Comments from Sampath Reddy, CIO on Interim Budget FY19-20

  • 1st Feb, 2019

The Interim budget has been a pragmatic and well balanced one, benefiting various sections comprising of farmers, middle class, the unorganized sector etc.

A farm package, the Pradhan Mantri Kisan Samman Nidhi, was announced with direct income support of Rs. 6,000 per year for those farmers owning up to 2 hectares of land. The budget outlay for this package is Rs. 75,000 crore in FY20 and interest subvention benefit was also announced on loans for both the farming and animal husbandry sectors.

Numerous benefits have also been announced for the middle class. On the personal taxation front, individual tax payers having taxable income up to Rs. 5 lakhs, would receive full tax rebate (compared to Rs. 2.5 lakhs exemption before). For individuals above Rs. 5 lakhs income, this rebate does not apply, and the earlier income tax rates/slabs are applicable. Also, standard deduction has been increased from current Rs. 40,000 per year to Rs. 50,000 per year. Besides that, TDS limits have been raised on various savings instruments. Individuals and the real estate sector is also expected to benefit from various tax advantages being provided to the sector. Overall, this tax saving will increase the disposable income in the hand of individuals, and provide a boost to consumption. This is a positive for GDP growth too, with consumption growth slowing down a bit lately. We expect especially the consumer sectors to benefit, and the stock markets are already indicating that, with the Auto & FMCG indices closing with healthy gains.

On the social security front, the government also announced a Mega Pension Scheme (namely Pradhan Mantri Shram Yogi Maandhan) for the unorganized sector, under which individuals having monthly income up to Rs. 15,000 per month, will be provided a pension of Rs. 3,000 per month, post retirement. This could turn out to be one of the largest pension schemes in the world in the coming years, and follows the Ayushman Bharat Yojana (one of the world’s largest health insurance schemes) announced in the last budget.

On the fiscal front, there been some slippage, as expected. The revised fiscal deficit for FY19 stands at a revised 3.4% of GDP (vs 3.3% earlier), and for FY20 has been budgeted at 3.4% too (vs 3.1% earlier). As a result, the gross market borrowing for FY20 has come in slightly higher at Rs. 7.1 lakh crore, compared to the market expectation of ~Rs. 6.5 lakh crore, and the net market borrowing for FY20 is Rs. 4.73 lakh crore. This will put some moderate upward pressure on bond yields (as been seen already). In the fixed income segment, we continue to prefer the shorter end of the yield curve.

We feel that the markets will soon digest the budget, and move on to more fundamental factors and global events. Investors should continue to invest systematically in equities to benefit from India’s long term growth story and recovery in corporate earnings.

For more details please refer to the budget document and Finance Bill.

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