Nirmala Sitharaman, Union Finance Minister. Photo: Kamal Narang

After beginning the Budget session on a mildly positive note andseeming indifferent for the first hour and a half of the Finance Minister’sspeech, the stock market seemed to suddenly lose patience at the fag end of theexercise. The Sensex 30’s 100 point gain at 11 am when the speech began, hadmorphed into a 900-point decline for the day after the speech wound down. 

The reasons for the market’s disappointment with the Budget seemto be threefold. One, while the markets were primed for big measures in theBudget to stimulate consumption, very little has been forthcoming in theBudget. On the rural side, given that food prices are already looking up, alleyes were on the Budget giving non-farm employment a leg-up through higherallocations to the MNREGA and flagship infrastructure schemes such as the PMAwas Yojana and PM Gram Sadak Yojana. These have bagged only modest increasesin the Budget. MNREGA allocations are pegged at Rs 61,500 crore for FY21,actually below revised estimates of Rs 71,000 crore for FY20. The PM AwasYojana has bagged Rs 27500 crore, about 9 per cent higher than the revisedestimates for FY20. The Gram Sadak and Krishi Sinchai Yojana’s have receivedmaterial increases of about 40 percent, but in their case the incrementalallocations add up to no more than Rs 9000 crore, hardly sufficient to make abig dent on rural demand. 

On the urban side, hopes were primed for a substantial lowering ofpersonal income tax rates. But the googly from the Budget, which forcestaxpayers in higher brackets to give up their exemptions to avail of the lowerslab rates, makes the stimulus effect of this giveaway a little iffy. The FM’sexpectation of a revenue foregone of just Rs 40,000 crore from this measure isa drop in the ocean in terms of boosting urban consumption. To provide context,India’stotal private final consumption expenditure for FY20 is estimated at about Rs123 lakh crore.  In fact, here, the condition that investors must give upon 80C and other tax concessions to avail of the new tax slabs may evenadversely impact the domestic flows channelled into markets via ULIPs, ELSS,NPS and market linked schemes.  

Two, with fiscal deficit targets in mind, the Budget doesn’tcontemplate a big government spending boost either, with its total expenditurefor FY21 estimated to be 12.7 percent higher than this years’. 

Three, the capital market proposals in the Budget aren’tparticularly friendly to equity investors either. The shifting of the taxincidence on dividends from companies to individuals actually pegs up the taxincidence on dividends for folks in the 20 and 30 per cent tax brackets. Norhave optimistic demands for doing away with LTCG and STT on equities been met. 

However, while the stock market had no reason to revise itsoutlook for the economy or corporate earnings after the announcement, the bondmarket will perhaps take a more favourable view of it, when it reacts on Monday.The Centre’s decision to rein in the deficit at 3.8 per cent this fiscal, asexpected by the market, and plans to keep net market borrowings at Rs 5.35 lakhcrore while routing a lot of the funding through the NSSF and extra budgetaryresources, reduce crowding out risks for bond investors. The decision tosubstantially raise the FPI investment limit in domestic bonds may be viewedpositively too, provided the markets believe in the credibility of the deficitnumbers. 

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Published on February 1, 2020