit, marketing, technology and delayed payment will be taken in 30 days.

GST refunds to be expedited

The FM also promised that all the current outstanding GST refunds will be made within the next 30 days. And, henceforth, GST refunds will be made within 60 days from the date of application. Exporters in the MSME segment have been complaining that despite completion of all formalities, the refunds are not being processed in a timely manner by the departments; as a result, capital is being blocked, sometimes for as long as six months, affecting their businesses. Though the government had promised that the GST refunds would be expedited, there continue to be delays. If the recent assurance is to be believed, there is reason for exporters to smile as it could spur trade activities.

Lastly, the FM also said that the MSME Act would be amended to bring in a single definition for MSMEs. One needs to see if the classification is on turnover, or plant and machinery.

Published on August 25, 2019

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