Budget 2020: ‘Market may have already priced in a fiscal slippage of 30 bps’

Agriculture and allied primary activities, infrastructure, banking, and financial services, especially the non-banking sector, and auto are the sectors that may receive attention in the Budget, says Dr Joseph Thomas of Emkay Wealth Management.

The market may have priced in a 30-bps slippage in the fiscal deficit but any deterioration above 50 bps may impact the yields on government papers and general interest rates, Dr Joseph Thomas, Head of Research, Emkay Wealth Management, says in an interview to Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) What are your expectations from the Budget? Do you think it will be a Budget that will count as growth estimates head south?

A) That the growth estimates have been trending south is one of the reasons why the Budget proposals are eagerly awaited by the market.

The government and the RBI have initiated several measures including a substantial cut in the corporate tax, lower official interest rates, better transmission of the beneficial effects of rate cuts, and better flow of credit to some of the sectors that require credit support, etc.

There are a number of issues that have been addressed quite well on the supply side. But we require some demand-side measures too. The current deceleration in growth is the result of sluggishness not only in the aggregate demand but also in investments.

Further rationalisation of personal taxation to support more spending is one of the things that is expected. The credit flow has improved, and the liquidity conditions are good, but certain sectors like the NBFCs are still struggling to raise money at reasonable rates.

Some are not getting money at any rate. The credit guarantee that was announced by the government was for six months and the same may require to be enhanced for one year.

It also means that no additional expenditure for the government on any count at this juncture but would be a confidence-building act.

Further rationalisation of taxes, especially the dividend distribution tax and the LTCG, are also expected by a major section of investors.

In any case, these are expected as part of the process paving the way for the final introduction of the Direct Tax Code (DTC).

Q) Do you think the government will be able to meet the fiscal deficit target? If not, what is the extent of slippage that the market will be comfortable with?

A) Yes, the fiscal slippages are likely. The attainment of the fiscal-deficit target has been made difficult by a number of factors.

The sluggishness in the economy resulted in lower tax collections, and the cut in corporate tax also has contributed its share, while the government borrowing programme swelled to all-time high levels for both central and state governments put together.

At the same time, the demands on the government for increasing expenditure were high due to the fall in consumption and investment and the resultant need for the government to step in to support aggregate demand.

The market has more or less priced in a 30-bps slippage but any deterioration above 50 bps may impact the level of yields on government papers and general interest rates.

But equity markets may tolerate a slippage better, as government spending, even at the cost of a small deviation from accepted levels, may help stimulate the economy in the long run. 

Q) Which are the sectors likely to hog the limelight in the Budget and why?

A) The likely sectors that may receive some attention in the Budget are agriculture and allied primary activities, infrastructure, banking, and financial services, especially the non-banking sector and auto.

If one looks back at the last couple of years, it has been the farm distress that has been a key issue that required some solution. This is also to be understood against the background of the governments’ intention to double farmers’ income over the next few years.

Retail credit, which used to flow from the non-banking financial services companies, financing smaller acquisitions and purchases, requires special attention in terms of the credit environment that the government can create for them in the coming year.

The budget needs to work for uplifting aggregate demand, as both consumption and investment are depressed, and it requires specific steps to revive the economy.

Q) What are the expectations from the Budget from investors or market perspective? 

A) The expectations from the budget are almost always intertwined with expectations on the tax front. In the run-up to the introduction of the DTC, we may see more rationalisation of the tax structure.

On the corporate tax front, the deep cut given to the corporates calls for some reduction in the personal tax rates too. This would be important from the point of giving a stimulus to retail consumption and investment as people tend to save and invest and also spend more with lower tax rates.

Similarly, the government may rationalise the Dividend Distribution Tax also as it hits the same quantum of money at multiple layers, which is something like taxing the same money many times.

This kind of tax treatment acts as a disincentive to equity investments and it may be restructured to be taxed just once, preferably in the hands of the investor as part of his normal tax dues. There is also some room for offering a lower LTCG tax given the current economic and market conditions. 

Q) Do you think the infrastructure sector will benefit from the Budget?

A) The detailed plan on infrastructure has been already announced by the government a couple of weeks back. This plan has outlined the projects at various stages of their conception and progress, and the entire allocation over the next five years of close to Rs 100 lakh crore has also been detailed.

But it needs to be seen how resources are going to be mobilised for this mammoth effort. The allocation in the current finance bill would be worth looking at to get a hint of how we are positioned to pursue the all-important objective.

The mobilisation of domestic resources for infrastructure would require special attention in addition to incentives for overseas investors too, mainly because of the peculiar nature of these projects, where the fruition lag is very large and the returns may be relatively smaller. It may be worthwhile issuing special instruments to raise funds for these projects.

Q) The government has struggled to meet the divestment target in FY20. What are the estimates you are factoring in for the next fiscal?

A) The government has been able to meet barely 20 per cent of the disinvestment target despite its best efforts, though at the time of the last Budget itself it was pointed out by many that the target was quite ambitious.

It may also be pointed out that the attainment of these targets is not entirely dependent on what the government desires to do but also on a number of exogenous factors like the state of the economy, the perception on the medium-term trajectory of the capital markets, the liquidity conditions in the market, the attractiveness of the offerings, etc. therefore, one may say that the estimates in the last Budget were quite unrealistic given the economic conditions that prevailing at that time.

Whether the next year would be good would depend to a large extent on the positive sentiment, which the Budget and the Budget proposals would attempt to create over the next year.

The disinvestment targets may not be revised downwards but may be kept more or less at the same levels. It is pertinent to mention here that during the course of the current financial year the markets faced one of the major challenges due to incessant selling by FPIs, mainly led by the fact that the tax on FPIs was hiked, a measure which the government withdrew afterwards to repair the sentiment.

Such factors also play a role in determining the climate for investments for both domestic and external investors.

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