Budget 2019: Many positives, but lower tax mop up could derail fiscal math

The initial market response to the Budget was negative. While the major indices did not fall much, the sell-off came later and across the board, indicating that the disappointment was widespread. Indeed, there’s wasn’t a single major sector where shares responded positively, as a group. The Advances-to-Declines ratio (AD ratio) for the National Stock Exchange (NSE) NSE was at 476 advances versus 1,265 declines.

In broad terms, the market sees the hike in customs tariffs for a wide range of items as negative, since it all affect cost inputs across a swathe of industries. Passing on those costs at a time when consumer demand is weak could be difficult. The hike in excise for petrol and diesel is also seen as inflationary. The easing of the corporate tax burden on some larger companies is a welcome relief, but the market was hoping that all corporates would come under this ambit.

On the positive side, there could be a boost to the construction sector and to infra-related companies as the infra-push gets underway. This could also generate some employment, which is another point of pain. There may also be some lift in demand, as rural relief programmes put money into the pockets of distressed farmers.

Opening up infra-debt funds for foreign direct investment (FDI) might also help in terms of bond market activity and lead to reduced yields. The rejigging of the “Angel Tax” provisions should mean relief for entrepreneurs in start-ups. The increased benefits for the affordable housing sector (as in more tax relief for loans taken) could lead to some stimulus in demand there.  

PSU bank recapitalisation coupled with the conceptualisation of a government backstop for a pool of Rs 1 trillion in NBFC assets could improve credit flows, first to the NBFC sector and down the line to retail borrowers. That seems like a positive, but care must be taken to ensure that there isn’t a fresh batch of non-performing assets (NPAs) as a result.

The disinvestment targets have been enhanced. But, the new concept that government stakes could be reduced to 51 per cent, including the stakes held by government-owned organisations, may spook the market. Some investors are assuming that it means Life Insurance Corporation (LIC) will be asked to take larger positions in disinvestments and also that more PSUs will be asked to create cross-holdings by buying up government stakes in other PSUs. This could adversely impact the balance sheets of many PSUs in the same fashion that has occurred in the case of ONGC – HPCL and in PFC – REC.

The fiscal balance mathematics could also be stretched. The Budget commits to holding the fiscal deficit as 3.3 per cent of GDP (gross domestic product) while maintaining its expenditure assumptions. This relies heavily on hopes that nominal tax collection will grow quickly (at above 22 per cent), spectrum allocation proceeds, as well as a higher dividend by the Reserve Bank of India (RBI), and higher disinvestment proceeds. It also relies on off-balance sheet borrowing by central PSUs. Lower tax collections could queer the pitch.

Devangshu Datta is an independent market expert. Views expressed are his own