03 Feb The Budget and Beyond

The Union Budget has over the years lost its policy making significance and should ideally be looked at as a presentation of the Central Government’s accounts – the receipts and expenditures. This is because many of the budget items have now been taken out of the realm of the budget (indirect taxes are now part of the GST framework) and the Government has been making key policy shifts and decisions during the year too (decisions relating to corporate tax rates, FII & FDI limits, duties and taxes, launching of schemes etc).

However, we continue to make it a grand exercise and keep expecting policies/decisions which could favour our cause as an entrepreneur/professional/investor/trader etc. This year was no different. In the backdrop of the economy slowdown, there were expectations of big bang announcements to boost investments, tax breaks to boost consumption and policy shifts to boost inflow of foreign capital. Add to this the wish list of individual industries.

This year too, the Finance Minister tried to please all and in the process disappointed most. While the bond markets would be happy with the lower projected borrowings, the equity markets were disappointed that there was nothing for them. Our take is that it was a measured exercise (notwithstanding the grand standing re reducing personal income taxes) given the limitations she was dealing with. The overall theme was focus on the rural and infra sectors as well as the realisation of the need to attract significant foreign capital.

Key Highlights:

1. Nominal GDP growth pegged at 10% for FY 20-21 – a fairly realistic number
2. Fiscal Deficit for FY 19-20 at 3.8%, FY 20-21 at 3.5%
3. Personal Income Tax slabs and rate changes – not many may go for this
4. Divestment target of Rs. 2.10 lakh crores – seems very optimistic, given the track record
5. LIC to be listed – could be a key to achieve point 4 above
6. DDT abolished. Dividend income to be taxed in the hands of the individual – higher taxes on dividend income, favourable for MNCs
7. Deposit Insurance Limit increased to Rs. 5 lakhs
8. Increasing limits of FPI investments in Corporate Bonds and also opening some category of Govt Securities for them – will broaden the bond markets and help to keep the rates low
9. Increase in customs duty of certain products in an attempt to promote Make in India – will make these items more expensive in the short term
10. Comprehensive agenda for integrated rural development
11. Increasing focus on technology and renewable energy

This year’s Budget was another reminder that we should treat it as a non-event as far as our investment strategy is concerned and not try to invest based on our expectations (eg removal of LTCG tax, relaxations of FDI rules in Insurance etc). The huge expectation though did give us a tactical opportunity to hold back some equity allocations and invest after the correction which has come through (though some of the correction could also be on account of worries related to the Corona Virus).

We continue to play for a slow and gradual recovery over the next 12-15 months.  We will see bouts of increased news flow and market action based on domestic and global news. The earnings season has largely been on expected lines and we see some pick up in the earnings especially in financials. We prefer investing in diversified portfolios where we expect the fund managers will add value through their active bets. On the fixed income side, we prefer medium duration corporate bonds as we expect spreads will narrow over time while yield movements may show some volatility.

Net Effect – status quo on the outlook and strategy.