Union Budget 2020-21 Preview
Please refer to important disclosures at the end of this report
Bold measures need of the hour to boost growth
Given recent slowdown in the economy there are expectations that the budget
would contain bold measures to boost the economy. Tight fiscal and monetary
policy over the past few years coupled with major structural changes have taken a
toll on growth which was further exacerbated post the IL&FS crisis and its fallout.
This is reflected in the GDP numbers which slowed down to 4.5% in Q2FY20 from
8.0% in Q1FY19.
Given the shortfall in tax collections as well as lower non tax revenues (on account
of shortfall in disinvestment targets), markets are concerned about fiscal slippage
in FY20 and FY21. However in the backdrop of the current slowdown we believe
that fiscal slippage is necessary and will go a long way in boosting growth given
that India doesn't have a twin balance sheet problem like 2013.
While the corporate tax cuts was a game changer move by the Government and
would go a long way in attracting investments over the medium term we believe
that more needs to be done in order to boost consumption demand which has
slowed down sharply from 10.6% in Q4FY18 to 5.1% in Q2FY20. Given the
severity of the slowdown we feel that expansionary fiscal and monetary policy is the
need of the hour to revive the economy.
Major expectations form the Union Budget
1) Personal income tax – The Government can try and address the slump in
consumer spending by providing tax breaks to the middle class which could be
either by the way of restructuring the tax slabs or by increasing the limit of the
deductions under Sec 80 C.
2) Housing – The Government is expected to continue it’s focus on affordable
housing and we could see greater allocation under the Pradhan Mantri Aawas
Yojna along with focus on execution. The Government could also increase the
tax exemption limit on housing loan interest from current levels of ` 2 lakh.
The Government could also look at expanding the scope of affordable
housing by increasing the carpet area as well the ticket size.
3) Auto – the government is expected to announce measure to shore up the auto
industry which was impacted by the credit crisis and implementation of BS6
norms from April 2020. There is very high probability that the Government will
announce an incentive based scrappage plan in the budget which will benefit
the sector, especially the MHCV space, which has been the worst impacted.
4) Make in India – In line with the recommendations made by the commerce
ministry the Government can hike import duties on various items like paper,
footwear, rubber items and toys as well as address the issues of inverted duty
structure in certain sector like chemicals, furniture, rubber paper etc.
5) Abolition of LTCG on equities and DDT – There are expectations that the
Government may abolish LTCG on equities while definition of long term can
also be changed from one to two years. There are also expectations that the
Government might do away with the Dividend Distribution Tax DDT on equity
given that the Government want to attract investments.