Formidable Budget challenges

Finance Minister Nirmala Sitharaman faces considerable economic challenges today. GDP growth has decelerated to an 18-quarter low, with no uptick in private investments. The government needs to adopt policies and mechanisms to boost private investment and foreign fund flows.

Consumption trends across urban and rural areas indicate a substantial slowdown, which is evident in sagging demand, high inventory levels, production cuts in the auto sector and low volume growth in the FMCG sector. 

While welfare schemes are expected to increase consumption, the tax-paying middle class would definitely expect something in their hand. 

The government’s ability to spend money is limited, with FY19 fiscal deficit standing at 3.4%, which could repeat itself in FY20. However, infrastructure spends to build roads, highways and airports are unavoidable. 

GST collections are yet to stabilise with collections for May pegged at around Rs 1 lakh crore, much below the budgeted estimate. This leaves less scope for tinkering with GST rates or lowering of targets, which could otherwise severely dent indirect tax revenues. 

Trade issues between other countries, as well as those involving India, are expected to strain export-oriented companies in lieu of protectionist measures. The government needs to adopt new policies in the light of changing trade dynamics, to benefit and support Indian companies. Infusion of additional capital and further consolidation among PSU banks is also a priority.

Additionally, implementation of the ruling party manifesto would lead to an increase in subsidies and expenditure for the government. The Prime Minister Kisan Yojana would require a further allocation of Rs 12,000 crore in addition to the earlier estimated Rs 75,000 crore, with similar funding needs for implementation of other welfare schemes.

In light of these challenges, the finance minister would be walking a tight rope to balance fiscal deficit and spending, with strong focus on higher tax revenues, a larger divestment portfolio and windfall from the RBI (based on the Bimal Jalan Panel recommendations) to support numerous welfare schemes and reduce government borrowing from the market. 

Any measures to uplift the economy would surely be helpful while companies’ expectations of a reduction in corporate tax might not be entertained.

The options are considerably less for the government to loosen its purse strings especially in the first year, post a fresh and overwhelming mandate returning them to power.

After a volatile year between 2018 and 2019 Budgets, where more than 75% of BSE All Cap Index gave negative returns, the stock market has shown a little life and colour over the last couple of months with equity fund flows seeing a minor rise, accompanied by retail investor participation. Any measures to boost investor sentiment would be greeted with a cheer.

These could include, reducing LTCG tax arising from the sale of equity shares (without indexation benefit) from the current 10% to a level of 5%. It would help to increase LTCG exemption gain from the current Rs 100,000 to Rs 200,000 and above. In addition, it would be worthwhile to remove the current 10% LTCG tax on equity mutual funds.

Alternately, any move to increase the time period of LTCG tax from the current one-year period to a two or three-year period would severely dampen stock market sentiment.

During the Budget 2018 speech, former Finance Minister Arun Jaitley, while announcing the LTCG tax imposition, was of the view that the government would garner close to Rs 20,000 crore in the first year of implementation. A very volatile year for the stock market in FY19 would surely ensure minimal LTCG tax collections for FY19. 

Considering the fiscal situation and revenue requirements, expecting the government to rethink on LTCG in the upcoming Budget, would be ambitious. 

Tax collections are the need of the hour and the government is looking at ways and means to collect more. Hence, not expecting any increase in exemptions or relief in taxes is a foregone conclusion.

The stock market has been listless over the last 18 months with retail investors losing heavily due to severe volatility in mid and small caps. Also, the stock market has been besieged with news of corporate frauds or poor ethical and corporate governance by many companies, which has resulted in stock prices crashing by 70-80% in a short period of time. 

Equity fund flows have been severely dented and are way below the Rs 10,000 crore per month average mark seen in 2018. 

Trust deficit and credibility issues are a couple of reasons for retail investors to shy away from making investments in the stock market.

The government needs to adopt and enforce stringent measures to restore investor faith and confidence in businesses, laws and regulations.

The SEBI circular of January 4, 2018, informing all AMCs to mandatorily benchmark every scheme’s performance against total return index (TRI) instead of price returns index (PRI), is very apt. Since TRI captures capital gains along with dividends and other pay-outs, unlike PRI (which captures only capital gains), it would be a true representation of an overall investment performance.

The Nifty50 index’s five-year PRI stands at 10.52%, while its TRI stands at 11.93%, a good 141 bps higher. This changeover makes it a higher threshold for the fund managers to beat the index. 

Barring a few schemes, most large cap mutual fund schemes in the regular category have underperformed their respective TRI returns. 

Going forward, well-researched space of large-cap stocks will see deterioration in outperformance. However, the same may not be necessarily true in the case of small and mid-cap mutual fund schemes. Expecting any major changes, incorporating exemptions or relief to retail investors would not be appropriate, considering the fact that government needs hefty revenues, boosted by direct and indirect tax collections, as well as other windfall gains. 

The author is CEO and co-founder
FYERS-Free Investment Zone