Budget 2020: Not ideal for 100m sprint, but promises a bit for the marathoner

In a challenging environment, most market participants had hoped the government would give them steroids to tide them over in the short-term – expectations on relaxation on LTCG to stimulus to boost demand were broadly belied. However, for the marathoner, this budget promises quite a bit.

So first a bit of perspective, to view the prism of marathoner about the past - when we look at a block of 5 years, we see 2 broad areas which have seen a significant increase in government spending. First was increase in salaries and pension to 3.2 million central government employees. Over a block of 5 years (2014-19 over 2009-14 block), the increase in salaries and pension has gone up cumulatively by approximately $145 billion. This is primarily pay commission recommendation, OROP implementation, etc. The second big change in government spends has been in recapitalising PSU banks ($45 billion). So, if these were the two big outlay changes, let’s also see where the government managed to raise additional resources. As against this, the increased government inflows by increasing excise on oil ($180 billion) and disinvestment ($45 billion). Now, incrementally, the salary increases will be far more modest for the next 3-4 years, also the massive recap of PSU banks seem to be nearing its end. For the first time in some time, today’s budget actually expects PSU banks to give it some dividend income, as they will become profitable. So effectively, if one looks at a block of the last 5 years, government spending has done the massive heavy lifting.

So while we look at this year’s budget and reflect on fiscal deficit (going up) and pressure on government finances, we need to keep in mind that there are potential tailwinds for the government to spend in the coming years, as these large spends like pay commission or PSU bank recapitalisation are mostly behind us.

So, when viewed from the prism of the marathoner, there were few other announcements in today’s budget speech that seem very promising.

There was a significant thrust on facilitating India Inc. with access to foreign capital pools. Be it in the form of DDT removal, or continuing of 5 percent concessional withholding tax till FY23. FPI limits were also relaxed in the corporate bond segment from 9 percent of outstanding to 15 percent of the outstanding is a significant positive. Sovereign Wealth Funds have warmed up to many Indian asset classes over the last few years and giving them a waiver against all taxes for their investment done in priority sector including infrastructure is a massive booster shot. A lot of infrastructure projects will have long-duration money at a cheaper cost of capital than before. We have seen significant deals on commercial real estate with large foreign investors over the last few years. Recycling capital through the sale of infrastructure assets to such SWF and attracting their capital to pursue fresh investment in priority sectors will, in my opinion, attract very large pools of capital to India.

Another area which was the long-standing demand of many longer-term market participants was the proposed listing of LIC. Listing of LIC will improve the efficiency of the overall sector, and will also make it one of the largest listings in Indian primary markets. LIC will be one of the most-valued companies in India, when listed and will allow the government to monetise some of its stake in this very valuable brand.

One area, which as an equity market participant I was disappointed was in government not really pressing on the accelerator by loosening its purse-string in front-loading spending on infrastructure or demand creation. Probably, it didn’t want to impact the bond market, and this should help longer-term interest rates to not go up – again a trade-off between short-term boost and longer-term benefits.

India Inc. has gone through a long period of cleansing and balance sheet deleveraging. The renewed emphasis on the need to celebrate the “wealth creators” amidst us struck the right note. While this may not bring out the animal spirits in India Inc. overnight, continued reinforcement of this theme along with fall in actual lending rates to economy and access to global pools of capital set the stage for disciplined aggression for the Indian entrepreneur.

In summary, the budget has a lot of longer-term enablers, while possibly missing out on the steroids market participants were hoping for. Here is to marathon long-term investor and entrepreneur who will capitalise on the big opportunities ahead.

Harish Krishnan is Senior Vice-President and Fund Manager (Equity) at Kotak Mutual Fund.