Budget 2020 – A Quantum Perspective

Equity View

Given the state of the economy, expectations were running high that the budget may have significant proposals to revive consumption demand. However Budget proposals neither give a major fillip to consumption demand nor do they address major problems faced by select sectors like real estate, power, and credit availability for below investment grade borrowers.

The major announcement in the budget of revision in tax slabs may be a non-starter as the tax payer may be worse off under the new slabs if exemptions and deductions are removed. To that extent sell off in Insurance companies assuming lack of investor appetite for their products due to loss of tax exemption may have been unwarranted. The abolition of divided distribution tax and shifting of taxability in the hands of dividend receiver may lead to significant tax increase for HNIs. Family run companies may now prefer the buyback route for paying of dividends.

The budget has been devoid of any major ideas to revive consumption or investment demand. It will be up to the natural business cycle to revive corporate earnings which could be a gradual process.

Fixed Income View

The Bond market was expecting an increase in the fiscal deficit given the fall in economic growth and the subsequent fall in tax collection. The government having announced a cut in corporate taxes in September, the tax collection situation became tougher.

The government was also under pressure to not cut its expenditure to meet the fiscal deficit, as any cut in expenditure will adversely impact the growth sentiment even further. Given that background, the bond markets expected the Fiscal Deficit to be increased for this fiscal (FY 20) and for FY 21.

The budget has been devoid of any major ideas to revive consumption or investment demand. It will be up to the natural business cycle to revive corporate earnings which could be a gradual process.

The government increased the fiscal deficit for FY 20 to 3.8% of GDP from the budgeted 3.3% of GDP and pegged it at 3.5% of GDP as against the target of 3.0% of GDP.

Increase in fiscal deficit of such magnitude would mean that the government will borrow more from the bond markets leading to a rise in government bond yields. The 10-year government bond trading at a yield of 6.5% as against the Repo Rate of 5.15% was indicative of the worries of the bond market on the fiscal situation.

Bond yields should ideally increase in the medium term but the government has tried to provide some relief to the bond market by announcing a large increase in investment limits for foreigners in corporate bonds. They have also paved way for inclusion of India’s government bonds in global bond index by allowing foreigners to buy certain bonds without any limit.

If the above steps do come about and leads to higher investments by foreign investors in Indian bonds, we may see the bond markets being supported and bond yields may well fall. Also, if the RBI continues its own version of “Operation Twist” – where they buy long maturity government bonds and sell short maturity bonds, it may continue to support the government borrowing programme and prevent bond yields from rising.

Overall, as always, we will continue to advise that investors should choose safety and liquidity while investing in debt mutual fund and investors investing in long term bond funds/dynamic bond funds, should take a long term view and be prepared to face volatility in their returns

Gold View

Although it did not come as much of a surprise, the budget disappointed by not reducing the customs duty on gold which has led to price distortions and is hampering efficient functioning of the gold markets in India. It also fell short of providing assurance on any road map towards reducing this anomaly that exists.

The finance minister in the budget has proposed that GIFT City would set up International Bullion exchange(s) in GIFT-IFSC as an additional option for trade by global market participants. Last budget had proposed a spot gold exchange which was the need of the hour as many of the key market players are currently under served by the current market structure and thereby stand at a disadvantage. Many important gold players demand market infrastructure that helps bring transparency and standardization that a spot exchange could offer. However, the participants continue to await a spot exchange as yet.

We hope that the idea of international bullion exchange is just an extension of the spot gold exchange proposed last year but is broader in vision. The now proposed bullion exchange in GIFT-IFSC should not just limit to global players or participants having presence in GIFT city. It should as appropriately allow participation from all players in the Indian gold ecosystem into relevant instruments that help bring transparency and efficient price discovery. The finance minister mentioned the eco system that existed in form of vaults, banks, insurance etc. The success of the international bullion exchange would depend on as much as open and free participation of key players in the gold value chain, as possible and relevant products that address their requirements. It should be well regulated and have clear and well defined rules of operation, facilitate imports and transfer to local markets, assurance on quality, lending and borrowing mechanisms and tax efficiency to be successful in fulfilling its intended role.

From the MD & CEO's Desk

• The prominent theme of Budget 2020 was the ease of living with improved Governance, such as improved savings for an average household, benefits to MSMEs through enhanced threshold and composition limits thus converting the Indian society to aspire for a better standard of living coupled with greater economic development and care. However, the fine print does not seem to support this theme.

• Digital revolution will go a long way to help improve Governance, however the system glitches are still being noticed while filing returns, etc and is far from being as simple as was portrayed.

• An increased outlay in Education, Health and Family welfare will contribute to improving the welfare of the society.

• An increase in the Insurance coverage for deposits from 1 lakh to 5 lakhs per depositor, will help re-instill confidence in Bank Fixed Deposits on the assumption that Bank interest rates would help beat inflation.

• Bulk of the rupee receipts i.e. 64% is expected to be attained through various modes of taxation. Individual salary tax payers will be the worst hit as more complexities have been introduced in the form of alternate Income Tax slabs with the removal of exemptions and deductions.

• While Dividend Distribution Tax has been done away with in the hands of corporates, it will increase the tax outflow and bureaucratic burden of maintaining records and offering the same for tax in individual returns.

• Removal of the Insurance premium exemption will have a major negative effect on the growth of the sector since Insurance policies were normally offered based on such exemptions.

• Normally such deductions particularly u/s 80C of IT Act acted as a boost for family savings and growth of the associated Financial Services Sector. The removal of the same will have a dampening effect on such savings and sector growth. It would also have an impact on the proposed IPO of LIC.

• Removal of reduction of interest on Section 24 of the Income Tax Act in respect of self-occupied vacant property is self-defeating the purpose of affordable housing/boosting the real estate sector.

• Looks like the Indian personal tax system is moving towards the American system of income being taxed without exemption/deduction, file return of income and claim credit for taxes paid.

• Reduction of tax for Corporates will not help savings and spur consumption which is the need of the hour.

• A quick back-of-the-envelope calculation shows that the old IT tax rates with all the deductions helps save more.

• Improved spends on infrastructure, if implemented and executed well can help boost the economy but the question on Fiscal deficit still remains.

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