When the going gets tough, Life Insurance Corporation of India (LIC) gets going. On umpteen occasions, the state-run life insurer has bailed out issuances by government companies and hoarded shares that were shunned by the rest of the market.
Now, LIC is offering itself to boost the government’s receipts. The Union budget for fiscal year 2020-21 (FY21) assumes disinvestment receipts of ₹2.1 trillion, more than three times the amount the government is expected to raise this fiscal through stake sales. So clearly, a lot depends on the smooth progress of the LIC initial public offering for the government to meet its FY21 fiscal deficit target of 3.5%. And given the stake sale in LIC is a one-off event, it’s important to note that on an ex-LIC basis, the fiscal deficit may be well above 4% next year.
As troubling as that looks, it’s the least of the markets’ worries about the budget. The big complaint is the lack of urgency in the tone and tenor of finance minister’s speech. “Given the huge amount of stress in the economy, expectations in the markets were running high. For instance, there could have been a targeted stimulus for the real estate sector, or a boost for consumption. The budget had nothing to write home about, and is a big disappointment, from the viewpoint of reviving the economy," said a fund manager at a domestic mutual fund, requesting anonymity.
In short, while the markets had a big-bang budget in mind, what they got instead was a damp squib. The Nifty 500 index fell 2.59% in response.
There was some tinkering with tax slabs for individuals, but the impact is likely to be limited, considering that exemptions would have to be foregone to avail the lower tax rates.
Continuing with the theme in last year’s budget, the tax on the super-rich will rise, what with dividend income now getting taxed in the hands of the recipient. Last year, there was a large increase in taxation of the super-rich by about 9-20%, which had raised worries about a drop in their savings and investment rate.
And where there is no fiscal stimulus to talk of, worries about fiscal slippage remain. To start with, the assumption on receipts for this year itself is aggressive, leave alone next year’s Budget Estimates, which build on this high base. For instance, the Revised Estimates for FY20 put receipts from taxes on income (non-corporate) at ₹5.6 trillion, an 18% jump over the receipts in FY19. But numbers released by the Controller General of Accounts earlier in the week show that receipts on this count grew just 5.1% in the nine months till December 2019. For the Revised Budget Estimates for FY20 to be met, receipts on this count would need to jump miraculously by more than 50% year-on-year in the March quarter. Assumptions on proceeds from telecom companies look optimistic at Rs1.33 trillion, and the food subsidy provision looks low. Besides, the 10% growth assumption in nominal GDP (gross domestic product) looks optimistic, coming on the back of an estimated 7-7.5% growth in FY20, and given new global headwinds. As such, the math behind the 3.5% fiscal deficit target for FY21 is questionable.
Of course, one can argue that the government didn’t have much room to spend and its hands were more or less tied, after the ₹1.5 trillion largesse through the corporate tax rate cut last year. Also, the finance minister has budgeted for a 13% increase in expenditure next year, and hence has some room to cut expenses in case revenues turn out to be lower than what is anticipated in the budget document. Indeed, the bond markets are likely to take the headline numbers of the budget in their stride, what with the gross borrowing number of ₹7.8 trillion also coming in more or less in line with the markets’ estimates.
Even so, the lack of urgency in the budget to fix India’s economic problems is a big worry. Small tweaks such as concessions on long-term capital gains tax would have helped sentiment on the Street to some extent. And leave alone sops for struggling sectors such as real estate, changes in rules on tax exemptions may mean that buying homes on loans may now become a less attractive proposition. Likewise, there was no major support for troubled non-banking financial companies either. And to top it all, the government may now crowd out the private sector in the equity markets as well, apart from its high bond issuance activity, with issuances estimated at ₹2.1 trillion.
All told, the message from the budget for the markets is almost one of indifference, and it isn’t surprising that investors voted with their feet.