Investment Shastra

Union Budget 2020: Overview

Union Budget 2020 Overview

Union Budget 2020 was full of hopes for some blockbuster surprises from the kitty of honourable finance minister.

The market seemed to have a lot of expectations from this budget. However, the government has limited fiscal bandwidth.

It can promote corporates to incur Capex and create a fertile business environment but can’t fill the gap of low Capex.

We are of opinion that steps taken by the government like corporate tax cuts along with GST roll-outAyushman BharatAawas Yojana, MSP increase, DBT transfer, etc are major reforms that are yet to show results at its fullest and will see its ripple effects in company’s earnings.

When the implementation of these plans reaches all beneficiaries, it will be lead to better outcomes overall taking the economy to its normal growth pace.

Key highlights from the union budget 2020 & our view:

  1. Scrapping of DDT: A dividend distribution tax for companies was introduced in the last budget and the same was not taken very positively by the markets.
    Considering the current slowdown in the economy, this move can attract more foreign capital. Positive for financial markets.
  2. Choices for tax slabs: Tax slabs for the individual tax payment were halved with the condition to no exemption. The choice to shift to a new tax regime lies with the individual taxpayer.
    Although the expectation was that tax slabs would be reduced throughout, this move can still be a positive as it provides flexibility.
    However, we do not believe that this would make a major difference in the spending capacity of the consumer as the net benefit (from the choices in tax regime) is not impactful.
  3. Audit threshold for MSME raised to ₹5 crores from ₹1 crore. A major portion of the Indian GDP (25% in services & 33% in manufacturing) is contributed by MSME.
    Considering the current liquidity crunch that has severely affected the MSME section, this laxity in regulation would be a major positive.
  4. Steps to further deepen Debt and Gold markets. Debt ETF of CPSEs to be introduced. This would increase the liquidity of debt instruments of PSU companies in an otherwise dormant bond market.
    Bullion exchange for gold trade by global players. This would lead to better price discovery of physical gold in local markets.
  5. Increase in Divestment plan: Government plans to sell stake in LIC through IPO. And to sell stake in IDBI Bank to private investors. This will keep PSU stock prices under check.
    This opens up more room for divestment as the government can take its own stake below 51% even if it is a strategically important PSU.
    This led to sell-off in PSU stocks as more stocks will be dumped in the market by the government. We believe this can be seen as an opportunity by long term investors as the stocks will be available cheap.
    Valuations keep on rising with growth in underlying business; special situations like these unrelated to underlying business create opportunities for long term investors.
  6. Deposit insurance coverage increased to ₹5 lakh from the existing ₹1 lakh. Positive for deposit holders considering the frequency of cases of misconduct in the banking industry.
  7. Encouragement to the manufacturing sector; Encouragement to manufacture mobile phones, electronic equipment and semiconductor packaging to be introduced to encourage the private sector to build Data Centre Parks throughout the country.
    Customs duty on autos and auto parts raised by up to 10%. Positive, as it would be a push to Make in India and generate employment.
  8. Increase infra spending as ₹100 lakh crore will be invested in infrastructure over the next 5 years and to develop 100 more airports by 2024.
    This would provide a major push to increase employment in the country.
  9. Initiative to Go Green: Firms operating old thermal power plants advised to shut units if emission norms not met. And to allocate ₹4,400 crores for clean air incentives in cities with over 1 million people.
    This might not be a major positive for the businesses, but a sustainable long term step. Also, it is in sync with the government’s action towards the initiative by the UN.
  10. Promote ‘Study in India’ initiative: 150 higher education institutions to offer apprenticeship diplomas by March 2021 and soon to announce a new education policy.
    This step is to attract students from Africa and Asia and promote India as a destination for higher education.
    A positive, as this would increase foreign inflow and domestic consumption.
  11. Initiatives for Railways: Plan more Tejas like trains to connect tourist locations. To develop solar capacity in Indian railways and announcement of the launch of the Bengaluru Suburban Transportation project.
    This move would increase rail connectivity and efficiency.
  12. Initiatives for Agri sector: Indian Railways will set up Kisan Rail in public-private partnership (PPP) model for the cold supply chain to transport perishable goods.
    Nabard refinance scheme will be expanded and NBFC’s & co-operatives to be more active in credit. Expanding ‘PM Kusum Scheme’ to 20 lakh farmers to set up solar pumps.

    But, investors seem to have forgotten two key measures already introduced by the FM before the budget (which ideally would have been part of the budget, if the economy wasn’t ailing).

  13. Corporate tax cut: In September 2019, India’s FM announced a major step for boosting the ailing Indian economy. Corporate tax rates had been reduced from 30% to 22%, as long as the companies don’t apply for other incentives or exemptions. Also, new manufacturing firms incorporated after October 2019 will be taxed at 15% instead of 25%, as long as they start production before March 2023. This is a major positive for the Indian Economy in the long run.
  14. Real Estate AIF fund: On November 6, 2019, the government announced the creation of Rs 25,000- crore alternative investment fund (AIF) AIF for affordable and mid-sized housing to aid the troubled sector. This emergency fund is seen as “critically important” as it would benefit not only a developer but also homebuyers. And will go a long way in helping the government’s plan of boosting the economy.

The government has managed to acknowledge the on-going crisis in different sectors of the economy. It needs to be seen how fruitful the measures prove to be in the coming months.

Overall, we believe that Union Budget 2020-21 was not a blockbuster budget however, after considering the initiatives, it was an attempt from the government to bring back stability in the current stressed economic environment.

Special measures focused on most stressed pockets like the rural economy, financial markets, manufacturing, and infra might create an impact coming forward.

Given the current slowdown situation, the budget was an attempt to put the economy at its normal pace. However, the expectations were quite high.

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Rushikesh Bhise

Rushikesh Bhise

Rushikesh Bhise, a CFA level 3 candidate, Post Graduate in Commerce from Pune & a CA-Inter. He is a finance enthusiast and has worked in the Investment Banking domain. He has a keen interest in analyzing the business of the companies and enjoys reading finance literature. His hobbies include reading books, playing Piano and practicing Martial Art.

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