Stressed sectors left out in the cold
Union Budget 2020-21 was announced in the backdrop of an unfavorable economic environment, with real GDP growth weakening to sub-5 per cent. As such, there was high expectation from the budget to reinvigorate the economy by a) stimulating investment and b) boosting personal consumption.
Nevertheless, the fiscal space to stimulate the economy was very limited. Given the constraints, the finance minister seems to have done a tightrope walk, to meet the key expectations of boosting investment and personal consumption.
Despite all the constraints, the FM in some way attempted to address the key demands such as 1) removal of 20 per cent dividend distribution tax (DDT) 2) lowering personal taxes in line with the corporate tax rate and 3) boosting investments. While DDT was completely abolished and made taxable at the hand of recipients at marginal tax rates, the FM has introduced an optional simplified tax structure based on income tiers with lower rates for individuals, but without any exemptions.
Given the multitude of exemptions available to the salaried, the net benefit to the individual would depend on his utilisation of existing deductions. Hence, benefits seem limited on this front despite lower tax rate in this option, while removal of deductions could have implications for financial intermediate players. With an eye to boost investments, the FM has allowed sovereign funds 100 per cent tax exemption on interest, dividend and capital gains for investment made before March 2024. This seems like a key positive and should help the government in their disinvestment plans for FY21.
Some of the other key announcements were with regard to 1) increase in deposit insurance from Rs 1 lakh to Rs 5 lakh, 2) need to liberalise farm markets 3) higher FPI participation in corporate bonds 4) raising infrastructure spend by 21 per cent year-on-year and 5) customs duty increase in auto and auto ancillaries, which should benefit domestic manufacturers.
The fiscal slippage for FY20 from the budgeted 3.3 per cent to 3.8 per cent was not a surprise, given the gross revenue shortfall of Rs 3lakh crore (Rs 1.6 lakh crore direct income tax + Rs 1.3lakh crore indirect taxes). In the assumptions for FY21, the divestment target of Rs 2.1 lakh crore seems aggressive, given the actual disinvestment achieved is far short of the revised FY20 target of Rs 65,000 crore.
While the plans for divesting LIC seems a very positive reform, the process could take a long time and completing the same prior to March 2021 could be a key challenge.
There were, however, a few misses. There was some expectation of a TARP like structure to address NBFC issue and boost credit in the unorganised segment. There has been no significant policy allocation for Make or Assemble in India. Also, no measures were announced to resolve the real estate stalemate.
Given the constraints, the FM seemed to have been able to only partially meet some of the high expectations the market had. This could imply near-term market volatility for the retail investors. However, this should not discourage the long-term investors as India continues to provide significant bottom-up entrepreneurial investment opportunities, despite tough macros.
Motial Oswal is MD & CEO, Motilal Oswal Financial Services