Article

Did the Budget 2020 Really Disappoint the Capital Markets?

03 Feb 2020

If you gauge the markets by the movement of the Sensex and the Nifty on the day of the Budget then it was surely disappointing. A loss of 1000 points on the Sensex is just one side of the story. The bigger worry is that the last 1 year’s efforts to breach the 40,000 mark on the Sensex have virtually come to a naught after the Sensex fell through that level with a vengeance. But there are some long term positives though there are some short term negatives. Let us first look at the long term positives and then come to the short term negatives that directed the crash in the indices.

Here are some long term capital market positives from Budget 2020

It is easy to get caught up in the panic of the moment, but don’t forget some genuine long term positives in the Union Budget 2020.

  • The decision of the government to exit IDBI Bank entirely is a good starting point and could lead to underlining the fact that the government has no business to be in business. Also, the proposed mega sale of stake in LIC could be a game changer considering its size. It will be almost as important as the Aramco IPO.

  • Partial credit guarantee scheme for NBFCs has been enhanced and that is likely to be a major positive for the NBFCs and the stressed realty sector.

  • The Rs.1000 crore packages for export oriented sectors like pharma and auto ancillaries can weigh positively on the trade deficit and the rupee value.

  • India may get to see the controversial credit default swaps (CDS) making an entry giving a bigger opportunity to hedge risk and to play risky debt on the downside.

  • Budget 2020 has also opened up the floodgates for Government securities to NRIs in a bid to broaden the market.

  • Finally, the Budget has also spoken about a big push to Debt ETFs to fill the gap in the bond markets. All these could be structurally positive for the capital markets.

But the short term outlook for the markets may be under pressure

Short term markets are more optical and less structural. Here is why markets are jittery.

  • LTCG tax was a bad idea in the first place. It impairs long term portfolio values and there were strong expectations of it being scrapped. That did not happen.

  • Getting rid of DDT is a good move but it is now being replaced by dividend tax. This may reduce the burden on lower holding groups but will make companies and promoters wary of paying out dividends.

  • Fiscal deficit at 3.8% was a shocker and the budget has used the full leeway for next two years. Higher fiscal deficit has negative implications for sovereign rating as well as for borrowing costs for corporates.

  • There was little detailing on infrastructure spending other than reiterating the commitment to infuse Rs.103 trillion into infrastructure in the next 5 years.

  • Budget 2020 did almost nothing to assuage the pain of small investors and consumers. The expectation was that the budget would give big breaks to the income groups between Rs.5 lakh and Rs.20 lakhs. Instead, we have a tax scheme that is immensely complicated.

  • Finally, disinvestment target has been enhanced to Rs.210,000 crore (what is that). While it looks optically appealing it is predicated on the LIC divestment and that may be much easier said than done.

It is true that long term efforts are there in the budget but the short sure looks hazy. That explains why markets are unimpressed.

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Did the Budget 2020 Really Disappoint the Capital Markets?

03 Feb 2020

If you gauge the markets by the movement of the Sensex and the Nifty on the day of the Budget then it was surely disappointing. A loss of 1000 points on the Sensex is just one side of the story. The bigger worry is that the last 1 year’s efforts to breach the 40,000 mark on the Sensex have virtually come to a naught after the Sensex fell through that level with a vengeance. But there are some long term positives though there are some short term negatives. Let us first look at the long term positives and then come to the short term negatives that directed the crash in the indices.

Here are some long term capital market positives from Budget 2020

It is easy to get caught up in the panic of the moment, but don’t forget some genuine long term positives in the Union Budget 2020.

  • The decision of the government to exit IDBI Bank entirely is a good starting point and could lead to underlining the fact that the government has no business to be in business. Also, the proposed mega sale of stake in LIC could be a game changer considering its size. It will be almost as important as the Aramco IPO.

  • Partial credit guarantee scheme for NBFCs has been enhanced and that is likely to be a major positive for the NBFCs and the stressed realty sector.

  • The Rs.1000 crore packages for export oriented sectors like pharma and auto ancillaries can weigh positively on the trade deficit and the rupee value.

  • India may get to see the controversial credit default swaps (CDS) making an entry giving a bigger opportunity to hedge risk and to play risky debt on the downside.

  • Budget 2020 has also opened up the floodgates for Government securities to NRIs in a bid to broaden the market.

  • Finally, the Budget has also spoken about a big push to Debt ETFs to fill the gap in the bond markets. All these could be structurally positive for the capital markets.

But the short term outlook for the markets may be under pressure

Short term markets are more optical and less structural. Here is why markets are jittery.

  • LTCG tax was a bad idea in the first place. It impairs long term portfolio values and there were strong expectations of it being scrapped. That did not happen.

  • Getting rid of DDT is a good move but it is now being replaced by dividend tax. This may reduce the burden on lower holding groups but will make companies and promoters wary of paying out dividends.

  • Fiscal deficit at 3.8% was a shocker and the budget has used the full leeway for next two years. Higher fiscal deficit has negative implications for sovereign rating as well as for borrowing costs for corporates.

  • There was little detailing on infrastructure spending other than reiterating the commitment to infuse Rs.103 trillion into infrastructure in the next 5 years.

  • Budget 2020 did almost nothing to assuage the pain of small investors and consumers. The expectation was that the budget would give big breaks to the income groups between Rs.5 lakh and Rs.20 lakhs. Instead, we have a tax scheme that is immensely complicated.

  • Finally, disinvestment target has been enhanced to Rs.210,000 crore (what is that). While it looks optically appealing it is predicated on the LIC divestment and that may be much easier said than done.

It is true that long term efforts are there in the budget but the short sure looks hazy. That explains why markets are unimpressed.