Notwithstanding the market reaction and super-rich people imagining their pocket getting lighter, the budget speech had fair bits of every shade
When Finance Minister Nirmala Sitharaman ended her nearly 10,500-word budget speech on July 5, not all faces were cheering. The market snubbed her as Sensex crashed nearly 400 points and some analysts on TV criticised the proposal of increased surcharges on incomes of super-rich people.
However, notwithstanding the market reaction and super-rich people imagining their pocket getting lighter, the budget speech had fair bits of every shade.
Banks and NBFCs got a booster, homebuyers got further relief and farmers got enough to smile. Here are budget announcements that may be either good, bad or ugly for markets:
Fiscal deficit: The revised fiscal and revenue deficits for FY20 at 3.3 percent of GDP and 2.3 percent of GDP, respectively, were better than what the Street had expected.
"The Finance Minister has done well to target the fiscal deficit 10 basis points lower than what was estimated in the interim budget. This comes in the backdrop of required momentum to the economy that has been facing several headwinds," Ranen Banerjee, Leader - Public Finance and Economics, PwC India said.PSU recapitalisation plan: PSU bank stocks surged after the Finance Minister announced a package of about Rs 70,000 crore. The Street was working with recapitalisation package of about Rs 40,000 crore, which was far less than what the FM presented.
“Higher package of Rs 70,000 crore suggests that the government is providing growth capital to PSU banks to improve credit availability. That is a positive sign,” Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management told Moneycontrol.
Infrastructure spending push: Government has announced its intention to invest Rs 100 lakh crore in infrastructure over the next five years. The move will help the government to create jobs in the economy and boost rural consumption.
“Infrastructure push and rural development continue to remain the government’s priorities, as highlighted in the budget. Initiatives such as affordable housing, upgradation, and expansion of roads through PM Gram Sadak Yojana, promotion of zero budget farming, extension of pension benefit to retail traders and lower corporate tax, among others should help power the government’s pro-growth agenda,” Ashwani Bhatia, MD & CEO, SBI Mutual Fund told Moneycontrol.
Reduction of STT: The proposal to restrict the STT to the difference between settlement and strike price will make equity options traders happy as they will pay less tax and allow them to lock-in to the gains up to the settlement price of the option.
Corporate Tax: The move to extend the benefit of 25 percent corporate tax to companies with turnover of up to Rs 400 crore is positive but falls short of the market expectation up to 1,000 crore.
“Although 99.3 percent of companies will be in the range but compared to corporate tax levels in other economies, the market expected India to follow,” Romesh Tiwari, Head of Research, CapitalAim.
Boost to FDI/FPI investment: In order to boost FDI investments, the government proposed 100 percent Foreign Direct Investment (FDI) for insurance intermediaries. Government said it might consider allowing more FDI in aviation, media (animation, AVGC) and insurance sectors in consultation with all stakeholders.
The government is also considering to increase the statutory limit for FPI investment in a company from 24 percent to sectoral foreign investment limit.
Liquidity in the NBFC: In order to revive the NBFC sector, the government proposed banks to buy high-rated pooled assets of financially sound NBFCs, amounting to Rs 1 lakh crore for FY20. The government said it will provide one time six months' partial credit guarantee to PSU banks for first loss of up to 10 percent.
Divestment: FM fixed divestment target for the current fiscal at Rs 1.05 lakh crore by undertaking the strategic sale of PSUs. Also, the government is likely to consider consolidation of PSUs in the non-financial space.BAD:
Electrical vehicles – boon or bane for the auto sector: The government envisions India as a global hub of manufacturing of electric vehicles. Government has already moved GST council to lower the GST rate on electric vehicles from 12 percent to 5 percent.
To make electric vehicle affordable to consumers, the government will provide an additional income tax deduction of 1.5 lakh on the interest paid on loans taken to purchase electric vehicles.
This comes in the backdrop of declining sales of traditional auto companies. “They will have to shell out more and put fresh capex in order to roll out electric vehicles as the Budget evidently took steps to boost EV plus the proposed development of new metros will further dent demand for the autos especially the passenger vehicle segment. This will be a huge negative for auto companies,” Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote told Moneycontrol.
Raising minimum shareholding: Increase in public shareholding from 25 percent to 35 percent for listed companies could lead to the delisting of many MNC firms. The proposal to raise public stake in listed companies is desirable but will face practical constraints, suggest experts.
“Raising minimum public shareholding norms will be negative for several MNC companies who run a closely managed business and reduce the 'skin in the game' factor for the promoters of mid and small cap companies. For markets, it may suck the liquidity by making more floating stocks in secondary markets,” said Tiwari of CapitalAim.
Increased duty on petrol and metals: The Finance Minister proposed to increase special additional excise duty and road and infrastructure cess each by one rupee a litre on petrol and diesel. She also proposed to increase customs duty on gold and other precious metals from 10 percent to 12.5 percent.
Custom duty on AC raised: Jayant Manglik said that custom duty on indoor and outdoor split ACs was hiked to 20 percent from current 10 percent. This could negatively impact Voltas, Blue Star, IFB Industries and Whirlpool.
Tax on the super-rich: Finance Minister proposed to enhance surcharge on individuals having taxable income from Rs 2 crore to Rs 5 crore and Rs 5 crore and above so that effective tax rates for these two categories would increase around 3 percent and 7 percent, respectively.
“The highlight of the budget is the higher tax on the super-rich. From the perspective of resource mobilisation and social justice, this cannot be faulted. But, it has to be acknowledged that the effective tax rising to 42 percent on the super-rich is very sharp,” VK Vijayakumar Chief Investment Strategist at Geojit Financial Services told Moneycontrol.