● Fiscal Deficit Likely at 3.5% of GDP; Actual Receipts Lower than Revised Estimates
● Weaker-than-estimated Revenue Receipts, Change in Direct and LTCG Tax Unlikely
● Non-tax Revenue may Increase; Disinvestment Target Could be Increased to Rs. 900B
● Fiscal Stimulus Likely to Remain, as GDP Estimates Weaken1. Fiscal deficit likely at 3.5% of GDP; Actual receipts lower than revised estimates
The actual revenue receipts in 2019 were well below revised estimates (lower by 1% of GDP). This may mean that the estimated revenue receipts for FY20 will most likely be revised downward. It may put pressure on the fiscal deficit target, which was kept at 3.4% in the interim budget. Newly introduced income support for farmers will also increase the expenditure. Thus, we expect the government to increase fiscal deficit to 3.5% of GDP.
2.Weaker-than-estimated Revenue Receipts, Change in direct taxes unlikely
|As % of GDP||FY18A||FY19A||FY19RE|
As the actual revenue receipts for FY19 came lower than estimated, there might not be any change in structure of direct taxes.
Government Unlikely to Remove LTCG Tax
Market participants are demanding for removing LTCG tax. But considering the upside pressure on the fiscal deficit because of weak revenue receipts, we expect this to be an unlikely announcement.
3.Non-tax Revenue may Increase; Disinvestment Target Could be Increased to Rs. 900B
Non-tax revenue target might increase as it is expected that the Bimal Jalan Committee’s recommendations on the central bank’s economic capital framework will be submitted very soon and the government can get a large share through the dividend. In FY19, non-tax revenues expanded 27.7% y/y to Rs. 2.5T. Dividends and profits stood at Rs. 1.1T. Of this, the government received Rs. 400B as surplus from the RBI in FY19, and an additional interim dividend of Rs. 280B (as per reports). The cumulative disinvestment proceeds of the government stood at Rs. 850B in FY19 Prov., exceeding the RE for FY19 (Rs. 800B).
4.Fiscal Stimulus Likely to Remain, as GDP Estimates Weaken
After the announcement of interim budget, Q4 FY19 GDP came at 5.8%, materially below expectations due to weak consumer demand, especially from rural India. In response to this, the government may maintain the fiscal stimulus announced in the interim budget, especially the ones pertaining to agricultural sectors (low-cost loans, benefits transfer of INR 6,000 per year to farmers, among others).
Consumer and Infra stocks to be in the spotlight
- FMCG Sector will Benefit from Income Support Scheme for Farmers: The government’s increasing thrust on farm income announced in interim budget is likely to be maintained. It has allocated Rs. 60,000 crore toward the Mahatma Gandhi National Rural Employment Guarantee, which ensures assured income to small farmers. This will improve sentiment in the FMCG sector.
- Government Schemes to Revive Auto Sector: Tax rebate of Rs. 12,500, helping households with earnings of Rs. 3.5–7 lakhs will strengthen the disposable income and hence boost consumer confidence. This may initiate the revival of auto sub-segments like scooters, commuter motorcycles (125 cc), premium (150-180cc), and entry level four-wheelers (PV).
- Infra Push to Benefit Related Stocks: Jalshakti Ministry established in the second term of the NDA government is expected to embark on the river linking development projects. Railways recorded the highest ever capex, whereas road/highway development spend was also strong. The government’s infra boost with Bharatmala Project will support stocks in the Construction sector – Cement, EPC contractors, and Developers, among others.
According to O’Neil Methodology, a follow-through day from here on can trigger new upward momentum in the market: The Indian market is in a Confirmed Uptrend from last five weeks. The distribution day count is at just two, but the market has not fared well. The market breadth has deteriorated. In Nifty Smallcap, stocks trading above their respective 50- and 200-DMA have come down to ~20% from ~35% at the start of June. On sectoral indices heat-map, for the last three month return, only Nifty Bank, Reality, IT, and Financial Services are in green. A follow-through day from here on can trigger new upward momentum in the market. On the flip side, increasing distribution will lead to downgrading the market to an Uptrend Under Pressure.
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