Several media reports have been indicating of late that the government is likely to make some bold announcements in the coming Budget to prop up the economy.
Equity benchmark Sensex hit a fresh record high of 42,063.93 in intraday trade on January 17 as the optimism around the upcoming Budget and ongoing December quarter earnings season continued underpinning the market.
Several media reports have been indicating that the government is likely to make some bold announcements in the coming Budget to prop up the economy. On the quarterly earnings front, the numbers have been mixed so far but the expectations are high from some private sector lenders.
The optimism around the Budget may be misplaced, but analysts and market experts are of the view that the earnings will keep the hopes intact.
"The third quarter December ended 2019 quarterly earnings have begun on a healthy note. Therefore, the chances of disappointment from corporate earnings seem a little less," said Naveen Kulkarni, Head of Research, Reliance Securities.
Kulkarni, however, is of the view that historically, Union Budgets mostly have been a non-event so the chances of disappointment are high. Government’s ability to balance the fiscal while doling benefits for growth is going to be a huge challenge.
Rusmik Oza, Senior VP and Head of Fundamental Research-PCG at Kotak Securities expects earnings of Nifty50 to increase by 21 percent in Q3FY20 on year-on-year (YoY) basis, thanks to the steep improvement in BFSI sector.
"The low base of December 2018 earnings and reduction in corporate tax rate cut may help companies report better numbers on a YoY basis. We expect double-digit earnings growth for most sectors except for media, metals and mining and transportation sectors," Oza said.
Oza, too, is sceptical that the Budget will be a big booster for the market.
"We feel the Budget can disappoint investors. Too many expectations are built on the Budget which is not realistic, considering the lower revenue collection and higher fiscal deficit. There could be a big miss in the disinvestment target which will put further pressure on the fiscal deficit," Oza said.
With the economy in deep stress, hopes from the upcoming Budget has grown stronger and it will be a measure of government’s intent to get the economic momentum back on track.
The market is widely expecting the government to announce policies that support growth revival and some of the steps expect include lower Personal income tax rates, removing long term capital gains (LTCG) tax and sector-specific import duty tweaks for promoting domestic manufacturing.
However, experts point out that the government will find it difficult to go for tweaks in taxes in the face of a widening fiscal deficit.
The fiscal deficit is likely to breach the budgeted target by 20-30 bps, coming in at 3.5 percent-3.6 percent of GDP.
Fiscal balance is expected to be weighed down by lower direct, indirect and GST tax collections which translate in a shortfall of roughly Rs 3 lakh crore. In addition, lower than budgeted nominal GDP will also be a pressure point, brokerages said.
Overall, there are chances that the Budget 2020 may not pan out on the expected lines, considering the revenue squeeze.
"FY21 Union Budget is unlikely to mark a departure from past budgets. We expect the government to consolidate fiscal deficit to 3.4 percent of GDP in FY21 with a gross borrowing estimate of Rs 7.7 lakh crore in FY21," said HDFC Bank in a report.
The bank, however, added there could be minor tweaks to the personal income tax slabs but the focus could be on higher allocation for DBT schemes. The amount of recap for banks could be lower in FY21 as the financial health of banks improve.
What steps the government takes or what measures are announced is anybody's guess at this juncture. Market analysts and experts suggest having a long-term look at an entity as a short-term approach is fraught with an increased risk of underperformance."Going into the Budget, hopes remain high with the way PM Narendra Modi himself is overseeing the demand of the industry at large and the dire situation the economy is in at this point. Q3 results could be a mixed bag. We think a very short-term approach to the market is fraught with an increased risk of underperformance in investing and also higher volatility in stock price and we end up speculating with uncertainty. With a very short-term orientation into equity as an asset class, we tend to behave in a fashion akin to buying a lottery ticket. The single greatest edge an investor can have is a long-term orientation," said Paras Bothra, President - Equity Research at Ashika Stock Broking.
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