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While her first GST council meet in Jun-19 was a relative non-event, Finance Minister Nirmala Sitharaman’s maiden Union Budget was certainly a market mover. Debt markets loved it, equity markets – would live to see another day. While broader consensus was of the view pre-Budget that there would be some form of fiscal push and that the fiscal deficit could be stretched in order to stoke Consumption in the economy, the FM was not buying that. For her, growth WITH profitability mattered and not growth at THE COST of profitability .– money (fiscal balance) first, growth second. So, while the budget deviated from expectations of fiscal stimulus, it did retain a rather strong scrutiny at source of funds which improved the FY20 fiscal deficit outlook to 3.3% from earlier 3.4% at Interim Budget (IB):

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Budget FY20: Where Is The “Fiscal Stimulus”?

CIO’s Desk , July 05, 2019

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WHERE’S THE MONEY, HONEY…

While her first GST council meet in Jun-19 was a relative non-event, Finance Minister Nirmala Sitharaman’s maiden Union Budget was certainly a market mover. Debt markets loved it, equity markets – would live to see another day.

While broader consensus was of the view pre-Budget that there would be some form of fiscal push and that the fiscal deficit could be stretched in order to stoke Consumption in the economy, the FM was not buying that. For her, growth WITH profitability mattered and not growth at THE COST of profitability .– money (fiscal balance) first, growth second.

So, while the budget deviated from expectations of fiscal stimulus, it did retain a rather strong scrutiny at source of funds which improved the FY20 fiscal deficit outlook to 3.3% from earlier 3.4% at Interim Budget (IB):

GLOBAL EQUITIES: GROWTH OPTIMISM LEADS TO BLUE SKY SCENARIOS

  • The FM’s expectations on the disinvestment targets seem quite bullish. She now expects disinvestment to ramp up from INR 90,000 Cr 5 months back (at the IB) to INR 1.05 lakh Cr. The change in tax treatments of the CPSE ETF making it now on par with ELSS certainly makes it attractive and could be the lever which the FM is pulling to prop up strategic asset sales.

    • Focus back on DIPAM and strategic asset sales

Source: Budget Document, CMIE.

  • Secondly, non-tax revenues are now expected 15% higher vs. the IB FY20 expectation. The culprit responsible for 57% of this increase is the RBI’s dividend – the Government now believes the Bimal Jalan committee would now dole out INR 1.06 lakh Cr. vs. the IB expectation of INR 83k Cr.
  • Thirdly, while the aggregate tax revenue expectations might have been dampened vs. the IB, the duty hike imposed on petrol and diesel augurs well for the GOI coffers.
    • Focus back on DIPAM and strategic asset sales

Tighter Purse Strings: Nirmala vs. Piyush

Source: Budget Document.

MARKET REACTIONS: FIXED INCOME UP, EQUITIES DOWN

Much of the head-line needle moving numbers of increased non tax revenues undoubtedly will leave the bond market cheerful – any source of funds for the Government will reflect in a yield cushioning –a -6 bps fall in the 10Y, aptly so with the revision of the fiscal deficit.

Equities though floundered and ended the day negative as the Budget had its characteristic pain today, gain tomorrow elements which did not go down well with Consumption oriented names (NIFTY Auto closed the day -2.8% down).

MAJOR TAKEAWAYS

Infrastructure spend as suspected was the darling of the Budget. Under the Gram Sadak Yojana, the GOI aims to invest INR 80,250 Cr. for upgradation of 1.25 lakh km. of roads. Setting up of Credit Guarantee Enhancement Corporation should help operational infra projects tap bond markets and recycle bank debt.

Deepening the bond market was another welcome theme. Allowing FPIs to subscribe to listed debt papers of REITs and InvITs will help alternate funding mechanisms to diversify their fund sources. Opening the doors to sovereign external borrowing should further reduce pressure on domestic yields.

Conscious of ailing NBFCs, the GOI will provide a one-time six-month partial credit guarantee to public sector banks for the first loss of up to 10% for purchase of high-rated pooled assets of financially sound NBFCs amounting to a total of ₹1 lakh crore during FY20. Making the RBI accountable for HFCs brings required policy stability.

Another shot in the arm for PSU Banks: with a recapitalization of INR 70,000 Cr. – much needed given that they would be buying out certain stressed NBFC assets.

More market liquidity in the form of increasing the minimum public float for listed companies to 35% from current 25%. This should curb volatility seen in stocks in recent times.

Make In India Push by offering direct & indirect tax incentives to attract global majors in specific areas to reduce import burden.

MAJOR TAXATION TAKEAWAYS

No Inheritance Tax, but surcharge increase on the super-rich: Taxing of income over INR 2 Cr. is yet again a robin hood moment of the New FM. The effective tax rate for individuals with taxable income above INR 2 Cr. would go up by 3.12% (to 39%) and above INR 5 Cr. by 6.86% (to 42.74%%) thanks to the increased surcharge on tax. However, in quantum this might not contribute significantly to revenues. As individuals falling under this category are few, so to prevent any negative political fallout, this might help the ruling establishment shred any perception of being pro rich.

Extending the Corporate tax rate of 25% to more companies: The reduced corporate tax rate of 25% to apply to companies with annual turnover up to INR 400 crores during financial year 2017-18.

Buyback tax extended to listed companies: Presently, an Indian unlisted company undertaking buyback of shares is subject to pay buyback tax at effective rate of 23.30% on difference between buyback price and original issue price. The provision is now proposed to be extended to buyback of shares by listed company as well. Accordingly, listed company would be liable to pay buyback tax of 23.30% and also if the buyback is through stock exchange mechanism then it would also be subject to STT. The proceeds received by the shareholders would be exempt from tax.

Tax incentive for purchase of electric vehicle on loan: The taxpayers would be eligible to claim interest deduction upto INR 1.5 lakh on purchase of electric vehicle on loan. This is step taken to boost the same of electric vehicle.

Angel tax exemption extended to funds received from Category II AIF: A closely held company which receives proceeds from resident shareholder from issue of shares at premium has to justify that the issue price is not more than the fair market value. However, the provision would not apply if the proceeds were received from Category I AIF. This exemption is proposed to be extended to proceeds received from Category II AIF upon issue of shares.

Enhancing tax breaks for Affordable housing could also offer required solace to the real estate sector at least partially.

Tax break in case of IBC cases: : In case of change in shareholding of a closely held company pursuant to resolution plan approved under IBC then (a) the company would be eligible to carry forward the unabsorbed tax losses i.e. provision of section 79 of the Income-tax Act would not apply; and (b) for computing the book profits for the purpose of computing minimum alternate tax, the aggregate amount of unabsorbed depreciation and loss brought forward would be reduced (presently the lesser of unabsorbed depreciation and loss is reduced from book profits).

EQUITY STRATEGY

Overall valuations of equities are not cheap, aggregate earnings momentum continues to be subdued and we can expect this to continue at least for another two quarters owing to compressed demand, ongoing negative spell in macro variables and delayed sowing in current monsoon season. FPI and domestic investor flows have been holding healthy owing to easing global monetary policy outlook as well TINA effect (There is No Alternative). For now, focus would likely to shift to implementation and execution path of the Government after the Budget and the panning out of corporate earnings.

FIXED INCOME STRATEGY

With the staggering amount of NBFC debt coming round the corner in Sep-19, we would prefer to stick to high quality corporate bonds and play at the shorter end of the curve. Avoid long duration funds; Prefer good quality Low duration, Ultra Short-Term Funds & Arbitrage Funds. Liquidity Management should be played through Overnight funds. Continue to prefer high quality Short duration funds and Corporate bond funds over Credit Risk funds.

Disclaimer

Different types of investments involve varying degrees of risk and past performance is no guarantee of future results. Do not assume that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended or undertaken by us) will be profitable. Results may vary over time and from client to client. Any projections or other information illustrated in this presentation which may have been provided to you regarding the likelihood of various investment outcomes are hypothetical in nature, and do not necessarily reflect actual investment results nor should they be considered guarantees of future results. Historical performance results for investment indices and/or categories have been provided for comparison purposes only and index returns may vary substantially from past performance in the future. Other investments not considered in the analysis and the recommendations resulting from this analysis may have characteristics similar or superior to those being analyzed. Please remember to contact Validus Wealth Managers Pvt Ltd if there are any changes in your financial situation or investment objectives or if you wish to impose, add or modify any reasonable restrictions to our services.

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