View: Budget enough to satisfy both optimists & pessimists

By Sanjeev PrasadThe budget has enough to satisfy both optimists as well as pessimists.The optimists will be happy with measures to revive consumption demand, such as the new alternative personal taxation regime, which will result in higher disposable income for households.They will be satisfied with the abolishment of dividend distribution tax (DDT), which will result in savings of Rs 25,000 crore for companies and potentially higher investment. This is in line with the government’s objective to revive investment through other ongoing reforms, including reduction in corporate tax rate announced earlier.The optimists will also cheer the government’s efforts to contain the fiscal deficit with central GFD/ GDP of 3.5 per cent for FY21 budget estimate versus the FY20 revised estimate figure of 3.8 per cent.On the other hand, pessimists will be unhappy about the quality of expenditure — with continued emphasis on revenue expenditure, lack of initiative to contain the burgeoning revenue expenditure and no meaningful impetus to capital expenditure, including new tax benefits for housing.The modest fiscal stimulus to consumption, along with low base of the first quarter of FY20, may result in recovery in private consumption (about 60 per cent of GDP) from the first quarter of FY21.However, the deceleration in private consumption over the past few quarters reflects low growth in household income, which in turn reflects weak job creation in the economy. As such, the limited fiscal impulse may not be sufficient to revive demand for consumer discretionary items such as two-wheelers, fourwheelers and consumer durables.The budget proposals are also potentially negative for insurance companies with likely lower ‘pull’ for savings-linked insurance products due to removal of insurance premium paid from tax exemption under Section 80C and higher effective I-T rate due to abolishment of DDT — dividends received by insurers are not taxed currently.Mutual fund companies will also be negatively impacted by the removal of DDT — tax savings for unit holders on dividends paid to them was an important feature of certain schemes. Finally, the higher tax on cigarettes through increase in the NCCF cess is negative for ITC and other cigarette companies. There are ‘feel-good’ factors in the form of lower personal income tax rate, savings for companies through abolishment of DDT and the government’s reiteration of its commitment to accelerate economic reforms.These may support market sentiment dented by a sharp slowdown in economic growth over the past 3-4 quarters, weak third quarter results of consumption-oriented firms and the spread of Coronavirus over the past 2-3 weeks.The high-quality financial firms may benefit from lower cost of funds and the resultant improvement in net interest margins, which may offset the slowdown in credit growth.(Sanjeev Prasad is the co-head of Kotak Institutional Equities)

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