The Union Budget 2020-21 was presented on 1st February 2020 amidst a very challenging economic environment. Although it was not acknowledged explicitly, the budget appears to have realized the fiscal limits. Not surprisingly then, it did not excite the market, where expectations were running very high.
There were evidently a lot of expectations from the Budget to revive the overall economy. This years’ budget has a focus on the agriculture and allied sectors, infrastructure, job creation, skill development and financial sector. Many measures including tax incentives have been announced to deepen the corporate bond market as well. We can see some definite emphasis on the MSME sector as well as rural economy.
As far as fund raising is concerned, the Government has taken few good measures that would deepen the debt market viz., the FPI limits has been increased to 15% (from 9% earlier), certain specified categories of government securities would be opened fully for NRIs (apart from being open to domestic investors), float Debt ETF consisting of government securities. Divestment target for FY21 has been increased to Rs.2.1 lakh cr largely to be funded through IPO of LIC and IDBI stake sale. As widely expected the government has resorted to fiscal deficit of 3.8% for FY20 taking help of the escape clause of FRBM act and set target of 3.5% for FY21; the expectations of reducing non-essential subsidies was not addressed.
In terms of major announcements, the government has tried to rationalize personal income taxation on the lines of the corporate income tax changes announced in September 2019. Personal income taxpayers now have an option to either continue with the current regime or choose the new lower tax regime (for taxpayers with annual income below Rs.15 lakhs) provided they give up on all major exemptions. This I feel is also moving a step closer to direct tax code (reducing tax rate & removing exemptions).
| Tax Slabs without exemptions (Rs.) | Rate |
| 0-2.5 lakhs | 0% |
| 2.5-5 lakhs | 5% |
| 5-7.5 lakhs | 10% |
| 7.5-10 lakhs | 15% |
| 10-12.5 lakhs | 20% |
| 12.5-15 lakhs | 25% |
| Above 15 lakhs | 30% |
Overall from an equity market perspective, we believe the budget has been a non-event and belied the lofty expectations. Equity markets reacted with a 2.5% correction in Nifty on 1st February. We believe once the fine-print is absorbed, the market’s focus should revert to fundamentals, viz. corporate earnings growth, global cues around the spread of Corona Virus and its potential impact on global growth. Given the absence of sharp growth revival, we expect the market to stay narrow – select sectors with better earnings visibility will continue enjoying valuation premium over the broader markets.
Key takeaways from the budget:
Three prominent themes of the Budget
– Aspirational India: Better standards of living with access to health, education and better jobs for all sections of the society
– Economic development: Development for all – “Sabka Saath , Sabka Vikas , Sabka Vishwas”.
– Caring society: Corruption free, policy-driven Good Governance, Clean and sound financial sector & ease of living
- Sixteen Action Points for Agriculture, Irrigation and Rural Development focusing on Blue Economy, Kisan Rail, Krishi Udaan, One-Product One-District etc.
Direct Tax:
- The finance bill has abolished the dividend distribution tax (DDT) and proposed to tax the dividend in the hands of shareholders/unit holders based on their applicable income tax slab rate. PSU companies may start additionally paying the amount of cash saved on account of DDT removal as dividend.
- Holding companies have been granted a deduction (under section 80M) for the dividend income received from their subsidiaries to remove the tax-cascading effect.
- Companies are required to deduct TDS at 10% if dividend paid to unit holder/individual exceeds Rs.5000 under Section 194 of the Income Tax Act.
- The government has proposed an optional new income tax regime (lower income tax rates) for individuals/HUF in the budget 2020. The flip side is that individuals who opt for the lower tax rates will not be able to claim most of the allowances and deductions under the new tax regime. If an individual has business income, once the new tax regime is opted, s/he cannot revert to the old tax regime. However, an individual without business income will have the option to go back to old regime.
- A taxpayer would be required to pay only the amount of the disputed taxes and will get complete waiver of interest and penalty provided s/he pays by 31st March 2020. Those who avail this scheme after 31st March 2020 will have to pay some additional amount. The scheme will remain open till 30th June 2020. Taxpayers in whose cases appeals are pending at any level can benefit from this scheme.
BUDGET at a glance
| Particulars | 2018-2019 Actuals | 2019-2020 BE | 2019-2020 RE | 2020-2021 BE | ||
| 1 | Revenue Receipts | 1552916 | 1962761 | 1850101 | 2020926 | |
| 2 | Tax Revenue (net to centre) | 1317211 | 1649582 | 1504587 | 1635909 | |
| 3 | Non-Tax Revenue | 235705 | 313179 | 345514 | 385017 | |
| 4 | Capital Receipts (5+6+7) | 762197 | 823588 | 848451 | 1021304 | |
| 5 | Recoveries of Loans | 18052 | 14828 | 16605 | 14967 | |
| 6 | Other Receipts | 94727 | 105000 | 65000 | 210000 | |
| 7 | Borrowings and other liabilities | 649418 | 703760 | 766846 | 796337 | |
| 8 | Total Receipts (1+4) | 2315113 | 2786349 | 2698552 | 3042230 | |
| 9 | Total Expenditure (10+13) | 2315113 | 2786349 | 2698552 | 3042230 | |
| 10 | On Revenue Account, of which | 2007399 | 2447780 | 2349645 | 2630145 | |
| 11 | Interest Payments | 582648 | 660471 | 625105 | 708203 | |
| 12 | Grants in Aid for creation of capital assets | 191781 | 207333 | 191737 | 206500 | |
| 13 | On Capital Account | 307714 | 338569 | 348907 | 412085 | |
| 14 | Revenue Deficit (10-1) | 454483 | 485019 | 499544 | 609219 | |
| (2.4) | (2.3) | (2.4) | (2.7) | |||
| 15 | Effective Revenue Deficit (14-12) | 262702 | 277686 | 307807 | 402719 | |
| (1.4) | (1.3) | (1.5) | (1.8) | |||
| 16 | Fiscal Deficit {9-(1+5+6)} | 649418 | 703760 | 766846 | 796337 | |
| (3.4) | (3.3) | (3.8) | (3.5) | |||
| 17 | Primary Deficit (16-11) | 66770 | 43289 | 141741 | 88134 | |
| (0.4) | (0.2) | (0.7) | (0.4) |
Sector Impact:
| Sector | Key Announcements | Impact & key stocks |
| Automobiles | · Raised duties on imported components/CBUs, the duty on CBUs/CKDs/SKDs for buses and electric vehicles has been raised by 5-15% (on base duty of 10-30%)
· Rs.1.70 lakh cr for transport infrastructure in 2020-21. | This will increase component cost for auto OEMs in the near term, though localization initiatives will offset in medium term
Positive for all auto players especially CV manufacturers like Ashok Leyland and Tata Motors |
| Asset Management | · Provides alternate tax computation methodology for individuals | Flows in ELSS (10.8% of equity in FY19) schemes may reduce. |
| Insurance | · LIC IPO to aid disinvestment target of Rs.2.1 lakh cr
· Provides alternate tax computation methodology for individuals · Rs.6950 cr re-capitalization of PSU general insurance companies namely National, Oriental and United India Assurance. | Negative for listed life insurance companies over short-term Forced savings in insurance could decline Expect increased competitive intensity as these PSUs (26.3% market share FY19) will now have additional capital. |
| Banks/NBFCs | · Extension of the time limit to avail the benefits under Section 80EEA (deduction related to affordable housing loans). · Increase in the limit on deposit insurance from Rs 1 lakh to Rs 5 lakhs · Availability of NABARD re-finance to NBFCs and co-operatives which are active in the agricultural credit space through expansion of the re-finance scheme. · Eligibility limit under SARFAESI to be reduced (Asset size limit from Rs 500 cr to Rs 100 cr, Loan size from Rs 1 cr to Rs 50 lakhs). · Proposed sale of balance (47%)GoI holding in the IDBI · Government support for NBFC/ HFC debt, by way of guaranteeing securities floated. | Marginally positive for Banks, NBFCs and HFCs.
Positive for Banks
Positive for AFCs like MMFs and CIFC
Positive for LICHF, REPCO, INDOSTAR and CIFC. Positive for IDBI Positive for NBFCs and HFCs |
| Cement
| · Allocation to PMGSY has been increased 38% YoY to Rs 19500 cr. · Allocation to PMAY (Urban) has been increased 17% YoY to Rs 8000 cr. · Allocation to PMAY (Rural) has been increased 3% YoY to Rs 19500 cr. | Should boost cement demand recovery |
| FMGC | · Allocation of Rs. 2.83 lakh cr for rural development, agri, horticulture, raising agri credit, PM KISAN. Agri and rural budget increased by healthy 13% · Doubling milk processing capacity from 53.5MT to 108MT · Increase in excise duty (NCCD) on cigarette by Rs 0.50/stick for 84mm Rs 0.40/stick for 74mm Rs 0.35/stick for 69mm Rs 0.35/stick for 64mm
· Withdrawal of Customs Duty on Skimmed Milk & certain milk products | These measures would not only increase rural incomes but also improve rural consumer sentiments. Positive for Parag Milk/Heritage foods As per our estimates, tax increase will be ~10% for ITC. Tax increase is sharper on small cigarettes (84mm/74mm/69mm/64mm saw an increase of 5/8/10/13%). At portfolio level, co will require to take price increase of ~7% to pass on this burden. Co will take around 9-10% price hike to support EBIT growth. Positive for ITC, Britannia Nestle etc. |
| Infrastructure/Capital goods
| · The total allocation to Ministry of Road Transport and Highways remains flat YoY at Rs 1.5 lakh cr · The total capital and development expenditure of Railways has been pegged at Rs 1.6 lakh cr- a marginal increase of 3% · Allocation to Pradhan Mantri Gram Sadak Yojana has been increased to Rs 19500 cr vs Rs 14100 cr YoY · 100 new airports will be developed by 2024 to augment UDAN Scheme · Sovereign Wealth Funds to be granted 100% tax exemption on interest, dividend and capital gains in respect of investments made in Infrastructure sector before 31st March 2024, subject to a minimum lock in period of 3 years · Capital outlay on Defence services is pegged at Rs 1.2 lakh cr an increase of 2.8% YoY · 148km Bengaluru Suburban rail transport project at a cost of Rs 18600 cr. · Rs 4500 cr allocation under DDUGJY (against Rs 4100 cr in FY20RE) · Tax holiday on profits earned by developers of affordable housing projects approved by 31st March 2020 extended by one year
· Government to set up 5 new smart cities
| Positive for most Infra companies
Positive for KEC, L&T, Siemens, RVNL, RITES, IRCON, BEML, TWL, Tex Rail, etc. Positive for developers involved in civil infrastructure segment like LT, NCC, ITD, HG Infra & JKIL
Positive for most Infra companies
Big positive for L&T, Defence PSUs viz. GRSE, BEL, BEML, HAL etc
Positive for JKIL, KEC, ITD, Siemens, BEML etc
Positive for contractors in the affordable housing segment like Capacite, PSP Projects, NCC etc. Positive for companies like Schneider Electric Infrastructure, Siemens, KEC International, APL Apollo Tubes, Sterlite Technologies, Asian Paints, Kalpataru Power Transmission
|
| Logistics | · Government to announce national logistics policy shortly · Focus on inland waterways by the government | We await details of the same
This will develop multi-modal transportation |
| Healthcare | · Health spend increased by 6% YoY to Rs 67500 cr, ~2.2% of the total budgeted expenditure in FY21BE · Allocation to PMJAY –Ayushman Bharat is Rs 6400 cr compared to Rs 3300 cr · Proposed to set up viability gap funding for hospitals in the PPP mode where there are no Ayushman empanelled hospitals · Health cess of 5% to be imposed on imports of medical equipment. Shall not be imposed on medical devices which are exempt from basic customs duty |
Positive for Hospitals – Apollo hospitals, Fortis, Narayana Hrudyalaya, HCG |
| Power | · Concessional tax rate for electricity generation companies: In order to attract investment in the power sector, it is proposed to extend the concessional corporate tax rate of 15% provided by the Taxation Laws (Amendment) Act, 2019 to new domestic companies that are engaged in the generation of electricity subject to the condition that they start generating electricity by 31st March, 2023 · Advise to shut thermal plants if they don’t meet emission norms | Positive for capital goods companies viz., BHEL, L&T
|
| Others | · Raising fish production to 200 lakh tn by 2023, Aim to raise fishery exports to Rs. 1 lakh cr by 2025 · Allocation of Rs 4,400 cr for ensuring cleaner air in cities above 10 lakhs
| Positive: Apex Frozen, Avanti Feeds, The Waterbase Ltd, Godrej Agrovet
Positive for companies like Whirlpool, BlueStar, Havells, Honeywell |
Stock markets in 2020 starts off on a volatile note
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’