Decoding the Union Budget - FY 2020-21 - HSBC Asset Management (India)
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Decoding the Union Budget
FY 2020-21
February 2020Union Budget FY2020 - 21
Major budget proposals
Fiscal math - tax and non tax revenue
Fiscal math - budget expenditure
Budget proposals - Financial sectors
How does the fiscal deficit get funded
Budget details: 2019-20 and 2020 – 21
Budget summary and Debt Market outlook
Equity market perspective
Equities - Key themes
Key sectoral impact & assessment
2Budget 2020-21
• FRBM leeway used for breaching fiscal deficit
− FY20 & FY21 fiscal deficit/GDP higher by 0.5% each year
− Budget Estimate (BE) fiscal deficit FY 21 at 3.5% vs target of 3.0%
− Fiscal deficit of FY20 Revised Estimate (RE) at 3.8% vs BE of 3.3%
− Overall leeway on fiscal deficit taken in line with FRBM law on account of “structural reforms in the
economy with unanticipated fiscal implications”
• No incremental borrowing for FY20, FY21 pegged at INR 7.8 trillion
− FY21 gross borrowing at INR 7.8 tn in line with market consensus
− Small savings having largely funded the incremental deficit, no incremental borrowing for FY20
• Small savings provide significant fiscal deficit financing
− Provide significant support to financing the fiscal deficit, contribution for FY20 ~31% of the fiscal deficit
vs BE of 18.5% (INR 2400 bn vs BE of INR 1300 bn)
− FY21 BE also estimated at INR 2400 bn which accounts for ~30% of the fiscal deficit funding
• Fiscal glide path to continue
• Target fiscal deficit to GDP for FY22 is 3.3% and for FY23 3.1%
• However deviation in the glide path is meaningful as FY21 was earlier pegged at 3.0
Target as expected but achievement remains a challenge
3
Source: Indian Union Budget Document, Bloomberg, February 2020How will the fiscal math play out? - Revenue
• Tax revenue estimates do not seem very aggressive but contingent on growth recovery
− Overall tax revenues to grow at 12% for FY21 vs 4% for FY20
− This is factoring in Loss of tax collections INR 650 bn (INR 400 bn from income tax and INR 250 bn
from DDT)
− Revenue growth estimates are higher than nominal GDP growth (10% for FY21 vs 8.5% for FY20)
− Current year collections and slow growth continues to present a challenge for increase in tax
collections
− GST collections growth at 13% vs current year of 5% will require a pick up in growth and improved
compliance
• Non Tax Revenue estimates seem aggressive
• Divestment target: Aggressive at INR 2100 bn
− Divestment estimates for FY21 seem aggressive at INR 2100 bn vs INR 650 bn in FY20
− Sources of divestment include sale of stake in LIC & IDBI Bank (INR 90000) and others
including BPCL, Shipping Corporation of India, Concor, Air India
• Telecom receipts BE of INR 1330 bn ambitious vs INR 590 bn in FY20
• RBI dividend for FY21 at INR 900 bn reasonable; No additional interim dividend from RBI in the current year
Overall, revenue estimates including divestment look optimistic
given low growth scenario
4
Source: Indian Union Budget Document, Bloomberg, February 2020How will the fiscal math play out? - Expenditure
• Revenue expenditure growth estimated ~12% for FY21 vs 17% in FY20
− This is factoring in flat subsidy for FY21 when, subsidy spend being down -25% for FY20 vs BE
− The reduction in food subsidy is shifted to off balance sheet (FCI borrowing)
− Therefore scope for reducing revenue expenditure remains limited in FY21
• Capital expenditure increased by 18% in FY21 vs 15% growth in FY20
• Capital expenditure spend for FY 20 has been higher than budgetary estimate
• Rationalization may possible in FY21; however with weak growth, this trade off may not be desirable
INR in Crores 2019-20 2019-20 2020-21 y-o-y y-o-y
Budget Est Revised Est Budget Est FY 20 (RE) FY 21 (BE)
Revenue Expenditure 2,447,779 2,349,645 2,630,145 17% 12%
Interest 660,471 625,105 708,203 -5% 13%
Pension 174,300 184,147 210,682 6% 14%
Subsidy 301,694 227,255 227,794 -25% 0%
Fertiliser 79,996 79,998 71,309 0% -11%
Food 184,220 108,688 115,570 -41% 6%
Petroleum 37,478 38,569 40,915 3% 6%
Capital Expenditure 338,570 348,907 412,085 15% 18%
Total Expenditure 2,786,349 2,698,552 3,042,230 17% 13%
• Off balance sheet loans and borrowing:
• Food Corporation of India: INR 1.36 trillion for FY21 vs INR 1.1 trillion in FY20 (funded via loans from
Small Savings)
• GOI serviced bonds: INR 495 bn BE for FY21 vs INR 446 bn for FY20 (FY19 was INR 656 bn)
Limited leeway on reduction in expenditure puts significant pressure on
revenues to maintain fiscal deficit for FY21
5
Source: Indian Union Budget Document, Bloomberg, February 2020Key measures to support for financial sector
• Bank Capital: Public sector banks will be encouraged to approach capital markets to raise capital
• Deepening of bond markets
− Some segments of G-Secs to be fully opened for Non-Resident Investors
− FPI limits for Corporate bonds to be increased from 9% to 15%
− Concessional withholding tax of 5% extended upto June 2023; alongside proposed 4% withholding
tax on interest on bonds listed on IFSC exchange
• New debt ETF comprised of Government Securities proposed
• Deposit insurance of deposits in Scheduled Banks to increased INR 5 lakhs from INR 1 lakh.
• NBFC sector: Mechanism to be evolved to further expand the scope for partial credit guarantee scheme
for NBFC, to address the liquidity concerns of the sector
FPI limits for Corporate bonds to be increased from 9% to 15%
Source: Indian Union Budget Document, Bloomberg, February 2020 6How does the fiscal deficit get funded
INR in Crores 2019-20 2019-20 2020-21
Budget Est Revised Est Budget Est Funding the Fiscal Deficit
GDP at Current Prices 21,100,607 20,442,233 22,489,420 100% 2% 4% 2%
10%
90% 17%
Gross Tax Revenue 2,461,195 2,163,423 2,423,020 31% 30%
80% 20%
Less: Assignment to States (809,133) (656,046) (784,180) 13%
Net Tax Revenue 1,649,582 1,504,587 1,635,910 70% 4%
3%
3%
60%
Non Tax revenues 313,179 345,514 385,017
50%
Capital Receipts 119,828 81,605 224,967 40%
68% 67% 65%
30% 62%
Total Receipts 2,082,589 1,931,706 2,245,894
20%
Revenue Expenditure 2,447,779 2,349,645 2,630,145 10%
0%
Capital Expenditure 338,570 348,907 412,085 FY18 FY19 FY20 (RE) FY21 (BE)
Market Borrowing T-bills Small Savings Others
Total Expenditure 2,786,349 2,698,552 3,042,230
Fiscal Deficit 703,760 766,846 796,336
Fiscal Deficit as % of GDP 3.34% 3.75% 3.54% INR In Crores 2019-20 2019-20 2020-21
BE RE BE
Funding the Fiscal Deficit Gross Borrowing
Market Loans (Borrowing) 423,122 473,973 514,870 Net Borrowings 423,122 473,973 514,870
Short term borrowings (Borrowing) 25,000 25,000 24,999 Maturities 236,878 236,027 235,130
External Assistance (Net) (2,952) 4,933 4,622 Buyback 50,000 0 30,000
Securities issued against Small Savings130,000 240,000 240,000 Gross Borrowing 710,000 710,000 780,000
State Provident Fund (Net) 18,000 18,000 18,000
Other Receipts (Net) 59,531 4,941 50,848
Draw-down of Cash Balance 51,059 0 (53,002)
No incremental borrowing this year and Incremental borrowing FY21 in-line with market estimates
7
Source: Indian Union Budget Document, Bloomberg, February 2020Budget details
INR in Crores 2019-20 2019-20 2020-21 y-o-y y-o-y
Budget Est Revised Est Budget Est FY 20 (RE) FY 21 (BE)
GDP at Current Prices 21,100,607 20,442,233 22,489,420 9% 10%
Gross Tax Revenue 2,461,195 2,163,423 2,423,020 4% 12%
o/w Corporation tax 766,000 610,500 681,000 -8% 12%
o/w Income Tax 569,000 559,500 638,000 21% 14%
Tax estimates contingent on
o/w GST 663,343 612,327 690,500 5% 13%
o/w Customs 155,904 125,000 138,000 6% 10% recovery of economic growth
o/w Union Excise 300,000 248,012 267,000 7% 8%
Less: Assignment to States (809,133) (656,046) (784,180) -14% 0%
Net Tax Revenue 1,649,582 1,504,587 1,635,910 14% 9%
Non Tax revenues 313,179 345,514 385,017 40% 11%
o/w Dividends from PSUs 57,486 48,256 65,747 Divestment estimates,
o/w Dividend from RBI, bank s and FIs 106,041 151,936 89,649
o/w Net Communication 50,519 58,990 133,027 receipts from communication are
o/w Other non-tax revenues 63,395 59,310 67,127
aggressive;
Capital Receipts 119,828 81,605 224,967 -21% 176% Dividend estimates reasonable
o/w Disinvestment 105,000 65,000 120,000
Total Receipts 2,082,589 1,931,706 2,245,894 16% 16%
Revenue Expenditure 2,447,779 2,349,645 2,630,145 17% 12% Limited scope for compression
Capital Expenditure 338,570 348,907 412,085 15% 18% In expenditure in FY21
Total Expenditure 2,786,349 2,698,552 3,042,230 17% 13%
Fiscal Deficit 703,760 766,846 796,336
Fiscal Deficit as % of GDP 3.34% 3.75% 3.54%
Funding the Fiscal Deficit % of Fiscal Deficit
Market Loans (Borrowing) 423,122 473,972 514,871 62% 65%
Short term borrowings (Borrowing) 25,000 25,000 24,999 3% 3% Borrowing on expected lines;
External Assistance (Net) (2,952) 4,933 4,622 1% 1%
Small savings to fund significant
Securities issued against Small Savings130,000 240,000 240,000 31% 30%
State Provident Fund (Net) 18,000 18,000 18,000 2% 2% Share
Other Indian
Source: Receipts (Net)
Union 59,531 July 2019
Budget Document, Bloomberg, 4,941 50,848 8 1% 6%
Draw-down of Cash Balance 51,059 0 (53,002) 0 -7%
Source: Indian Union Budget Document, Bloomberg, February 2020Overall: Target as expected but achievement remains a challenge
• Fiscal deficit in line with market expectation
• However achievement remains a challenge in an environment of slow growth
• Divestment estimates are aggressive
• Expenditure side leeway is limited as part of subsidy estimates are already factored as off-
balance sheet funding
Debt market outlook
• Near term debt markets may stay range bound as there is no immediate additional
borrowing
• Medium to long term, growth recovery and adherence to deficit targets will be the key
variable
• RBI stance and further actions such as “Operation Twist” are key monitorables
Divestment estimates are aggressive
Source: Indian Union Budget Document, Bloomberg, February 2020 9Union Budget:
The Equity Markets Perspective
10Lack of Stimulus dents Optimism
• The push from savings to consumption: Government is pushing individuals to move from savings to
consumption by offering a better tax regime if one does not avail the investment benefits / other deductions.
• However, market was expecting direct measures to revive consumption. The personal tax rejig is unlikely to
provide the desired benefits. Dividend taxed in the hands of the recipients could have a negative impact.
• Lack of specifics with respect to Infrastructure spends (through NIP) and the overall growth in
allocation came lower than expectation.
On the positive side;
• Focus on structural reforms re-emphasized: GST, IBC, DBT, NIP etc.
• Digital Ecosystem: Digital governance, Bharat Net to improve connectivity, setting up of data centre parks
and improving digital penetration
• Inclusive growth: Continued to focus on social welfare, education & skills development, healthcare sector,
clean energy, financial inclusion and affordable housing
Overall, the budget is a continuation of government’s focus on structural reforms
and improving the system efficiency
Source: Indian Union Budget Document, Bloomberg, February 2020 11Key themes / Proposals
Tax proposals
Personal Income Tax Slabs rejigged: Reduction in income tax slabs for income upto Rs. 1.5 mn sans any earlier
deductions.
Dividend Distribution Tax abolished: Dividends to be taxed only in the hands of the investors and not at the source
Disinvestment push
Proposed mega IPO of LIC and Privatisation of IDBI Bank
Focus on the bottom of the pyramid
• Farmer welfare: Rs 1.2 trillion to be allocated for Rural development with commitment to double farmer income.
• Financial support: Credit to agriculture sector to see an increase of 25% to Rs 15 trillion.
• Healthcare: Expansion of government’s flagship healthcare schemes - Aysuhman Bharat and Jan Aushadhi
• Continued emphasis on ‘Make In India’ initiatives
• Domestic manufacturing: New scheme to promote manufacturing of mobile phones, electronic equipment and semi-
conductor packaging.
• Infrastructure
• National Infrastructure Pipeline (NIP): Re-emphasized the investment envisaged to the tune of Rs. 105 trillion over
the next five years. Allocation towards key infrastructure ministries have been increased
• Transportation: To improve connectivity to tourist destinations, new trains / stations under the PPP routes, increase in
number of air fleet and airports.
• National Gas Grid: Focus on expanding current national gas grid from 16,200 kms to 27,000 kms for promoting
cleaner fuel.
Preference for Consumption over Savings but lack of immediate stimulus measures is negative
Source: Indian Union Budget Document, Bloomberg, February 2020
12Key Sectoral impact & Assessment
Sector Measure Likely impact
Negative for savings products that are tax saving in nature
Removal of Standard Deductions / 80C related to ( insurance and mutual funds).
savings deduction in the new optional personal Removal of Principal & Interest deduction for home loan
tax structure buyers in the new optional personal tax structure to be
negative for HFCs
Deepening of bond markets – increase in FPI limit
Financial in corporate bonds and specified categories of
Will improve the capital flow into the country
Sector Government securities would be opened fully for
Non-resident Investors.
Focus on partial credit guarantee scheme for Positive for NBFCs / HFCs as it will address liquidity
NBFCs/ HFCs challenges
Deposit Credit Guarantee Insurance hiked to Rs. Positive for depositors but may increase the insurance
0.5 mn from Rs. 0.1 mn earlier costs for banks.
Consumer Excise duty on Cigarettes hiked Negative for Tobacco companies.
Removal of Principal & Interest deduction for
home loan buyers in the new optional personal
Negative for Residential developers
tax structure
Real Estate
One year extension on interest deduction for
housing loans taken for affordable homes and
Marginally positive for Residential developers
income tax exemptions on developers' income
from affordable housing projects
Information Positive for IT companies as it may lead to higher dividend
Removal of Dividend Distribution Tax
Technology pay-outs
Source: Indian Union Budget Document, Bloomberg, February 2020 13Key Sectoral impact & Assessment
Sector Measure Likely impact
National Infrastructure Pipeline (NIP): Re-emphasized
the investment envisaged to the tune of Rs. 1.05
Neutral for Infrastructure companies
trillion over the next five years. However, the growth in
overall allocation has been lower than expectation.
Allocation to some of the key sector / agencies have
increased. NHAI allocation has been increased by
Infrastructure 16%. Pradhan Mantri Gram Sadak Yojana (PMGSY)
Positive for Construction companies
allocation grew by 39% from FY20 RE. Urban Infra
(Smart Cities and AMRUT) allocation increased by
40% .
Railways has seen marginal growth of 3%. However,
emphasis has been more on new lines (+52%), track Positive for the Rail sector companies
renewables (+25%), Doubling of tracks (+11%).
Plans to expand national gas grid to 27,000 km
Positive for Gas Utilities
from 16,200 km
Oil & Gas
Adequate provision of fuel subsidy allaying
Positive for upstream and downstream PSU Oil firms
concerns on subsidy burden on PSU Oil firms
Viability gap funding for hospitals in Public Private
Healthcare Positive for Healthcare service companies
Partnership (PPP) mode
Source: Indian Union Budget Document, Bloomberg, February 2020 14Disclaimer
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performance is not indicative of future performance.
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