February 1, 2020

Eye on the Market Budget FY20-21: Focus on Macro Stability withLimited Growth Stimulus

Indian Finance Minister Nirmala Sitharaman presented the Annual

Budget for fiscal year 2020-21 on 1st February 2020. In the longest

budget speech in history, the Finance Minister chose to stick with

fiscal discipline and refrained from providing significant expenditure-

led stimulus to growth. Given high expectations in the run up to the

budget, BSE Sensex fell 2.43%, with most sectoral indices ending the

day in red, reflecting some disappointment.

Fiscal deficit

estimate revised to

3.8% of GDP for FY20

Growth in government’s budgeted infrastructure spends slowed in FY21BE (Base

Estimate), while ailing sectors like Real Estate, NBFCs, MSMEs and Autos did not

receive any significant budgetary support. The government increased customs

duty on several goods in an attempt to encourage domestic manufacturing and

‘Make in India’ through protectionism.

Sticking to the path of fiscal prudence may alleviate the risk of a sovereign rating

downgrade for now, however, with no significant increase in nominal GDP estimates,

the debt-to-GDP ratio may not see any imminent improvement. The new direct

income tax structure may likely have limited stimulative impact as per Citi analysts,

given the absence of exemptions/deductions. With DDT abolition being a positive for

corporates, Citi analysts expect buybacks to now be modestly more attractive.

Elimination of incentives under Section 80C under the new tax structure may have a

negative impact on insurance and equity mutual fund (ELSS/ULIPS) sales.

With a fiscally conservative Budget, Citi analysts believe that the MPC may feel

reduced pressure to turn hawkish during its 6th Feb policy review. They expect 10yr

G-Sec Bond yields to stay above 6.50% and gradually move towards 7%, with

market stabilization activities from the RBI keeping the yields in check. INR may

strengthen below 70/Dollar towards the end of the fiscal year led by current

account inflows.

We present to you the key highlights of the Budget proposal*:

FISCAL DISCIPLINE

INFRASTRUCTURE

TAXATION

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Key infrastructure ministries received budgetary allocations of INR 2.7 tn, up 6% YoY in FY21E (down from 16% in

FY20E). Including revenue expenditure, total budgetary allocation grew 3% YoY in FY21E (versus 10% in FY20E).

100% tax exemption on interest, dividend and capital gains received by Sovereign Wealth Funds (SWFs) of foreign

governments for investment into infrastructure and other notified sectors. Eligible investments will have to be

made before 31st March 2024, with a minimum three year lock-in period.

Budgetary allocation increased for defense by 3% YoY (versus 16% in FY20E), for roads by 14% YoY (versus 7% in

FY20E), while planned capex for railways increased 3% YoY in FY21 (versus 17% in FY20E).

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Personal income tax rates lowered for income up to INR 15 lakhs per annum. Individuals opting for the new

regime will have to forego much of the tax exemptions and deductions (e.g. HRA, home loan, equity/insurance

investments etc.) available under the older tax structure. New income tax slabs are as below:

Income between INR 5 lakhs – INR 7.5 lakhs will be taxed at 10% (down from 20% earlier)

Income between INR 7.5 lakhs – INR 10 lakhs will be taxed at 15% (down from 20% earlier)

Income between INR 10 lakhs – INR 12.5 lakhs will be taxed at 20% (down from 30% earlier)

Income between INR 12.5 lakhs – INR 15 lakhs will be taxed at 25% (down from 30% earlier)

Income above INR 15 lakh will continue to be taxed at 30%

Significant increase in customs duty announced for several household goods, chemicals, metals, electrical

vehicle parts, cellular mobile phone parts, and few other electronic goods & machinery.

Additional tax deduction of up to INR 1.5 lakhs against interest paid on loans taken for affordable homes. Tax

holiday announced on profits earned by affordable housing project developers.

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Fiscal deficit estimate revised to 3.8% of GDP for FY20 (50 bps above the budget target). The Government plans

to bring down the fiscal deficit to 3.5% of GDP by FY21 and further down to 3.3% in FY22.

Expecting a nominal GDP growth rate of 10% YoY for FY21, the Government targets a gross tax revenue growth of

12% YoY for FY21 (vs a 4% YoY growth in FY20E), implying a tax buoyancy of 1.2 – in line with long-term trends.

Corporate taxes estimated to grow 11.5% YoY, while GST collections are estimated to grow by 12.8% YoY in FY21,

in-line with the nominal GDP growth target.

The Government budgeted for INR 2.1 tn (~0.9% of GDP) divestment revenues in FY21, including proceeds from

planned listing of LIC and strategic divestments. Dues from telecom companies, disinvestment through ETFs,

dividends from PSUs and the RBI also form significant part of non-tax revenue estimates for the Center.

Expenditure growth budgeted at 12.7% YoY for FY21, lower than the 16.6% YoY in FY20E. Conservative

expenditure projections imply lesser tailwinds for GDP growth as per Citi analysts.

Revenue expenditure budgeted to grow ~12% YoY (down from 17% in FY20E), while Capital expenditure is

budgeted to grow by ~18% YoY in FY21 (~1.8% of GDP), up from 13.4% YoY in FY20E.

FINANCIAL MARKETS

RURAL/AGRICULTURE

OTHERS

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Foreign Portfolio Investment limit on corporate bonds increased to 15% of outstanding from 9% previously.

Limits on foreign investment in select categories of government securities was also removed.

Dividend Distribution Tax (DDT) charged on dividends paid by companies stands withdrawn. Dividends will now

be taxed in the hands of the investors at applicable tax rates.

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Spending by rural/agri focused ministries is expected to increase by ~13% YoY in FY21 (down from ~40% YoY in

FY20BE).

Allocation to MNREGA (rural employment scheme) was reduced by ~13% YoY in FY21, to INR 615 bn (0.27% of GDP).

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Bank deposit insurance coverage increased from the current INR 1 lakh to INR 5 lakhs per depositor.

100% deduction in profits for startups with an annual revenue of up to INR 1 bn for three consecutive years out

of the first 10 years.

5% TDS to be levied on foreign remittances through Liberalized Remittance Scheme (LRS) and overseas

tourism spends in excess on INR 7 lakhs per annum. Individuals staying outside India for 240 days will be

eligible for non-resident status (up from 182 days earlier).

In a move to assist smaller NBFCs, eligibility limit for debt recovery under SARFAESI act was reduced to INR 1 bn

(from INR 5 bn earlier) of asset size or INR 5 mn (from INR 10 mn) of loan size.

Proposed to extend the scheme for restructuring of MSME loans till 31st March 2021 (from Mar’20 currently).

Above is an attempt to provide an overview based on the Indian Union Interim Budget 2020-21. However, for gaining full & accurate insight, we request you to read the

budget speech which is available in public domain, before arriving at any conclusion.

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*(Source: Budget Documents, Citi Research)

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*For more details, please refer to the Budget Document.