29 JANUARY 2020
Amidst a difficult backdrop of slowing growth and rising fiscal slippage, the Union Budget 2020-21, due to be announced on February 1st, will be keenly watched by investors for both demand stimulus and fiscal prudence, according to Citi analysts. With space for monetary policy support reducing, expectations of a substantial stimulus from a fiscally conservative government seems to be running high and any disappointment may result in a correction in the equity markets given already high valuation.
Citi analysts expect the government to focus on encouraging manufacturing, stimulating demand (rural / mid-income segment) and pushing infrastructure development (road / railways), in addition to trying to revive ailing sectors like NBFCs, power and real estate through structural changes. Below are the key expectations from Budget 2020-21 as per Citi analysts:
Citi analysts believe that any changes to LTCG or dividend distribution/buyback taxes may affect the equity markets significantly. Nifty declined 5% and 7% respectively in the one month following last two Budgets (2018 & 2019 final budget) reacting to the introduction of LTCG Tax in 2018 and FPI surcharge in 2019. Citi analysts project a 30bps fiscal slippage in FY20 (to 3.6% of GDP) and expect the government to set a target of 3.5% for FY21. Citi analysts prefer 'targeted' and 'temporary' stimuli to revive growth, as they believe that a temporary deviation in the deficit path may be less concerning to global credit rating agencies, given a credible plan for getting back to austerity.