Union Budget 2018: Quantum's Evaluation and Outlook

The fifth and last full budget by the NDA Government, before the 2019 general elections, was presented by the Finance Minister, Mr. Arun Jaitely in Parliament today. The Budget focused heavily on rural economy, agriculture and healthcare but wasn’t very well received by the financial markets. The re-introduction of Long Term Capital Gains Tax (LTCG Tax) is painful for market to digest. Moreover, the fiscal deficit is pegged for next year FY 2018-19 at 3.3%, higher than the earlier target of 3%. The higher fiscal deficits are always negative for the investors as it raises the burden on the government.

Quantum is famous for exhorting our investors to ignore the budget. We stand by that, that an annual summary of the Union Government’s accounts and the projections for the next year should not affect your long term financial goals.

The Budget focused on the following key areas:

1. 1. Agriculture and Rural Economy
2. 2. Poor and middle class
3. 3. Health, Education and Social Protection
4. 4. MSME and Employment
5. 5. Infrastructure and Financial Sector
6. 6. Fiscal Situation
7. 7. Tax Proposals

View by Mr. Jimmy Patel, MD & CEO:
Most of the big corporations are already moving towards the bond markets to take advantage of the lower cost. Making it mandatory to raise one fourth of the total borrowing through bonds can push the supply side of the corporate bond market. But there is lot to be done to boost the secondary market which is essential to improve the price discovery mechanism. More steps need to be taken to improve the depth and liquidity in the bond market, while also strengthening the credit rating monitoring mechanism.

Fund Houses have to realign the income distribution strategy; dividend stripping may get controlled while the investors may end up paying tax even in the short term. This doesn’t augment well for the mutual fund industry as Ulips as per current reading are outside LTCG Tax purview and with commissions riding high on Insurance mobilization retail savings may get diverted to Ulips. The new proposed definition of equity oriented mutual fund is also grey in terms of equity fund of funds.

View by Mr. Nilesh Shetty, Associate Fund Manager, Equity:
As expected the focus of the budget has been towards Rural India. Measures like ensuring farmers receiving 50% higher amount than their cost of production and upgrading of agricultural markets etc. are focused on ensuring farmers get fair and remunerative prices for their output. Large increase in Infrastructure spending (up 20%) is in line with increased thrust on infrastructure creation that we have seen in previous budget. MSME sector continues to remain the focus with expansion of credit available and well as reduction in tax rates. Health Insurance coverage for 100 million economically weaker section households of INR 0.5 million each perhaps is the most ambitious announcement of the budget.

Increase in standard deduction for salaried class is a mildly positive but given that expectations were running high the salaried class will be disappointed.

From an equity market perspective the reintroduction of Long Term Capital Gains Tax (LTCG) is a big negative. Security Transaction tax (STT) was introduced for its simplicity of collection and assured revenues. With the reintroduction of LTCG and collection of STT equities are bearing the brunt of both taxes together. The fiscal deficit number at 3.3% looks marginally higher than estimates which could disappoint the bond markets.
Overall the budgets focus has been along expected lines with emphasis on Rural India and MSME sector given that they have been in some distress but reintroduction of LTCG (even though has a grandfathering clause) will be perceived negatively by the equity markets.

View by Mr. Pankaj Pathak, Fund Manager, Fixed Income:
The Modi government seems to have set aside fiscal prudence eyeing its re-election. The fiscal deficit for Financial Year 2018 was pegged higher at 3.5% against the budgeted 3.2% and for Financial Year 2019 at 3.3% of GDP which is higher than the 3% target set under the FRBM Act (Fiscal Responsibility and Budget Management Act, 2003). Bond yields have reacted sharply with the 10 year climbing by more than 20 bps intra-day.

The overall increase in expenditure growth is not really of that high order but the markets are rightly being apprehensive of the inflation impact of the government's focus on rural and farm sector. At a time when macro trends are weakening (high oil prices, rising inflation, increasing current account deficit), the markets would have expected more fiscal prudence and commitment to the 3.0% fiscal target. That has not come through and has left the bond markets disappointed.

The expected MSP (Minimum Support Price) increase of the order of around 8-10% should lead to CPI (Consumer Price Index) inflation to average around 5.5% which could force RBI to potentially hike the Repo rate this year to bring inflation within its 4% target. The bond markets will expect a hawkish tone from the upcoming RBI policy due next week.

View by Mr. Chirag Mehta, Senior Fund Manager, Alternative Investments:
On expected lines, the Finance Minister kept import duty unchanged on gold. However, the market may have been disappointed as it was gearing for a nudge lower on duties. Given the challenges the government is facing on the fiscal deficit, it was indeed unlikely that they would let go any of their revenue streams. However, it was announced that the government would formulate a comprehensive gold policy and develop gold as an asset class. Government policies play a big role in making or breaking the market. This focus was always missing and if rightfully implemented it could be a big game changer for the gold market in India. However, the intent seems missing as the starting point for reshaping the gold market is to reduce / eliminate import duty as it distorts the price efficiency of the market. The finance minister kept duty unchanged but has made a really big promise towards the development of gold markets in India. It would have been impactful if there were some reduction in duty to be in sync with the big commitment the government has made to the gold markets in India.

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Above article is authored by Quantum.

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