The first budget of NDA 2.0 was presented in a difficult economic environment. The slowdown in the economy, rural distress, unemployment and fiscal strain posed major challenges. The economy badly needed stimulus to kick-start growth. After the monetary stimulus from the RBI, there was all round clamor for fiscal stimulus from the government. The FM has to be appreciated for presenting a prudent budget with fiscal discipline while attempting to kick-start the economy through capitalization of PSU banks and addressing the NBFC crisis.
PSU banks have been given a capital infusion of Rs 70,000 crores and sound NBFCs have been given a one-time six-month credit guarantee apart from incentivizing banks to invest in NBFCs. These two measures can contribute to revival of credit growth thereby stimulating the economy.
A highlight of the budget is a sharp increase in tax burden on the super-rich. The higher surcharge on those earning between Rs 2 to 5 crores and above Rs 5 crores annually takes their tax burden to 39 percent and 42.7 percent respectively. The government is unlikely to mobilize huge revenue from this. But from the perspective of inclusive growth this move can be justified and it has a clear and clever political message.
The proposal to issue sovereign bonds abroad is attractive in the current context of very low global interest rates and India’s low external debt to GDP of 5 percent. The economic logic behind this proposal is sound: By shifting part of government’s borrowing abroad, domestic interest rates can be kept low. The mere mention of this proposal sent the 10-year bond rates crashing to 6.66 percent on July 5th. However, this option has to be used very carefully.
From the perspective of the capital market, the budget is a mixed bag. The suggestion to SEBI (it is not a budget proposal) to explore the prospects of raising the public shareholding in listed companies to 35 percent from 25 percent presently, though desirable and good in the long-term, will face some practical issues in the short run. There is the risk of some MNCs opting for delisting their shares. However, in the long run higher free float will improve India’s weightage in the MSCI index facilitating more FPI flows. The budget proposal to tax share buybacks, to level the field with Dividend Distribution Tax, is negative for companies, which are presently buying back shares. But investors can expect higher dividend from companies in future. Extending the benefit of lower corporate tax of 25 percent to companies with turnover up to Rs 400 crores is mere incrementalism.
Market performance, going forward, will be influenced by global market trends and domestic corporate earnings. It is important to appreciate the fact that we are in a global bull market, mainly driven by dovish central banks. India is relatively under-performing in this global rally. At the same time, there is an economy-market disconnect in India and valuations are not cheap.
In my previous letter written on 3rd July, I had indicated the possibility of a sharp correction in the market. Now that it has happened, investors can do calibrated buying on declines. Investors are advised to stick to quality and continue with SIPs.
Posted: July 8, 2019