INSUBCONTINENT EXCLUSIVE:
By Motilal OswalThe Union Budget 2020-21 was announced in the backdrop of an unfavourable economic environment, with real GDP growth
weakening to sub-5 per cent level
As such, there was high expectation from the Budget to reinvigorate the economy by 1) stimulating investment and 2) boosting personal
consumption.
Nevertheless, the fiscal space to stimulate the economy was very limited
Given the constraints, the Finance Minister seems to have done a tightrope walk to meet the key expectations of boosting investment and
personal consumption.
Despite all the constraints, the Finance Minister in some way attempted to address the key demands such as 1) removal
of 20% dividend distribution tax (DDT) and 2) lowering of personal income taxes in line with the corporate tax rate and 3) boosting
investments.
While DDT was completely abolished and made taxable at the hand of recipients at marginal tax rates, the Finance Minister has
introduced an optional simplified tax structure based on income tiers with lower rates for individuals, but without any exemptions
Given the multitude of exemptions available to a salaried person, net benefit to the individual would depend on his utilisation of existing
Hence, benefits seem limited on this front, despite lower tax rate option, while removal of deductions could have implications for financial
intermediary plays.
With an eye on boosting investments, the Finance Minister has allowed sovereign funds a 100 per cent tax exemption on
interest, dividend and capital gains for infrastructure investment made before March, 2024
This seems like a key positive and should help the government in its disinvestment plans for FY21.
Some of the other key announcements were
with regard to i) increase in deposit insurance from Rs 1 lakh to Rs 5 lakh, ii) need to liberalise farm markets, iii) increase in FPI
participation in corporate bonds, iv) increase in Infrastructure spend by 21% YoY and v) customs duty increase in auto and auto ancillaries,
which should benefit domestic manufacturers.
The fiscal slippage for FY20 from budgeted 3.3 per cent to 3.8 per cent was not a surprise,
given the gross revenue shortfall of Rs 3 lakh crore (Rs 1.6 lakh crore direct income tax + Rs 1.3 lakh crore indirect taxes)
In the assumptions for FY21 the disinvestment target of Rs 2.1 lakh crore seems aggressive, given that the actual disinvestment achieved is
far short of revised FY20 disinvestment target of Rs 65,000 crore
While the plan for disinvesting LIC seems a very positive reform, the process could take a long time and completing the same prior to March,
2021 could be a key challenge.
The key misses for the Budget seems to a) total overlooking of the expectations of a TARP-like structure to
address NBFC issue and boosting credit to the unorganized segment, b) No significant policy allocation for Make or Assemble in India and c)
no measures to resolve the real estate stalemate.
Given the constraints, the Finance Minister seemed to have been able to only partially
meet some of the high expectations that the market had
This could imply near-term market volatility for retail investors
However, this should not discourage long-term investors, as India continues to provide significant bottom-up entrepreneurial investment
opportunities, despite the tough macros.
(Motilal Oswal is Managing Director - CEO of Motilal Oswal Financial Services
