The initial reaction of the equity markets to the Union Budget 2020 suggests a few disappointments. Non-abolition of long-term capital gains (LTCG) tax, confusion about the impact of dividend distribution tax (DDT) removal, taxing dividends in the hands of recipients and the alternative provided to individuals for lower rate of tax, provided they do not claim exemptions/deductions, all led to the initial knee jerk reaction.
The alternative tax system discourages investments which market participants do not seem to be comfortable with. The overhang of coronavirus outbreak on our markets also got magnified in the second-half of the session.
Whether the provisions of the Union Budget will succeed in reviving the much needed growth is not entirely clear. Amid all this, international rating agencies may form an opinion on the rating of India based on their perception about how long the growth slowdown will continue. Foreign investors will look for signs of revival of growth before they commit funds to India.
The Finance Minister (FM) has done well with responsible fiscal targets for financial year 2020-21 (FY21). The targets set by the FM by and large look achievable. But it will be crucial for her to stick to it for FY21; else the international rating agencies may not be happy about a second consecutive miss.
The Budget has also continued the process of clean-up and making structural changes without getting disillusioned by the negative political outcome of the previous measures. The other themes in the Union Budget show a clear thrust towards improving the competitiveness of Indian businesses and Indian citizens, while providing liquidity in the hands of individuals. Whether and how soon this will result in consumption revival will be interesting to watch.
Budget and interest rates
Interest rates may not come down in a hurry. Given the rising dependence of the government on National Small Savings (NSS) fund (Rs.10.67 lakh crore borrowing in FY20RE vs Rs 8.80 lakh crore in FY19) and the alternative personal tax system proposed in the Budget, the government may not be able to cut interest rates in a hurry. The transmission of interest rates in the economy may, therefore, take a little longer. However, the Budget includes provisions to incentivise foreign investments in Infra projects.
At the same time, a reasonably anchored gross bond supply, some visibility on a bond index inclusion plan and the underlying global environment where a global growth dynamic may be impacted with the Coronavirus outbreak could mean that the interest rates may not rise much from here and we may see intermittent minor dips.
From the eligible tax payers, not many may opt for the new alternative system proposed as their net gain would either be miniscule or even negative. Hence, the worry that inflows into savings or insurance monies may fall sharply looks misplaced.
The disinvestment target of Rs.2.1 lakh crore for FY21 looks tall, given that as per the FY20RE we could end FY20 with divestment receipts of Rs 0.65 lakh crore versus the initial target of Rs 1.05 lakh crore. However, the roll-over of the divestments of Air India, Concor, BPCL into FY21 and the proposed stake sale in Life Insurance Corporation of India (LIC) and IDBI Bank could help.
The markets will absorb the effect of the Budget in the next few days, and in case the coronavirus situation stabilises, the markets may even stage a recovery.
Dhiraj Relli is MD & CEO, HDFC Securities. Views are personal