Budget 2018: FM Jaitley Has Done His Bit; The Market Has To Move On

The Union Budget 2018 is out and you know that:

• There is tax on long term capital gains over Rs 1 lakh on sale of equity shares at 10 percent but with a grandfathering clause your cost of acquisition, as and when you sell, is the highest price as on 31 Jan ’18;

• there is fiscal slippage from 3.2 percent targeted earlier to 3.5 percent for FY18 and target for FY19 has been revised to 3.3 percent from 3 percent;

• there is no meaningful reduction in corporate tax rate. Though the limit for the 25 percent rate has been raised from Rs 50 crore to Rs 250 crore and it covers more than 90 percent of corporates, most companies in the listed space have a turnover of more than Rs 250 crore.

Now let us look at some other facts.

The populism, in the last full budget before general elections, is more optical (the noise being made about it) than in the budget numbers. For example, the so-called ‘Modicare’ in lines of ‘Obamacare’ of USA. The incremental impact due to the health insurance, which is supposed to cover 10 crore households and benefit 50 crore people assuming 5 members per family, is approx Rs 4,000 crore. This is not huge, given the overall budget proportions. The total expenditure on health in FY19 is Rs 54,667 crore, only marginally higher than Rs 53,198 crore in FY18.

Consider this: The expenditure on defence is Rs 282,733 crore in FY19 against Rs 267,108 crore in FY18. Expenditure on health is less than 20 percent of defence expenditure.

There is fiscal deficit slippage on account of (a) implementation of GST, this year, being the initial year of hiccups, which is expected to improve next year and (b) tax collection is for 11 months and not 12 months. According to the GST Act, tax for March 2018 does not become due before 20 April 2018, which falls in the next FY. There is another piece to the fiscal slippage: we are looking at it as a percentage of GDP whereas nominal GDP growth itself was lower in FY18. Nominal GDP growth in FY18 is estimated at 10.5 percent against 11 percent in FY17. In FY19 it is expected to improve to 11.5 percent.

The higher nominal GDP growth itself gives leeway to the government to project an ‘optically’ lower deficit, as the market looks at it as a percentage of GDP. In the medium term, the nominal GDP growth has been projected at 11.8 percent in FY20 and 12.3 percent in FY21. These are, respectively, 7.5 percent and 8 percent in real terms with an implicit GDP deflator of 4 percent.

There is another perspective to deficit. We discussed fiscal deficit as a percentage of GDP; the other perspective is outstanding debt as a percentage of GDP. While ‘optically’ the deficit for the year may come down, the government’s debt may move up. There is a prudential move on that as well. Central Government’s outstanding liabilities are estimated at 50.1% of GDP as on 31 March 2018, which is expected to come down to 48.8% by FY19. It is expected to decline to 46.7% and 44.6% of GDP over the next two financial years. Importantly, as proposed in new framework, the Central Government will endeavour to reduce its debt / total outstanding liabilities to 40% of GDP by FY25. Looks long, and there may be course revisions in between, but there is recognition of the need for fiscal discipline.

The equity market has shrugged off the initial jolt, the kneejerk reaction to the announcement of the LTCG tax on equity and equity mutual funds. At closing, equity indices were marginally lower than yesterday, it may be termed as a flat close. Market now realises that only on the gains made from now on, 10% will have to be shared with the government and 90% can be taken home.

The bond market has reacted negatively; yields on benchmark government securities are up significantly i.e. prices are down. Time to realise that a fiscal slippage was always on the cards. The bond market is doubting the credibility of the 3.3% target for FY19, but given the higher GDP base, stabilization of the GST regime and potential PSU divestment of more than Rs 80,000 crore, which is the target for FY19, it should not be a tough ask.

Source: https://www.moneycontrol.com/news/opinion/budget-2018-fm-jaitley-has-done-his-bit-the-market-has-to-move-on-2497511.html

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