Budget 2020 – Watchful Event

What to expect?

Honorable FM Nirmala Sitharaman will present her 2nd Union budget on 1st Feb 2020. As usual lot of expectations & in optimism, markets are showing volatility. The majority think that budget could create an overall positive tone, but there are various key points that are crafting challenging mathematics for the government.

Some key points are as follows: 

1. GDP & Consumption Slowdown 

India’s GDP growth is still under pressure & consumption witnessed slowdown.

Low GDP number of 5% (latest reported Quarterly GDP) is many driven by sluggish manufacturing (Oct IIP data was worst since 2015), low spending in infrastructure & capital goods, while poorer domestic consumption demand in economy seen in both urban & rural areas was majorly due to weaker job creation. The jobless rate climbed to 6.1% the highest in the last 45 years.

2. Government Spending

Government spending is below forecasts & delayed GST compensation transfer to states has added pain in the economy. As states spend more than 60% of total government expenditure.

3. Disinvestment target

GOI budgeted disinvestment target was at Rs.1.05 Trillion, but as per govt. data disinvestment till March end is expected to be in between Rs.0.4-0.5 Trillion. BPCL ,Concor & Air India sale is still under pipelines.  

4. AGR Payment

AGR payments through telecom sector can act as a savior. As telecom sector owe approx. Rs.90,000 Cr to the Department of Telecom. This can provide a buffer and some relief to the government.

Considering above mentioned maths, we believe FM will focus on revival of both investment & consumption with keeping fiscal deficit in mind.   

Below are some measures in fiscal policy/budget we expect that can help to restore the growth story of the Indian economy which FM can take into consideration :

1. Taxation Measures :

We can see relief in both the Direct cum Indirect tax part.

# Direct Tax – The key expectation from the Budget is that of increasing the threshold limit for the minimum amount not chargeable to tax, from INR 250,000 to INR 500,000. 

# Increase in contribution limit under 80CCD

# DDT (Dividend Distribution Tax) is expected to withdraw and can be seen chargeable in individual hands.

# LTCG (Long term capital gain) Tax, Government might remove LTCG on equity holding more than 2 years.

2. Sector Specific Measures :

While there is no guarantee on whether the government will announce any deduction in personal income tax, markets expect the budget is likely to focus on sector-specific measures to address challenges as sector-specific boosters are necessary to revive overall demand growth.

Automobile & Consumer Durables :
GST reduction can be seen in both Automobile (from 28% to 18%) & consumer durables sector (From 15-16% to 8%).
 
Real Estate :

The real estate sector which contributes almost 9% to Indian GDP is struggling with a huge pile of unsold inventory in recent years, expects enormous benefits from the finance minister. Implementation of alternative investment funds & relief in taxes for buying properties will help sector to fight credit crunch.

Banking & NBFC :
Banking and the NBFC is one of the prime sources of funding for major industries. While focusing on the health of the financial institutions it is also important to have sufficient liquidity. The government may bring some action for getting liquidity into the system by purchasing assets from NBFC similar to US TRAP initiative.

Insurance :
Government may consider some measures to increase the penetration of insurance. Increase in tax benefit on health insurance under section 80D can be on cards.