Budget 2020-21: Seems to have done a tightrope walk to meet the key expectations of boosting investment and personal consumption
By Motilal Oswal
Budget 2020-21: The Budget was announced in the backdrop of an unfavourable economic environment, with the real GDP growth weakening to sub-5%. As such, there was a high expectation from the Budget to reinvigorate the economy by stimulating investment and 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 tight rope walk, to meet the key expectations of boosting investment and personal consumption.
Despite all the constraints, the FM in some way attempted to address the key demands such as the removal of 20% dividend distribution tax (DDT) and lowering personal taxes in line with corporate tax rate and boosting investments. While DDT was completely abolished and made taxable at the hand of recipients at marginal tax rates, FM 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, the net benefit to the individual would depend on his utilisation of existing deductions. Hence, benefits seem limited on this front despite lower tax rate in this option, while removal of deductions could have implications for financial intermediate plays. With an eye to boost investments, FM has allowed sovereign funds a 100% tax exemption on interest, dividend and capital gains for investment made before March 2024. This seems like a key positive and should help the disinvestment plans for FY21.
Some of the other key announcements were increase in deposit insurance from Rs 1lakh to Rs 5lakh, need to liberalise farm markets, increase in FPI participation in corporate bonds, increase in infrastructure spend by 21% y-o-y and the custom duty rise in auto and auto ancillaries, which should benefit domestic manufacturers.
The fiscal slippage for FY20 from budgeted 3.3% to 3.8% was not a surprise, given gross revenue shortfall of Rs 3 lakh crore (Rs 1.6 lakh crore direct income tax + Rs 1.3lakh 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 plans 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.
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The key misses for the Budget seems to be no TARP-like structure to address the NBFC issue and boost credit in the unorganised segment, no significant policy allocation for Make or Assemble in India and no measures to resolve the real estate stalemate.
Given the constraints, the FM seems to have been able to only partially meet some of the high expectations the market had. This could imply a near-term market volatility for the retail investors. However, this should not discourage the long-term investors as the country continues to provide significant bottom up entrepreneurial investment opportunities, despite tough macros.
The writer is MD & CEO, Motilal Oswal Financial Services