The Union Budget of 2019 was presented in the parliament on Friday by the Minister of Finance, Nirmala Sitharaman. While there were calls for stimulating the economy in the face of slowing growth, the finance minister kept her focus on long term growth and fiscal consolidation, rather than a quick stimulus. The budget focused quite a bit on infrastructure development and deepening of the financial markets. We also saw some increase in taxes and duties here and there to prop up revenue.
Let us take a look at how the budget is going to impact markets, and subsequently, your investments.
The budget announced measures to bring more money into the stock market. From increasing minimum public shareholding threshold to 35% to raising the FPI holding limits from 24% to sectoral FDI caps, the budget had a slew of measures. Here are a few announcements which are likely to impact the stock markets and your investments.
Increase in public shareholding
Perhaps, the most significant announcement with respect to the equity markets was the proposal to up the minimum public shareholding to 35% in all listed companies. Currently it stands at 25%. This is a mixed bag and the outcome will depend on the actual execution. In the short run, this is likely to have negative impact as a lot of new shares will come in to the market, increasing supply. This will lead to a fall in prices. Some MNCs are also likely to be concerned about the increased float and may consider de-listing their shares.
Our view however, is that this will be beneficial in the long run. As the regulations stand at present, companies are required to comply with 25% public shareholding within 3 years of listing. We believe if SEBI goes ahead with this proposal, it will provide a time of 2-3 years for all companies to become compliant. This means there will not be an immediate increase in available shares and it will happen gradually.
This is good for both the equity markets and your investments. Over the last couple of years, fund managers have struggled to find good opportunities in the market. An increase in supply of free-float stock can increase liquidity and create more investment opportunities.
Taxes and Auto sector woes
A hike in Excise duty of ₹1 on petrol and diesel may add to the woes of the auto sector, which has already been reeling under the impact of falling demand. With the added push for electric vehicles (EVs) through the reduced GST rate of 5%, auto companies will now have to shift their focus to EVs. This, again, can lead to some short term trouble as auto stocks might continue to suffer. However, once the industry has had time to adjust and move to EVs, they will become more immune to fuel price changes.
PSU Banks & NBFCs
Government also announced a further infusion of Rs. 70,000 crores into PSU banks to boost credit growth. This recapitalisation exercise will help lift stock prices of the banks benefiting from this move. Credit availability has been a problem in recent times, especially after the IL&FS fallout which made it difficult for NBFCs to raise money. To this end, the government announced a credit guarantee scheme which has been discussed in more detail in the next section.
What it means for your investments
For equity investors, the budget will lead to some more pain in the short term. The market has already shown its displeasure by falling close to 3% on Friday and Monday combined. But some of the measures may lead to a recovery in credit growth.
In recent times, India has been reeling under a slump in consumption demand. Easier availability of credit may turn things around. This could lead to better earnings growth in the coming years, especially given the low base.
Higher availability of mid and small cap stocks is also likely to create new investment avenues, giving a boost to funds investing in these categories. Higher float capital can also reduce the impact cost of many stocks, which will lead to lower volatility in their prices. Investors of mid and small cap funds will definitely benefit from this. However, the gains may take a year or more to show up in your fund returns.
With respect to debt markets, the budget of 2019 had quite a bit to offer as well. Deepening of the credit system and better liquidity management found prominence. Bond markets cheered with the 10-year government bond yields falling from 6.75% on Thursday to 6.59% today. There were two aspects that brought this about – one, fiscal consolidation was in focus as fiscal deficit target was reduced to 3.3% of GDP. This may further reduce interest rates. Second, the budget addressed liquidity concerns in the market post the IL&FS fiasco. Let us understand these moves better.
Though seemingly ambitious, the fiscal deficit target was revised down to 3.3% of the GDP from the earlier target of 3.4%. Additionally, the government is also looking to the foreign markets for its borrowing programme. While India’s overall debt is higher relative to other countries, its external borrowing to GDP ratio is still one of the lowest. The finance minister spoke about tapping the foreign markets to fund the deficit. Analysts are estimating about 10% of the deficit to be funded through this route. Domestic bond markets may see some relief, pushing the already falling rates further.
The market was keenly looking for some guidance on liquidity after the IL&FS event sparked a crisis in the system. DHFL failing to make repayments further aggravated concerns and raised questions about short term liquidity. The budget focused both on structural reforms as well as easing the current situation. Structurally, RBI will get more powers to supervise NBFCs. Housing Finance Companies, which were previously under the ambit of National Housing Bank, will also be brought under the regulatory control of RBI. The Finance Minister also proposed one-time six-month credit guarantee for banks. The government will absorb up to 10% of losses incurred on pooled assets purchased from sound NBFCs. This will encourage banks to provide much needed cash to NBFCs. Opening up an additional window, the government also allowed Foreign Portfolio Investors (FPIs) to purchase debt securities issued by InvIts and REITs.
What it means for your investments
For a debt investor, both aspects are of importance. The first one gives us a hint on interest rate direction. The second aspect comes as a reassurance as investors had begun doubting bonds as an investment vehicle. With SEBI tightening regulations for debt funds and the government stepping in to clean up the NBFC mess, the debt crisis may come to an end soon. As an investor, if you were caught in the crisis, chances are you have already suffered losses or are aware of which funds hold these troubled papers. In short, there is little unanticipated risk left in this space.
The next big question is where the interest rates are going to be and which segment of the markets will benefit the most. The 10-year government bond yields fell sharply after the budget. Gilt and long duration bonds, which have already gained from the interest rate rally, stand to gain further from this. However, the rally might already be over and hence, this may not be a great time to invest in such funds. These, therefore, should not form a part of core portfolios.
Investors with a 3-year time frame can consider corporate bonds which invest in high quality papers with an average maturity of 2-3 years. For investors with less than 3-year time frame, short duration, or ultra-short duration funds will be more appropriate, depending on the exact time-frame.
Impact on your taxes
Just like its past budgets, the government left the tax slabs unchanged. So your taxes are not going to get impacted. The only thing worth noting in this space was the inclusion of CPSE ETFs under ELSS. This means that you can now avail deduction for your investments in this instrument. However, it’s still not clear how this scheme will work as ELSS needs a lock-in of 3 years.
Two new deductions were introduced. First for affordable housing, i.e., apartments or houses which cost less than Rs. 45 lakhs. If you are buying such a house, you can avail an extra deduction of Rs. 1.5 Lakhs on the interest paid on the loan. However, given that you could already get a deduction of Rs. 2 Lakhs for such interest, it needs to be noted here that at current levels of interest rates, it is highly unlikely for your interest expense to cross Rs. 3.5 Lakhs. Second was for purchase of electric vehicles. If you take a loan to purchase an electric vehicle, you can avail deduction of up to Rs. 1.5 Lakh for the interest paid.
Overall, the budget had very little with regards to income taxes for the middle class.