Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
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Key takeaways from the Interim Budget FY19-20

Blog Blog Details
  • February 11, 2019
  • Mr. Siddharth Bothra|
  • Fund Manager, Sr. Vice President
Commentary
The Government of India presented the Interim Budget for FY20F. This was the last budget by the current government before the general elections in April-May 2019. Typically a budget financial documents would go to 100page plus, while a vote on account would be 8-9 pages, this interim budget was 18pages. There was fear that this could be a populist budget with a higher rise in expenditure on rural/social welfare schemes. Despite the political pressure in the run-up to the elections, the downward slide in the fiscal deficit ratio was not disrupted. Net bond borrowings by the Government is still at FY12 levels and just a third of incremental deposits.

The interim budget had measures towards three key themes: Agri, Real estate and middle-class salaried class. 

Some of the most notable announcements were: 1) Direct annual cash transfer of Rs750b to each of 117m farmers with land holdings <5acres in three instalments of Rs2000/each. 2) Increase in tax exemption for income up to Rs0.5m for individual taxpayers, which could cost the Government Rs185b. and some sops for the Real Estate sector.

The budget provides the fiscal stimulus of ~0.36% of GDP via the direct income transfer scheme and ~0.15% via tax exemptions for income up to Rs0.5m for taxpayers and increases in the standard deduction for salaried individuals. Both these announcements should further incentivize consumption or savings. In recent times growth had started to stall with high-frequency economic data becoming negative– this ~0.5% of GDP stimulus could help arrest it and have a positive second-degree impact. 

Key measures:
Pradhan Mantri Kissan Samman Nidhi Scheme: The Rs750b income transfer scheme (Rs2000 transferred to each of 117m farmers thrice a year) -  is a policy innovation, where the response from the recipient is hard to model. They could use this guaranteed transfer to borrow against, use it to buy food/durables or repay loans. The economic implications could be different in each of these cases. The split of consumption for the bottom 60% of households is Food (60%), Fuel (10%), Clothing (7%) and Medical (5%). There is a belief that had this been a Rs500/month transfer scheme it would have broadly been used on food and would have been more effective in transferring wealth from rich to poor, which seems to be the broader objective. However, given this is coming bunched up in four months, there is a probability that this could be used for discretionary items also, but that also is likely to be low-value goods and perhaps largely unbranded. 

Middle-class sops: There was a slew of sops for the middle class and salaried people. 1) Individual taxpayers with taxable income of ~0.5m not required to pay any income tax. 2) The standard deduction for salaried people raised from Rs40000 to Rs50000. Apart from these, there were few more sops such as TDS threshold on rental income increased from Rs0.18m to Rs0.24m and exemption of income tax on notional rent on the second self-occupied house.

Key Maths for the Budget
The Budget has estimated total Receipts (ex-borrowings) at Rs20.8tr, a growth of 14% over FY19RE. This is driven by 14.4% rise in Government expenditure and only around 6.2% in Capital Expenditure.

The government has missed its fiscal deficit target for FY19 of 3.3% by 10bps at 3.4% of GDP and also kept a fiscal deficit target unchanged at 3.4% of GDP for FY20. This slippage can largely be explained by the Governments announcement of New Farm Package of Direct Benefit Transfer to small farmers.

As a result, Governments gross borrowings increased significantly to INR7.1tr up from 5.7tr in FY19. Net borrowings is expected at Rs4.7tr in FY20, up from Rs4.23tr in FY19.

Current GST monthly average run rate stands around Rs970b, even assuming a seasonal uptick in March this number is expected to around Rs986b in FY19. The assumption for FY20 is at Rs13.7tr implying a run rate of Rs1.14tr or 16% growth. There is a risk of further rationalization of GST tax brackets in FY20 and cut in GST tax rates, which pose further risk to these aggressive assumptions.

However, we feel this has a cushion in the form of moderate corporate tax revenue assumptions, which can surprise on the upside. Corporate tax revenue budget is budgeted to rise 13.3% in FY20. However, given the street expectation of earnings growth recovery in FY20 could boost corporate tax collection. There was a 8% upward revision in corporate tax collection in FY19RE vs FY19BE.

Non-discretionary and semi-discretionary spending now accounts for almost ~77% of the Centre’s total spending, implying less than 23% of spending is discretionary in nature, which exerts constraints on fiscal independence.

Divestment targets seem aggressive for both FY9 and FY20 with divestment target for FY19 at Rs80000 (Rs35000crs done till now) and Rs90000crs for FY20.

Negatives
Extra-budgetary spend in FY19 was at Rs1.4tr higher than budget estimates. Rs1.24tr was increased in FCI borrowings – likely due to higher inventory and may include unfunded food subsidy. Similarly, continued reliance on small savings to fund deficits creates distortions in the plunging financial savings.

Subsidy to GDP has started rising again following 140bp fall during FY13-18. Subsidy as % of GDP peaked at 2.5% in FY13 and bottomed at 1.1% in FY18. It is now slated to increase to 1.4% in FY20.

Fiscal slippage of 10bp in FY19 and 30bp in FY20 could lead to higher Government borrowing and presents risks for interest rates on the upside. However, some part of it could be negated due to lower crude oil prices and dovish stance by key Central Governments on rate tightening and balance sheet contraction. Hence we do not feel the strengthening of yields will be disruptive for the market.

This budget breaks the trend of increasing capital expenditure that this Government had been following. Composite Capital Expenditure as % of GDP had risen sharply 3.4% of GDP to 5.2% of GDP over FY15-18. However, there has been a pause in this in this interim budget with this ratio slated to fall to 4.5% in FY20.

Sectoral beneficiaries and Our stance
Budget is positive for the consumption theme on the margin and Real Estate sector in general. However, It is marginally negative for the capital expenditure dependent plays.

Our approach to portfolio construction continues to be selective bottom-up based on QGLP framework.

We are currently more positive on turnaround plays like corporate banks and beaten down consumer discretionary sectors such as Auto.
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