Focus on farm sector and improving productivity and efficiency

Equity indices saw the biggest intraday plunge in 5 years post the budget. The markets felt let down as the budget was devoid of any major big bang reforms to stimulate the economy. 

The budget seemed to focus more on enhancing productivity and efficiency in the economy (For example, digital refunds to exporters, mapping and geotagging of warehouses to improve supply chain efficiency, carrying out governance reforms in Public Sector Banks) 

The key focus area was agriculture and allied activities. The FM listed 16 action points for the farm sector. However there too there was no increase in allocation under Direct Benefit Transfer or PM Kisan. 

Rs 22000cr was allocated under the National Infrastructure Pipeline (NIP) but no concrete measures were announced to engage the private sector in infrastructure projects.

Turnover threshold for audit of MSMEs has been increased to 5cr. New export credit scheme for exporters called NIRVIK (Niryat Rin Vikas Yojana) has been introduced under which exporters would get higher insurance cover at a lower premium. This is intended to facilitate credit flow to the export sector. 

FY20 fiscal deficit at 3.8%, FY 21 gross borrowing at 7.8 lakh cr and fiscal deficit at 3.5% of GDP is in line with what the markets were pricing in. Therefore the bond markets may not be as unhappy with the budget as the equity market. 10% nominal GDP growth assumption for budgeted revenue estimates seems reasonable. Increase in FPI limit in corporate bonds to 15% from 9%, allowing NRIs to participate in Gsecs, cut in withholding tax on overseas listed corporate bond issuances and a debt ETF for Government securities (along the lines of recently launched CPSE ETF) are intended to deepen the Bond markets. DDT has been scrapped. The dividends would now be taxed in the hands of individual investors at their respective marginal tax rate. No change in LTCG and no increase in FPI limits in equities to respective sectoral FDI limits also would not have gone down well with equity markets. 

Given the fiscal constraints, there really was not much scope for big dole outs and sops. In that sense it was a fairly prudent budget. The Government would be keen to wait another year to see how the GST stabilizes. The government would be hoping that with gradual revival in economic activity tax buoyancy would increase and that compliance would improve further. 

With Coronavirus fears dampening global risk sentiment and given the negative reaction of equity markets to the budget, we see the Rupee opening weaker on Monday, around 71.60 compared to previous close of 71.35. Chinese markets would reopen after the Lunar New Year holiday. Shanghai composite would open gap down and that could further dampen risk sentiment in Asia session.