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Some assurance, some direction, and lots of hope

By Sanjeev Prasad
ED AND CO-HEAD, KOTAK INSTITUTIONAL EQUITI..

By Sanjeev Prasad
ED AND CO-HEAD, KOTAK INSTITUTIONAL EQUITIES

The budget will largely satisfy the markets expectations on the governments commitment to economic reforms and partly assuage the markets concerns about fiscal management. A section of the market will probably feel disappointed by the lack of any meaningful fiscal stimulus, but Indias weak fiscal position, with FY20BE fiscal deficit at 3.3% of GDP and consolidated fiscal deficit of around 6%, does not provide much scope for a broad fiscal stimulus. As such, the governments large borrowing in the form of bonds and small savings has partly nullified the RBIs accommodative monetary policy stance and resulted in a partial transmission of rate cuts by the RBI.

The government expectedly focused on its major social welfare programmes. It increased the expenditure on rural spending under various welfare schemes to Rs 4.3 lakh crore for FY20, a 22% increase over FY19. In our view, better financial inclusion, health, housing, and sanitation have large long-term economic benefits, given the large positive impact on overall productivity.

The government reiterated its commitment to economic reforms and the role of private sector investment in improving Indias long-term growth potential. However, the budget did not carry any specific measures to reverse the current slowdown or increase investments. The government will announce specific policies for various infrastructure sectors later. We expect investment-related sectors such as capital goods, construction and infrastructure to benefit in the medium term, although the extent and timing of benefits will depend on the governments ability to implement certain investment-related reforms.

The budget largely focused on fiscal consolidation and provided limited fiscal stimulus to a few sectors. The government had limited scope to reduce taxes given Indias high fiscal deficit and continued slippage in GST collections. The government did whatever little it could. In particular, we welcome the governments enlarged budget for affordable housing under the PMAY scheme and the additional Rs 1.5 lakh deduction on interest paid on self-occupied houses costing up to Rs 45 lakh, which is a positive for the real estate sector and the economy as it may kick-start housing investment, which has declined sharply over the past few years. It has also extended lower corporate tax rate of 25% to companies with a turnover of up to Read More – Source
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