A missed chance for the markets
Expectations of a growth stimulus have been belied
At a time when the rise in GDP has slowed to a decade-low, the markets were hoping for big measures to boost growth even if they came at the cost of a larger fiscal deficit. Higher growth and consequently corporate earnings would have helped the markets sustain high valuations and attractive more investors, both foreign and domestic.
Expectations had built up following the sharp cuts in corporate tax rates last September, measures to revive realty and non-banking finance companies, and, of late, fears over coronavirus affecting global growth. The Budget, however, has belied most expectations and lacks measures required for a faster recovery in corporate earnings, and the markets’ reaction is an indication of that.
“If one was expecting big growth-boosting measures, they did not materialise. Despite the considerable focus on infrastructure, rural development, health, and education in terms of fund allocation and concrete near-term measures, there have not been many big changes,” says Sujan Hajra, chief economist and executive director, Anand Rathi Shares & Stock Brokers.
Pankaj Bobade, head, fundamental research, Axis Securities, says: “What the markets were expecting were concrete measures to revive the economy, which prima facie doesn’t look to come out immediately.”
Most experts say the cumulative effect of these measures on economic and corporate earnings growth may not be significant.
The new optional income-tax regime for individuals may also not yield as much as the ~40,000 crore benefit (read: consumption boost) the finance minister has estimated, given the number of exemptions done away with. Also, there has only been a revamp and not abolition of dividend distribution tax. Here too, with dividends now taxable in the hands of individuals, it may mean less money in their hands (unless companies proportionately raise the dividend payment), which may affect consumption.
“The impact (of personal tax rate cuts) could be limited, given the withdrawal of exemptions to avail of lower tax rates,” says Jaideep Arora, chief executive officer, Sharekhan by BNP Paribas.
Some experts see the Budget in a relatively positive light, given the low tax collections and growth rate, and other proposals announced.
“Within constraints of low tax income and low growth, utilising the fiscal space and nominal GDP growth estimates are credible. The government has talked about listing LIC and divesting its remaining stake in IDBI Bank, apart from Air India and other companies. Even if one of them works, it sets the tone for privatisation. Tax cuts also indicate the government’s intention to push consumption,” says Shibani Kurien, head of equities, Kotak Mutual Fund.
Restricting the fiscal deficit at 3.5 per cent and net government borrowings at ~5.36 trillion (up 7.5 per cent year-on-year) in FY21 also seem achievable, which should keep bond yields and the cost of funds for India Inc in check.
“For the bond market, the borrowing numbers seem to be broadly in line with market expectations and are unlikely to put significant pressure on yields in the short term,” says Abheek Barua, chief economist, HDFC Bank.
These projections, however will be put to the test as the year progresses in terms of economic growth, the government’s expenditure, and its ability to raise resources, especially the divestment target of ~2.1 trillion, double the Budget Estimate of ~1.05 trillion for FY20. If the markets remain subdued, achieving these could become an uphill task.
“The disinvestment target looks very optimistic. Overall, we see no big thrust to revive the economy,” says Arun Kumar, head of research at Fundsindia.com.