The Interim Union Budget 2019-20 had a lot of significance for the economy as well as the equity markets as it was the last budget by the current government. Expectations of a populist budget were running high to run-up to the budget due to the results of the recent state elections and the upcoming general elections. As widely expected, the government attempted to fulfil populist demands by smartly packaging its financial plan. It provided relief to the targeted sections (farmers, middle class) without disturbing the fiscal estimates. Thus the total cost of announced populist schemes was much lower than feared. The two major announcements were (i) direct annual cash transfer costing Rs75,000 crore per year to rural (not necessarily poor) population and (ii) increase in tax exemption for income up to Rs 5 lakh for individual tax payers, which will cost the government another Rs18,500 crore. The attempt clearly seems to be reaching out to all sections of the society – farmer, rural population, middle-class, and labourers (pension), among others.
Against this backdrop, we believe that the Finance Minister has managed to create a reasonable balance by meeting populist demands as well as supporting economic growth by focusing on fiscal discipline and reforms. The government is trying to stimulate the economy on the fiscal front with thrust on consumption. The Finance Minister has also used the occasion to outline the government’s 10-point ‘Vision 2030’ with a focus on digital India, cleanliness, rural industrialization, infrastructure and healthcare. We believe that the government has managed to walk a fine path by keeping the fiscal deficit below 3.5% for both FY19 / FY20 despite giving a slew of sops for the rural sector, farmers, unorganised workers as well as the middle-class.
Direct cash transfer of Rs 75,000 crore per annum to farm households
As widely expected, the central government announced direct cash transfer of Rs 6,000 per annum to marginal and small farmers with land holding of up to two hectares (ha). With almost 86.2% of holdings falling in this category, the scheme will benefit 125.6m farmers, costing the exchequer an annual amount of Rs 75,000 crore.
The budget also increased the interest subvention on crop loans by 2-5% for farmers struck by natural calamities, which will greatly help the small farmers. It also provided social security coverage by bringing a monthly pension scheme of Rs3000 for workers in unorganised sector.
Direct tax changes to benefit lower-to-middle income households
The government proposed full tax rebate for Individuals with annual income upto Rs5 lakhs. Thus, people with gross income upto Rs6.5 lakh may will not be required to pay any tax, provided they make required Investments. This is expected to cost Rs18,500 crore to the exchequer.
Further the government provided various benefits to incentivize housing demand – 1) Ceiling Limit of TDS has been increased for deduction of tax on rent from Rs1,80,000 to Rs2,40,000 and 2) exempted levy of income tax on notional rent on second self-occupied house.
Despite two big announcements, the budget is not highly expansionary
While total spending is budgeted to grow 13.3% YoY in FY20, following 14.7% in FY19 revised estimates, we believe these targets are unlikely to be met because of a shortfall in receipts. Thus, although the government has announced farm income support and direct tax benefits, we do not consider the budget as highly expansionary. Overall, the headline fiscal deficit target of 3.4% of GDP each for FY19 and FY20 is within the desirable limits and can be broadly achieved with no major slippages, in our view.
Conclusion - a fine balance between social and economic growth
Since this was an interim budget, the proposals were expectedly limited. All in all, the Budget announcements were positively geared towards socialistic reforms, as the country is on the edge of an upcoming election for the new Government. The budget is likely to be positive for sectors like consumer (FMCG), discretionary (auto, durables) housing and building materials (paints, cables), NBFC in consumer, auto, housing etc.
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