Near-term market volatility likely over unmet expectations
Given the constraints, the FM seemed to have been able to only partially meet some of the high expectations the market had.
The Union Budget 2020-21 was announced in the backdrop of unfavourable economic environment, with real GDP growth weakening to sub-5 per cent. 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 tight-rope walk, to meet the key expectations of boosting investment and consumption.
Despite all the constraints, the FM in some way attempted to address the key demands such as 1) removal of 20 per cent dividend distribution tax (DDT) and 2) lowering personal taxes in line with corporate tax rate and 3) 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, the FM has allowed sovereign funds a 100 per cent tax exemption on interest, dividend and capital gains for investment made before March 2024. This seems like a key positive and should help government in its disinvestment plans for FY21.
The key misses for the budget seems to a) there were expectations of TARP like structure to address the NBFC issue and boost credit in the unorganised 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 FM seemed to have been able to only partially meet some of the high expectations the market had. This could imply near-term market volatility for the retail investors. However, this should not discourage the long-term investors as India continues to provide significant bottom up entrepreneurial investment opportunities.
— The author is, MD & CEO, Motilal Oswal Financial Services.