Pedestrian Budget in an Highly Uncertain Environment - Union Budget 2020-21 Review

• Post the union budget 20-21 the Sensex and Nifty were sharply down by 2.5% and 3.3% respectively
• The domestic GDP growth has been set at 6%-6.5% for FY21 while nominal GDP growth rate has been set at 10%
• For FY20, Fiscal Deficit has been revised to 3.8% from 3.3% set earlier while for FY21, fiscal deficit has been pegged at 3.5%
• Government Gross Borrowing at Rs 7.8 trillion for FY21
• Government Net Borrowing at Rs 5.48 trillion for FY21

The budget speech for 2020-21 was the longest on record but the core of the budget was weak. There were no signs of any strong growth push, instead focus was on spends in rural and irrigation, which over the years have not really changed the cyclical nature of rural consumption, which is sharply down at present.

The government deficit numbers are looking very ambitious given a weaker than expected nominal GDP growth forecast of 10% against 12% expected. The government has not taken into account the effect of corono virus, which could pull down global growth substantially.

Sensex, Nifty & INR are highly vulnerable to the effects of the corona virus while bond yields will also be pressured if FIIs sell debt on INR weakness.

Post the union budget 20-21 the Sensex and Nifty were sharply down by 2.5% and 3.3% respectively. INR is likely to open weak on Monday while yields on government bond will remain flat ahead of RBI policy which is scheduled next week.

Union budget 20-21 highlights the challenges to fiscal consolidation from slower real and nominal growth, which may continue for longer than the government forecasts. The modest narrowing of the deficit to 3.5% in the fiscal year 2020-21 from 3.8% in the fiscal year 2019-20, sustained weaker growth and tax cuts would make gross revenue targets difficult to achieve. The government also has limited room to reduce expenditures without further weakening growth. While the government remains committed to medium-term fiscal consolidation, any material strengthening in India's public finances will likely be limited in the near term, and the debt burden will remain sensitive to changes in nominal GDP growth.

Domestic equity markets are at a risk of falling on weak corporate earnings, threat of further economic slowdown due to outbreak of deadly coronavirus and as the outcome of Union Budget 2020 didnt really cheer up market sentiment. Market participants in India were expecting a strong stimulus from the government in order to stem the current economic slowdown and removal of LTCG which was introduced in Union Budget 2018. Sensex & Nifty closed 2.5% down post Budget session. However, new changes in Union Budget 2020 Include:

• The dividend distribution tax shifted to individuals instead of firms.
• Introduced new slabs and reduced the tax rate for different slabs for an individual income up to Rs 15 lakh per annum, if a taxpayer opts for foregoing exemptions and deductions. The new tax regime will be optional, and the taxpayers will be given the choice to either remain in the old regime with exemptions and deductions or opt for the new reduced tax rate without those exemptions.
• 100 more airports to be developed by 2025 to support UDAN scheme.
• Rs. 100 trillion has been allocated to development of the infrastructure sector in India over the next five years.