Expectations are high, after all its the first Budget in the reign of Modi 2.0. The NDA II is here to rule with a huge mandate. There are hopes of bold reforms and measures that can bring about a visibly positive change in the economy. In the midst of a sluggish economy and liquidity crisis faced by most business houses, the forthcoming Union Budget, the first for Nirmala Sitharaman, is something to watch out for.
There are strong indications that suggest the economy has slowed down. GDP growth rate is at a five-year low. Further, global industrial production is not at its optimum.
The time is now to do all that can be done with the government spending to offset the private sector slowdown. Since it is the first Budget of Modi 2.0, well get a good insight into the thought process of the government after winning a large majority.
For FY20, we expect the government to focus on agriculture, rural development, infrastructure spending and more. However, such a wishful list is of no use if the overall impact on the economy is not considered. In spite of the odds, it would be interesting to see what the government does under the given circumstances.
No change is expected on the tax front. As far as indirect taxes are concerned, GST is the privilege of the GST Council and, therefore, apart from some policy direction, no changes in GST rates are expected in the Budget.
Some mending may be possible on the import/export duty front.
The weaker sections of society seem to be the underlying focus, all thanks to Antyodaya. This also means meeting expectations of the urban HNI and MNI may not be fully satisfied. However, if and when the economy gains momentum, both the categories may benefit, directly or indirectly.
Budget steps that can enthuse the capital markets:-
- A cut/abandonment of long-term capital gains (LTCG) LTCG seems difficult.
- We dont see rationalisation of dividend distribution tax happening anytime soon.
- We hope to see a raise in the exemption limit for income-tax from Rs 2.5 lakh to Rs 3 lakh. Such as move would put at least Rs 2,500 more in the hands of each of Indias 50 million taxpayers, boosting their spending power.
- Companies with sales of Rs 500 crore (vs the current Rs 250 crore) may be taxed @25 per cent vs normal 30 per cent, providing a rate reduction for them.
- Despite odds, the government may seem optimistic on tax collection to project a manageable fiscal target without any jugglery or aggressive tax collection, telecom revenue or divestment targets. Targets maybe tweaked to lower capital expenditure in Q4FY20. A six member committee is expected to identify 0.5-1.5% GDP as excess RBI capital. This recapitalisation will help the government to concentrate on other avenues like infra spending or debt reduction.
- We expect the government to announce a pathway to cut interest rates on small savings schemes. However, the cutoff may not be huge. Because there is a dependence on small savings schemes to fund off balance sheet items by the government savings rate of households has fallen from 23.6 per cent in FY12 to 17.2 per cent in FY18 and this shall affect savers.
- If the trend of past few years is to be considered, we dont think strategic sale of PSUs will happen anytime soon. The divestment targets have been met in the recent past by selling stakes in one PSU to another PSU. Further, the launch of a series of CPSE ETF, Bharat 22 ETF and the proposed financial sector ETF indicates the same sentiment.
- Infusing more capital into the public sector banks, removing the roadblocks for the speedy resolution of IBC cases and incentivising banks to buy good quality NBFC assets may ease the financial sector woes. However, the government spent of Rs 2.06 lakh crore over the last two years on bank recapitalisation, which may not yet have the desired effect on PSU banks.
- Widening the tax base is most likely to occur as our revenue base is smaller. Besides, Indias debt ratio is much higher compared to any other BBB rated economies.
- We can look at the possibility of the government allowing issue of tax free bonds by PSUs to fund infra spend. If we include borrowings by entities in food, fertiliser, fuel, roads, irrigation, railways, power etc, the borrowings by government entities have risen YoY over the past 3-4 years. Social sector and defence have been ignored recently as there has been a rise in spending on infra and rural. Infra spending have to be scrutinised as there are other aspects of the economy that too need to be looked into, such as quality of learning in schools and health care (India spends only 4 per cent of GDP on healthcare vis-a-vis world average of 9 per cent).
- Liberalisation of FDI norms to attract investments in labour-intensive industries to promote employment is most likely to happen and the govt may provide the sops in income-tax/corporate tax for fresh recruitment are subjected to conditions.
- Including fuels in GST is less likely to happen and may have to wait, given the current risky fiscal condition
- The AT&C (Aggregate Technical and Commercial) losses, although reducing over the years, have remained unchanged in FY19. The current levels are still higher than the policy target. This has proved to be a tough issue in power sector reforms. Some policy measure to induce faster reduction of these losses is likely.
- Apart from a few setbacks, REIT is a positive support for the whole real estate market of India and the government may make some optimistic announcements in this area as well.