Govt can do little as revenue constrained, budget failed to deliver

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New Delhi, Feb 4 (IANS) Foreign brokerages have pointed to the problem areas in the Union Budget 20201-21 with one explanation being that there is little now that the government can do.

In a research note, Bernstein said: “The message is fairly simple – there is little the Government can do, in an overall revenue constrained environment to help revive the economy. For this, bolder decisions are required — and that’s where this budget failed to deliver.

Given the significant amount of discussions between the Government and the various stakeholders since August 2019, the expectations were clearly high. Investors were expecting market-friendly measures such as tweaks to LTCG, higher fiscal deficit targets — for increasing growth spends. “What we witnessed was a budget which had something for everyone — making it a directionless budget”.

Bank of America Merrill Lynch in a report said that the revised estimates will have to be revised again due to severe resource constraint and the two remaining months will be challenging. It said the government faced a severe resource constraint in FY20, with weak nominal GDP growth compounded by a large corporate tax cut in September 2019. Unfortunately, the govt. does not seem to have fully acknowledged these in the revised estimates it presented for FY20 (year ended March 31, 2020).

Revenue forecasts for the year still build in 19 per cent YoY growth over FY19, even though actual collection growth for the first nine months is only 5.7 per cent. In addition, the government has forecast disinvestment revenue of Rs 650 billion for the year, while it has collected only Rs 270 billion so far (including the recently launched CPSE ETF). Selling Rs 380 billion of stock in the remaining two months might be challenging.

Goldman Sachs in a report said that the deficits in tax collections and privatization receipts were offset in the usual three ways — cut in current spending (0.4 per cent of GDP), higher non-tax revenues (0.2 per cent of GDP — as additional dividends from the RBI and other public sector financial institutions), and lower transfers to states (0.8 per cent of GDP).

Within current spending, the cuts were achieved through reduced subsidy payments. The payments to the Food Corporation of India (FCI) with respect to the food subsidy bill were short of the revised estimates by Rs 755 billion (0.4 per cent of GDP). Capital expenditures, on the other hand were slightly higher than the budget by Rs 103 trillion (0.05 per cent of GDP).

Overall, with budgeted nominal GDP growth of 10 per cent yoy and gross tax revenue growth of 12 per cent yoy, the implied tax buoyancy stands at 1.2 which continues to appear ambitious versus the 0.5 tax buoyancy achieved in FY20. Unless there is a sharp increase in tax compliance, we think it is quite likely that the government will have to cut current spending, as was the case in FY20.

“We view the budget to be positive for the infrastructure sector (higher capital expenditure), and neutral to marginally positive for Infotech (as abolition of dividend distribution tax may benefit cash-rich companies) and banks (given increase in deposit insurance coverage) but slightly negative for insurers (removal of tax deduction) and staples (higher excise duties on tobacco, lower than expected increase in budgeted rural expenditure),” it said.

Credit Suisse in a note said that the growth in direct taxes appears to assume inflows from tax amnesty provided in FY20. The pick-up in growth in indirect taxes also assumes better enforcement — could be a challenge.

By largely sticking to its expenditure targets ex-subsidies, government spending could stay elevated: one of the pro-cyclical forces that we were worried about.

CS said the personal tax regime without deductions is directionally negative for mortgage and life insurers. However, we see limited negative near-term impact as we estimate most salaried tax payers will likely prefer earlier regime. Deposit insurance hiked to Rs 0.5 million from Rs 0.1 million may benefit smaller private banks. Estimated increase in insurance premia $4 billionn for system (25 bp impact on deposit costs) will likely be passed to borrowers/depositors.

CS noted the sharp increase in cigarette taxes a heavy blow to ITC – specific tax on cigarettes up 11-16 per cent across various slabs. This will require ITC to take a 10-15 per cent price hike, in a very weak macro environment causing high single digit volume decline. Even after taking price hikes of over 10 per cent, cigarette EBIT likely to be flat in the best case in FY21, and the risk of GST cess hike does not go away.

The report noted that no stimulus for rural consumption a negative for FMCG. Total budgeted rural expenditure largely flat YoY in 2020-21. Thus, there is no stimulus for improving FMCG rural growth which is at a 15-year low.

Customs duty on some electrical appliances Custom duty on small electrical appliances like fans, mixer-grinders, etc, hiked to 20 per cent (from 10 per cent). Positive for Havells/Crompton as they face imported competition to some extent. Customs duty on kitchenware hiked to 20 per cent (from 10 per cent). Positive for TTK Air conditioner compressors import duty increased from 10 per cent to 12.5 per cent which would mean some cost push for players like Havells.

–IANS

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