Devangshu Datta: Post-Budget forecast: Cloudy with some sun

Impending GST implementation might see tax collection projections go awry

The Budget sparked off a relief rally. It did not change the treatment of long-term capital gains tax in ways that would have a negative impact. It also promised to contain the fiscal deficit. It also contained several other positives in terms of beneficial changes and clarifications to tax codes. However, it is clearly an interim document. The projections would be somewhat suspect because there isn’t too much data from the second half and there is an impending goods and services tax (GST).
 
The error factors are larger than normal. Everybody must be braced for a messy shift of service and goods tax rates if the GST is implemented at all. If that happens, all indirect tax collection estimates will go awry.
 
The gross domestic product (GDP) growth projections will be pared down in the second half. The fiscal deficit hit 94 per cent of the targeted Budgetary Estimates of 2016-17, by December 2016. Taken together, a lower GDP and the high fisc by December make it likely that the fisc will have slipped.
 
The projections for 2017-18 include a 25 per cent increase in personal income tax collections. There are no obvious signs of a huge employment surge (with concomitant wage and salary hikes), or of rising corporate profits that could lead to higher compensation. So the government must be hoping for massive punitive collections from black money unearthed by demonetisation, given no other obvious route to such revenue increases.
 
Beyond those possibly dodgy numbers, the positives include welcome clarifications on indirect transfer (aka the Vodafone “retrospective” tax), and some cuts in rates for personal income tax and corporate taxes. Some populist sops were doled out to the rural economy but that was expected, given Assembly elections. 
 
The stock market also welcomed a commitment to holding the fisc down to 3.2 per cent of GDP, and a cutback on government borrowings. However, 3.2 per cent represents a slippage from the earlier target of three per cent. The bond market was slightly sceptical, since Treasury Bill yields actually rose post Budget. It’s pertinent to note that the Economic Survey estimates that the Consolidated fisc (States plus Centre plus UDAY) will be uncomfortably high at 7.5 per cent of GDP, which makes it likely that overall government market borrowings will be higher.
 
In terms of specific sectors, there were sops for real estate, which may encourage investments in construction, realty, cement, etc. There was disappointment in that the commitment to public sector bank (PSB) recapitalisation is minuscule at Rs 10,000 crore, whereas at least Rs 4 lakh crore is required. Some PSBs have gross non-performing assets (NPA) in the range of 20 per cent of all advances. The disinvestment target also seems unrealistic, at Rs 72,500 crore. The 2016-17 target of Rs 56,000 crore will not be met — the Revised Estimates for disinvestment this year is Rs 45,000 crore.
 
So far corporate results for Q3 have been better than feared. However, there are signs that consumption did slump and also that companies saw an inventory build-up. It remains to be seen if consumption demand does bounce back quickly as the Budget and Economic Survey both estimate.
 
The overseas news is likely to be net-negative in the short run, even though there are some positive signals. The European Union (EU) is likely to see stronger growth and the Bank of England has just revised up its estimates for post-Brexit growth in the UK. America is chugging along with strong jobs creation and the latest Federal Open Markets Committee statement maintains status quo when it comes to holding rates. Most traders don’t expect a US policy rate hike till June at least.
 
But the USA has embarked on a protectionist course that will hurt the information technology (IT) industry in particular and goods exports in general, with pharma companies hit harder than other sectors. The “extreme vetting” of visas and the travels bans hitting seven countries have caused some fear. If H1B visa norms are tightened, it will hurt Silicon Valley for sure.
 
A hard Brexit will also hit exports to the UK and force Indian companies using the UK as a platform for the EU to relocate. The USA plus UK absorbs about 18-19 per cent of Indian goods exports and close to 65 per cent of IT services exports. Those will be hit. The imports bill could also rise due to hardening crude and gas prices. 
 
The rupee saw some recovery last week as foreign portfolio investors (FPI) turned net equity buyers after months of selling. FPIs also bought some debt after a long period of selling. Electoral results, especially in Uttar Pradesh, could have some impact on the market because these results could indicate the Bharatiya Janata Party’s chances of winning the 2019 general elections in the face of an Opposition, which is making tactical alliances.
 
The technical picture looks quite bullish. There have been gains across the board, with the participation of almost every sector. Realty, FMCG and PSBs have seen the most investment. The large premium the BSE received upon listing indicates that sentiment is very strong. The Nifty could soon test resistance at around the 8,950-9,000 levels of last September — that’s the next target on the upside.