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'Government likely to announce fiscal deficit target of 3.4-3.6% of GDP for FY20'

We broadly expect the government to focus on two key themes in its second term – i.e. reviving economic growth and to improve ease of living.

July 03, 2019 / 11:31 AM IST

We expect the government to announce a fiscal deficit target of 3.4-3.6 percent of GDP for FY20, and the government may outline a fiscal consolidation roadmap in its second term, Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q: What are your expectations from Modi 2.0 Budget? 

A: We broadly expect the government to focus on two key themes in its second term—revival of economic growth and improve ease of living.

The Budget may have various measures/announcements around these. Some of the expectations are:

• Focus on infrastructure and reviving the capex and investment cycle.
• Disinvestment, privatisation or merger of public sector enterprises and undertakings, particularly in banking, general insurance and airline sectors.
• More schemes and initiatives, or ramp up of existing welfare schemes, to help aid the distress in the agriculture/rural sector.

• Taxation: There is scope for the government to widen its coverage to more companies and gradually cut corporate tax rate considering the current stress in certain corporates and recent economic slowdown.

Presently, companies with annual turnover up to Rs 250 crore are subject to a lower corporate tax rate of 25 percent compared to 30 percent for other companies. However, the government may remove some existing tax exemptions and there is a possibility for tweaks in the capital gains tax structure for equities.

Q: Will the government retain fiscal deficit target at 3.4 percent of GDP for FY20?

A: We expect the government to announce a fiscal deficit target of 3.4-3.6 percent of GDP for FY20. It is worth noting that the government was able to achieve its revised fiscal deficit target of 3.4 percent of GDP for FY19, despite a 1 percent of GDP or Rs 1,67,400 crore shortfalls in net tax revenue collections from the revised estimate.

This was primarily helped by curtailing expenditure and by surpassing non-tax revenue, disinvestment, etc. The government may also outline a fiscal consolidation roadmap in its second term.

Q: Do you expect financial sector reforms such as privatisation of some PSU banks, capital infusion, etc. in the upcoming Budget?

A: Yes, there are talks of privatisation in the financial sector, and there could be some announcements regarding the same in the upcoming Budget or over the course of the year.

The government has already provided recapitalisation to some PSU banks and gradually seems to be going in for consolidation within the sector. We feel that consolidation/merger and privatisation may help to bring more efficiency to PSUs over time, and also help to provide more fiscal space to the government (from stake sale), going forward.

Q: Do you expect the government to give investment stimulus to boost growth in Budget 2019?

A: One of the key agendas of the government is to help revive the capex/investment cycle, and increase the investment rate (of Gross Fixed Capital Formation) as a percentage of GDP from 32 percent in FY19 (presently) to around 36 percent by FY23.

For this to happen, a greater push from the government towards capital/public expenditure is required over the coming years.

Capital expenditure as a percentage of GDP has reduced over the past few years—from ~1.9 percent of GDP in FY17 to 1.6 percent of GDP in FY20 (interim budget estimate). While the share of revenue expenditure (as a percentage of GDP) has increased—from 11.1 percent of GDP in FY17 to 11.7 percent of GDP in FY20 (interim budget estimate).

However, the government has increased plan outlay expenditure to some key ministries like railways, roads and highways, etc. over the past few years.

It is also important to help revive private investment, which has been fledgeling for a while, and the government needs to provide an impetus for that.

Q: Amid the recent fall we have seen in markets, where are the pockets of opportunities? 

A: We still prefer largecaps but are also seeing selective bottom-up opportunities in midcaps, where valuations have come down. We recommend investors to continue to invest systematically into equities.

With regards to flows, AMFI data shows that there have been inflows into mid and smallcap equity funds over the past couple of months.

With the correction in the mid and small-cap space, the valuation premium of the Nifty Midcap index to the headline Nifty 50 index has pretty much closed, compared to a significant valuation premium at the start of the year 2018.

Historically, midcaps have traded at a discount to largecaps over the long-term. Also, some money has lately been moving to arbitrage funds, given their tax advantage (treated as equity-oriented funds from a taxation perspective) and the volatility in debt markets/funds.

In the debt markets/fund’s space, due to certain credit events, we have seen some outflows from credit risk funds over the past couple of months, and inflows into higher credit quality fund categories.

We could also see some shift of money back to bank deposits, if the credit risk remains elevated, although it should be noted that bank deposit rates have come down gradually.

Q: What are the top sectors that investors can look at given the current situation?

A: With the expected focus on capex/infra themes in the upcoming Budget, we continue to be positive on the capital goods sector. We feel that the capex cycle has broadly bottomed, and expect a gradual recovery in the same.

Capacity utilisation has also reached optimum levels (now slightly above the long term average), and that should help in reviving new investments.

Other sectors that we are positive on are private financials (with a large part of the NPA cycle behind and credit growth picking up), pharma is also approaching attractive levels (due to a significant correction in share prices, and stabilising pricing in the US).

Cement is also likely beneficiary of accelerated infrastructure spending, with healthy volume growth and recent price hikes.

For the consumer staples sector, given the valuation multiples and deceleration in growth, we are a bit cautious.

IT services have already performed well last year on the back of currency depreciation, so gains may be limited going forward. The sectors that we are underweight on are auto, metals, utilities, and telecom, and we are looking for appropriate opportunities in this segment, when/if the opportune time arises.

Q: What are your expectations from the June quarter numbers from India Inc.?

A: Overall, June quarter earnings are expected to be quiet, although we expect a stronger recovery in H2FY20.

From a sector perspective, we expect earnings growth to be majorly contributed by private financials during the quarter, and also to some extent by the capital goods sector. Consumption and IT sector earnings are expected to be subdued.

Disclaimer: The views and investment tips expressed by investment experts on are their own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Jul 3, 2019 11:31 am