04 Feb 2020 17:57 IST

Budget 2020: The macro worries still remain

Given the higher fiscal deficit target, the roadmap for government borrowing is still unclear

The equity market’s disappointment in Budget 2020 appears to be an overreaction, but there are sentimental issues with regard to the selling pressures gaining momentum across the board. Further, it is not clear how the removal of dividend distribution tax (DDT) will ease the tax burden of investors as they may well end up paying more income-tax.

While small savings will be hit given the option to shift to the new income tax slabs, there is no clarity on the net flows into the equity market with the net reduction in income tax. The market was eagerly hoping for a correction in long term capital gains tax (LTCG), which the Finance Minister has silently ignored. The government passes on the hard choice to the middle-class in so far as their tax savings versus direct tax savings from the income.

Most importantly, the Bank Nifty fell because of the additional burden on the banking sector following the five-fold hike in deposit insurance costs up to ₹5 lakh per depositor. There are no clear policy measures as far as the banking sector is concerned, except that they are encouraged to raise borrowing from the market for additional capitalisation. The disinvestment of Life Insurance Corporation (LIC) to the extent of 10 per cent will bring substantial money for the government, given its valuation, which stands at over ₹29 lakh crore. This, along with the dilution of government’s remaining share in IDBI Bank and the sale of Air India, will add to the government’s kitty.

Leaving it to the market

The macro worries still remain, given that fiscal deficit targets were raised to 3.5 per cent of GDP along with a lower target of nominal GDP growth target of 10 per cent for the FY21, and the unclear roadmap for the higher borrowing programme of the government. Inflation is already catching up and it’s unlikely that interest rates will be lowered further. The RBI’s Monetary Policy Committee (MPC) is expected to keep the repo rate steady.

The Budget has not addressed the present demand slackening that has contributed to the growth slowdown, and particularly rural consumption, which might delay the revival of the economy in the near term. There is not much structural reform agenda in the Budget, though there are no freebies and hike in unproductive expenditure either. The Finance Minister leaves the challenges of growth revival to the market as the factors that would hinder would be higher interest rates going forward, unclear infrastructure financing plan, and specific measures to enhance credit flows from the banks and the NBFC sector.

There is considerable focus on attracting foreign portfolio investment flows — raising their share from 9 per cent to 15 per cent, opening up government securities to NRIs and, most importantly, the incentives for the sovereign wealth funds (SWFs) in financing infrastructure. There is definitely scope for growth of the corporate bond market, by way of FPI inflows and particularly into the companies that would benefit from the abolition of dividend distribution taxes.


(The writer is Professor of Finance and Economics at XLRI – Xavier School of Management.)