With the Budget set to be presented soon, Harsha Upadhyaya, CIO-Equity, Kotak Mutual Fund, spoke to Moneycontrol’s Jash Kriplani, on his expectations from the annual exercise. In his assessment, spends on infrastructure and healthcare are likely to increase. He highlights the tight fiscal situation of the government and the limited ability to reduce taxes at this point in time.
What are your expectations from the upcoming Budget?
This has been a challenging year in terms of revenue collections for the government. In the Budget, we would need to look at how the government will continue to focus on growth despite having revenue constraints. The government is expected to focus on both tax and non-tax revenues, to improve its collections. As is always the case ahead of any Budget, people are fearing higher taxes. There is already some chatter on the possibility of a COVID-19 cess and also an increase in long-term capital gains tax (LTCG). Any increase in tax in any form will be taken as a negative. Higher non-tax revenues will be required to compensate for lower collections from income tax. This year has not been great in terms of disinvestment revenues. All of this will get pushed to the next financial year. Also, there could be some more addition to the disinvestment target for the next financial year.
The finance minister has already hinted that her focus would be on growth and won’t be too worried about fiscal deficit…
This will depend on what number the government is targeting for 2021-2022 in terms of fiscal deficit and how much more it can allocate towards productive segments. I don’t think there will be any sector-specific policy focus, especially in the Budget. For many years now, the government has not used the Budget to give stimulus to any particular sector. It has been more focused on the overall economy or the overall corporate sector. If at all, there could be support for agriculture or MSME. We have to wait and see what this could be both in terms of quantum and its impact on the overall situation. We will also possibly see higher healthcare spending. For years, this has needed higher allocation. But, it never gained momentum, given the constraints. However, we can expect higher expenditure on primary healthcare in light of the impact of COVID-19.
Could the Budget cut duties or other levies to give fillip to consumer spending?
The ability of the government to cut taxes at this point of time is limited. If there are no increases in taxes, one should be happy. I don’t think we can see any cut in taxes. This won’t be the base assumption. Even if there be a willingness to support discretionary consumption, I don’t think the government has the flexibility to do that.
Which sectors are likely to benefit from government spending?
On the expenditure side, it will be more of the same. Some of the policies that this government has followed in the last few years will focus on agriculture, rural population, affordable housing. These are some of the things that will continue to get policy focus. There is also a great need for continuation in the implementation of large infrastructure projects, as funds that were earmarked for infrastructure spending have not been fully deployed due to challenges we saw this financial year. Many projects have also been stalled. So, people would like to see what kind of infrastructure spending the government can undertake. This will help in the revival of the overall investment cycle, sustenance of markets and the economy.
Can we expect any large big-bang reforms in the Budget?
If you look at Budgets over the past several years, they have been more of statement of accounts rather than platforms for policy initiatives. Such initiatives have been taken outside the Budget. We have seen several monetary and fiscal measures taken outside of the Budget. For example, the large reform on production-linked incentives was also announced outside the Budget. So, Budget is becoming more of an accounting exercise, rather than anything to do with medium to long-term policy-making.
What is your outlook for the economy and equity markets? The economy is clearly seeing improvement week-on-week and month-on-month. But, the question is: how much of that has already been discounted by the markets? Valuations have moved up quite significantly in the recent past. One can’t say that everything is only because of the fundamental improvements. We have also seen high-levels of liquidity coming into the stock markets in the last 3-4 months. Along with fundamentals, liquidity has also pushed the market valuations to current levels. And there are a couple of events in front of us -- corporate earnings and the Budget. These events, along with liquidity, could decide the course of the markets over the very short term. One should expect higher volatility at higher valuation levels. For any reason, if a correction comes through, the choppiness in markets will impact all participants. At these valuations, and given that there has not been any large correction since markets started to move up from the March lows, you should be careful in terms of chasing the momentum.
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