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Quantum's View on the Union Budget 2019 Friday, Jul 05, 2019

The union budget 2019 was presented today. Finance Minister Nirmala Sitharaman ditched a colonial-era tradition of carrying Budget papers in a briefcase. Following are some expert views on the budget by Quantum.

View by Mr. Jimmy Patel, MD & CEO:
The mutual fund industry was looking forward to this budget and there was a hope to get some attention from the maiden budget speech of FM Smt. Nirmala Sitharaman. However there was nothing in store for the mutual fund industry. Much was expected by the middle class but there are no impetuses on their savings. Moreover government has kept fiscal deficit around old numbers. We will have to wait for the financial prudence by government. Digital India has been spoken about; it has been made a vision by the government. The way it gets rolled out; with ease and convenience, will go a long way in making India a digital economy.

The Government has announced a bold step to raise money overseas and might be positive for Gsecs, but instead of raising money overseas, the government should have displayed more confidence by increasing the limits for foreign investors under the FPI route into the Indian Government Bond market and encourage global investors to invest in India and help develop the local bond market. The increase in public-holding in listed companies to 35% from 25% proposed to SEBI by FM will result in more inclusive participation in share-holding, however many promoter led companies and MNCs may prefer delisting as was noticed in the recent past. Capital gains so generated when promoters will offload stakes will help the government, besides there will be supply of equity, but the markets need to absorb the same and should not result in negative growth of the Sensex and Nifty. The government was mute on the source of funding it has announced for infrastructure push over the next 5 years of 100 trl rupees. The announcement made by the government to invest in rail infra plus road infra and development of inland waterways is step in the right direction. While Smt. Sitharaman proposed to increase special additional excise duty and road and infrastructure cess each one by 1 rupee a litre on petrol and diesel, this will as usual result in inflationary trends.

View by Mr. Atul Kumar, Head - Equity Funds:
Union Budget 2019-20 was eventful as it was first after NDA came back in power, showing its intent and vision. It was also first to be presented by a female finance minister.

On overall accounts, 3.3% fiscal deficit is targeted. This is lower than 3.4% last year. However, the revenue mobilization target from direct tax and GST are quite ambitious. Growth of 18-19% in revenue assumptions belies the soft economic growth, with nominal economic growth at 11-12% only.

The expectations from the budget were high given that economic growth has slowed down. Stimulus was expected to pump prime. Infrastructure spending, tax benefit for housing were among the measures market hoped for to get the economy on track. In addition, stressed sectors such as agriculture and SME were looking forward to sops.

In terms of actual delivery, budget had impact on sectors such as NBFC and auto. Government has encouraged PSU’s to buy securitized paper up to Rs. 1 trillion and it will take losses up to 10% of amount. This is likely to help out the stressed NBFC sector. PSU banks are likely to get Rs. 700 billion capital to step up lending. Electric vehicle have been given a push with a tax benefit up to 1.5 Lac INR. Similarly affordable housing has also got a boost from further tax benefit on interest of Rs. 1.5 Lacs. This addresses only a limited part of housing market.

For small businesses that are paying GST, interest subvention for 2% will be provided for fresh loans. On tax side, personal income tax has gone up for the rich earning above 20 million INR. Tax on businesses having turnover of 4 million is reduced which was earlier limited to 2.5 billion turnover. Cigarette has been brought under excise now, hurting as the industry as it paid GST already.

Some of these measures addressed part of problems facing the economy. A stimulus package such as government infrastructure spending is missing from the Budget. Such spending would have led to 'crowding in' i.e. investment by private sector. On above count, it falls short of expectations. Growth is likely to remain subdued for the economy.

View by the Mr. Pankaj Pathak, Fund Manager, Fixed Income:
The government has kept fiscal deficit unchanged and borrowing numbers unchanged which has come as a relief to the bond markets which was anticipating an increase in fiscal deficit given the massive shortfall in tax revenues seen in FY 19. But what still remains under question is how will they meet the tax and non-tax revenue targets and Bond markets should thus remain skeptical on this issue.

The 10 year government bond yield which was 6.80% two days back moved down sharply during the budget speech to trade below 6.6% on the announcement of India contemplating to issue the Indian Government (Sovereign) Bond in the overseas markets and in overseas currency. Indian government and the RBI have thus far, very rightly so, resisted this temptation of raising money overseas and subjecting itself to the whims and fancies of the global banking system.

Ideally, we believe government bond yields will be range bound as the government, State and PSU bond supply remains large and markets might factor in higher borrowing as the months progress but with an accommodative RBI which may cut the Repo Rate further in the months ahead and the prospect of a overseas dollar bond issue may lead to some further dip in market interest rates.

View by the Mr. Chirag Mehta, Sr. Fund Manager - Alternative Investments:
Customs duty has become a major revenue-earner for the country and the dream of making India the gold-trading capital has been sacrificed for the sole purpose of filling the government coffers in a bid to reduce the deficit. Further increase in customs duty will only distort markets further as the current differential between the Indian gold prices and International gold price will widen by 2.5% to 15.5% in total. This is a significant differential and may augur well for illicit gold imports and further distort gold markets significantly. Such interventionist policy making ensures that India will never be at the center of the global gold markets despite been the largest consumer and will continue to remain a price taker. Such distortions make it difficult to channelize the hoard of India’s gold savings into circulation and thereby integrate the gold market with other financial markets.

To Conclude...Keep your Investments Simple and Stay Invested!!
We reiterate what we have been always saying - the Indian markets offer great potential for the long term investor. As such, budget announcements do not alter the economy or your investments. Quantum is "famous" for insisting to our investors to ignore the budget. We stand by that, whatever is the outcome of the budget, the accounts and the projections for the next year should not affect your long term financial goals.


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