Union Budget 2020-21 was always going to be tightrope walk for the Finance Minister given the weak economic growth, slower tax collection and subdued business sentiments. The task was cut out to revive growth and maintain macroeconomic stability within limited space for spending for financial year 2020-21 (FY21). FM’s honest attempt to deliver this has few positives but one is left with a feeling of ‘dil maange more’. Capital markets, in particular, would have loved to see more stimulus measures for specific sectors.
Nominal GDP growth of 10 per cent is a fair estimate. Assuming 4 per cent inflation rate, it implies real GDP growth at 6 per cent is within reach. In this backdrop, revenue growth assumed at 16.4 per cent could be challenging with higher reliance on increase in non-tax revenues like divestment and dividend proceeds. Discipline has been maintained with expenditure budget growth of 12.7 per cent. Fiscal deficit pegged at 3.8 per cent for FY20 and 3.5 per cent is also reasonable and credible that brings fiscal consolidation in next year.
As the FM mentioned in her speech, Budget was focused on three parts – Aspirational India, Economic development and Caring society. These objectives have been broadly addressed. Clear message was sent on importance of wealth creators in the economy. Budget has outlined government’s attempt to ease investments and to boost infrastructure growth with focus on adding to road and rail network, increase in number of airports and improving port connectivity.
There was cheer for individual direct tax payers as there were significant changes in the income tax structure with estimated impact of Rs 40,000 crore of tax foregone. While tax rate has been cut in lower income slabs up to Rs 15 lakh in new tax regime, standard deductions and exemptions have been taken away. It was largely expected that real estate will be a sector that will be given booster to stimulate growth. While affordable housing push continues, there is no meaningful push given the broader real estate market which came as a disappointment for the markets.
Another positive in this budget has been 100 per cent tax exemption on income on investments in all forms i.e. dividend, interest, capital gains by sovereign funds in infrastructure sector to boost the sector and provide much needed capital to this sector.
The big announcements
For the capital markets, while there is no relief on long term capital gain, as many would have wished for but there was a positive announcement for small investors in lower tax slabs due to removal of Dividend Distribution Tax (DDT) in the hand of the companies. However, since this will be negative for promoters, companies may choose to do buy-back instead of dividend.
Other big announcement was the intent of listing of Life Insurance Corporation of India (LIC) in the coming year and is significant step which while provide government opportunity to monetise its wealth. LIC, once listed will be one of the most valued companies, and will also attract substantial foreign flows and could raise India’s weight in MSCI index post listing. Announcement on complete sell-down of government stake in IDBI Bank will be further fillip to revenue collection through divestment in addition to strategic divestments of entities like Air India, BPCL, Concor, SCI. Success in few of these may provide a template for further privatization which can improve the capital efficiency of economy. Divestment target pegged at Rs 2 lakh crore could be challenging but it is not an unachievable target.
While the macroeconomic has been handled well, markets are feeling let down with absence of any meaningful measures for most of the sectors. At the same time, the FM has stayed away from adding further tax on petroleum products and let consumers retain the benefit of lower oil prices. She has attempted to give momentum to liberalised market and gain trust from stakeholders. With emphasis on privatisation, productivity should improve in the long run.
We have crossed an important milestone but journey of economic revival and having healthy market will continue with further opening up of the market and wealth creation measures.
Nilesh Shah is MD & CEO, Kotak Mahindra Asset Management Company. Views are personal