When expectation met with reality…

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There were high expectations from the budget given the larger mandate of the new government.  When this excitement met with the realistic financial position, it limited the government’s bandwidth to announce eventful measures. Though below expectation, the announced measures provide a prudent plan for FY20 with a conservative approach not to overspend in a slowing economy.

On a positive note it surprised all of us with a better fiscal target of 3.3% for FY20. While the market was hoping of some dilution in the short-term and support for the economy with backup measures. Though fiscal target improved, government spending is likely to be muted in FY20, which is not positive for equity market and revival in economic growth. Within which an inherent positive is that spending will be tight and oriented based on priorities like PSUBs and NBFC. A strong support is provided to PSUBs with Rs 70,000cr recapitalization and a backup to NBFC saga through additional guarantee.

Similarly, borrowing plan is likely to be oriented and a portion will be sourced externally. This can reduce the crowding-out effect of domestic corporate borrower and reduce bond yield which is positive for bond market and economy in the long-term as cost of funding reduces. The 10-year Government bond yield has reduced by 50bps in the last one month to 6.55%. Also, allowing AA graded bonds as collateral is a positive step for development of bond market.

The key areas mentioned in the budget were Bharatmala, Sagarmala and Grameen Bharat with roads, home, power and gas. Beneficiaries could be PSUBs with higher than expected Rs70,000cr recap and NBFC with one-time guarantee to buy bonds and support liquidity. Real estate has also been given sops to improve investing in affordable houses. Infra is marginally positive due to higher work-order from National Highways Authority of India (NHAI) and cheaper cost of funds. Opening up of FDI/FPI on aviation, media, insurance, REIT and proposal to ease in local sourcing norms in single brand retail sector are positive foresight. But for real benefit more reforms are needed in labor and high taxation system of the country. Losers could be Auto sector due to lack of clear reforms for combustion engines while focus is on Electric Vehicle. Jewelries, due to increase in gold duty.

A concerning factor in the budget financial is that revenue assumptions of FY20 which seems to be on the higher side. The financial statement is not updated with the actual numbers of FY19 which was quoted by the media and economic survey. It showed a clear shortfall of a whopping Rs 1.67 lac cr in net tax collection for FY19. When we compare the actual revenue of FY19 provided in the economic survey document with the forecast of FY20, it shows a growth of 25% compared to 6% in FY19. This gives a sense that the government may overcome this deficit through higher taxation charged on direct tax, excise duty and custom duty in spite of the fact that economy is still weak.

The market was hoping for supportive action from the government which was not provided in the budget. This was undoubtedly due to the bleak fiscal position given a slowdown in domestic and global market. Given the lack of incentive to invest, equity market may be lackluster in the short-term. Going ahead market will start to react on the actual performance of Q1FY20 result for which the outlook is muted.

Posted: July 11, 2019

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