FY21 Budget Preview: Call for Stimulus amid Fiscal Concerns

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 1^st, 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:

• Income Tax Reforms : With only 2-3% of India’s population paying income tax, reducing the income tax rate for the INR 5 lakh – 10 lakh annual income segment may benefit ~12-15 million mid-income taxpayers who may have a higher propensity to consume, at the cost of ~INR 250bn (0.1% of GDP). Raising the limit for zero tax-slab or increasing the deduction limit under 80C may also be considered.
• Excise Duty on Fuel : Reducing the excise duty on petrol / diesel by INR 1/ltr, at the cost of ~INR 150bn (0.07% of GDP), may have a wider ranging impact than a reduction in income tax rates, as per Citi analysts. Changes to excise duty are relatively less difficult to reverse and may help stimulate demand for basic FMCG goods.
• Capex : With a renewed focus on infra development, the government may provide higher capex allocation to fund the National Infrastructure Pipeline (INR 102tn investments planned over FY20-25E). However, Citi analysts believe that reallocation of funds from revenue to capital expenditure may be restricted given that 2/3rds of expenditure remains locked in defense, interest, salary, and subsidy commitments.
• Boosting manufacturing : through tax holidays, easier land acquisition, labor law changes (already work-in-progress), easier credit for MSMEs, disbursement of funds under farm-income support schemes and furthering the strategic divestment agenda may be among the key focus areas, 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.