Jul 5, 2019
Key Budget Takeaways
The Finance Minister highlighted the progress achieved over the past five years via structural reforms, low inflation, an institutionalized process for bad loan recovery that has recovered 4 lakh crores already and reduced NPAs by 1 lakh crore over the last year, a healthier public sector and corporate banking sector, transparent and consumer friendly regulations in the real estate sector, and successful implementation of technology led initiatives.
Vision for the Decade… $5 Trillion is in Sight
The Indian economy has grown at a robust pace from $1.85trillion in 2014 when this government was formed to $2.7 trillion today. The economy is expected to touch $3 trillion in FY20 and $5 trillion within a few years. This goal will be achieved by developing physical and social infrastructure, Make in India programs, incentivizing a start-up ecosystem and focusing on exports.
25% Tax Rate Extended to Companies with up to 400cr Annual Turnover
Currently, the lower rate of 25% is applicable to companies having annual turnover up to INR 250 crores. It is proposed to widen this limit to include all companies having annual turnover up to 400 crores.
Increase in Tax Surcharge for Individuals with Income Above 2crs
The Finance Minister proposed raising the tax surcharge on individuals having taxable income from INR 2 crore to INR 5 crore and INR 5 crore and above, so that the effective tax rates for these two categories will increase by around 3% and 7%, respectively.
Reduction in Promoter Holding to 65% in Publicly Listed Companies
The Finance Minister proposed raising the current threshold of minimum public shareholding from 25% to 35% to SEBI. This will effectively lead to a reduction in promoter stake from 75% to 65%. If implemented, this will push huge supply into the market. Separately, reduced holding may disincentivize promoters to keep the company listed and lead to delisting of companies.
A Less Cash Economy
In order to discourage large cash withdrawals from bank accounts, it is proposed to provide tax deduction at source at the rate of 2% on cash withdrawals by an entity in excess of Rs. 1 crore in a year from their bank account. This will curb the cash economy and improve productivity.
Laying the Red Carpet for Foreign Investors
This budget proposed many initiatives to improve foreign investor participation:
• Rationalise existing KYC norms for FPIs
• Hike statutory limits for foreign investments in some companies
• Merge NRI portfolio route with FPI route
• Allow FPIs to subscribe to listed debt papers of REITs
• 100% FDI for insurance intermediaries
• Local sourcing norms will be eased for FDI in Single Brand Retail sector.
Incentives for Affordable Real Estate
In order to incentivize the purchase of an affordable home, it is proposed to provide a deduction upto INR 1,50,000 for interest paid on loans taken for purchase of residential housing having a value up to INR 45 lakhs. This shall be in addition to the existing interest deduction of INR 2 lakhs.
Other Key Structural Reforms
• Improving connectivity and reducing the cost of transportation, thereby increasing the competitiveness of domestically produced goods
o New Metro Rail Projects for a total route length of 300 kilometers have been approved during 2018-19. Also, during 2019, about 210 kms metro lines have been operationalized. With this, 657 kms of Metro Rail network have become operational across the country.
o Sagarmala will enhance port connectivity, modernization and port-linked industrialization.
• One Nation, One Grid – ensuring power availability to states at affordable rates. Government launched Ujjwal DISCOM Assurance Yojana (UDAY) in 2015 aimed at financial and operational turnaround of DISCOMs. Government is examining the performance of the Scheme and it will be further improved.
• Government proposed a scheme providing loans upto 1 crore for MSMEs within 59 minutes through a dedicated online portal.
• Fiscal deficit target reduced from 3.4% to 3.3%.
Outlook
Market Expectations Heading in to the Budget
Heading into the budget, the market’s expectations centered around counter-cyclical fiscal policy measures to impart a meaningful boost to the economy, that worked in concert with monetary policy and did not dampen monetary policy mechanisms. Markets were also looking for meaningful boosts on consumption and investment.
Strong Intentions for Infrastructure Spending
Clearly, the government’s plans for 100 lakh crore in infrastructure investment over five years are welcomed. The research on multiplier benefits from infrastructure investment are well documented. This will create jobs, bring about improved productivity etc. However, details on the investment timing and weightage between the years remain unclear.
Wider Tax Net Necessary
The drop in household savings rates to 8-9% of GDP is a clear sign that the consumer is struggling to save. It also essentially means that government, state and off balance sheet borrowing at 8-9% of GDP are sucking up household savings and crowding out corporates. It’s fairly clear that the narrow swath of tax payers are beginning to feel the weight of the burden of high taxes. We would look for the government to focus on a wider tax net that brings in tax collections from the non-tax paying segment of the population.
External Borrowings Come With Risk and Opportunity…
India’s sovereign external debt to GDP is less than 5%, amongst the lowest globally. However, the government’s plan for sovereign overseas borrowings comes with a fair degree of risk. Maybe the government did not have a choice given receding retail interest in debt and limited FPI investments in local currency debt.
Risks and Benefits…
However, one would do well to remember that it is precisely our low sovereign exposure that allowed India to generally skirt the stress experienced last year in the emerging markets sell-off that particularly targeted countries with large external borrowings. Should the government be able to manage the currency risk, borrowing overseas could enable the government to reduce its cost of borrowing. This also reduces domestic supply, pressures rates lower domestically, a positive.
Consumption Boost Expectations
Market participants had high expectations of a boost for the consumer, and initiatives to address agrarian stress, rural stress and generally declining consumer demand. Greater clarity on initiatives to address consumption demand was a miss, and maybe there will be additional measures forthcoming. This government has demonstrated a propensity to announce reforms over the course of the year, and budgets have been declining in importance over the years.
Revival of Animal Spirits
Investors were hoping the budget would bring about a revival of animal spirits, a change in sentiment, a decline in the cost of capital, incentives to invest. On this measure, the markets spoke clearly and investors appear to be generally disappointed.
Decline in Rates a Positive and Bias Remains Lower Rates
The decline in bond yields, dropping to 6.60 levels and settling at 6.70~, down roughly 15 bps is a positive. With the expectation of further rate cuts, one would expect a continued downward bias on interest rates.
PSU Banking Recapitalisation Package
While the markets were expecting a recapitalisation in the vicinity of 40,000 crores, the higher 70,000 crores suggests that the government is making available growth capital to PSU banks to improve credit availability. That is a positive.
However, the core problem remains unaddressed, which is of governance and ensuring indiscriminate lending does not lead to a whole new set of NPAs a few years hence. One can argue that some of the change in habits has been addressed via the NCLT and IBC route.
Yet again, markets were expecting announcements of strategic divestment or privatization sales, which would allow new management to come forward to manage the entity.
NBFC Parity and Backstops
The F.M. announced a one lakh crore six month partial guarantee for first loss up to 10% on the purchase of pooled assets of sound NBFCs. Initiatives to provide parity in tax treatments vs scheduled banks with respect to interest and deposit taking have been announced.
Back to Earnings, Monetary Policy
Coming off a gruelling election campaign, and transitioning to a new Finance Minister with a short window of approximately a month to put together a budget is a tall order. Many initiatives – land reform, consumer stress, agrarian stress – remain works in progress, and this government has clearly demonstrated a willingness to initiate big bang initiatives during the course of the year. Details will emerge in coming days. Focus will now shift to monetary policy and earnings. Further clarity on the state of the economy will come via management commentary. The prognosis on interest rates and monetary policy remains positive. Equity investment outcomes will be increasingly driven by stock selection rather than macro factors.
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