CIO comments on Union Budget FY18-19

By Mr.Sampath Reddy, Bajaj Allianz Life Insurance

Overall, the Budget was a well-balanced one, with a focus on rural and agricultural sectors, and the common man. Expenditure towards agriculture, rural development, healthcare, infrastructure and education sectors has been increased. The government proposes to hike Minimum Support Price (MSP) to 1.5X of the cost of produce, to help aid its vision of doubling farmer’s income by 2022. The Finance Minister also announced an ambitious National Health Protection Scheme, to cover 10 crore poor families, and will provide health coverage of Rs. 5 lakhs per family per year, in case of hospitalization. The Finance Minister heralded this as the world’s largest govt. funded healthcare program.

The government expenditure is budgeted to grow at 10.1% in the year compared to 12.3% in FY18, driven by growth in capital expenditure of 9.9% in FY19 versus a contraction in FY18. Meanwhile, the revenue expenditure is estimated to grow at 10.2% in FY19 versus a 15.0% growth in FY18.

Fiscal deficit for FY18 has been revised to 3.5% of GDP from 3.2% budgeted earlier, which is in line with expectations of a fiscal slippage.  However, the fiscal deficit target for FY19 came in slightly higher than expectations at 3.3%, due to increased budgetary allocation in the rural and agricultural sectors in a bid to improve employment generation— to relieve the stress in the rural economy. At the same time, the government announced its intention to accept the FRBM Committee’s recommendation for the govt. to reduce its debt to GDP ratio to 40%.

Cut in the corporate tax rate for smaller companies with annual turnover up to Rs.50 crore to 25% in last year’s budget, has now been extended to the companies with turnover of up to Rs. 250 crore. Tax impetus given to the SME and MSME sectors, is a clear positive for smaller enterprises and the initiative would give additional benefits to this sector which is an important segment of the economy.

As widely feared, the Government has proposed a 10% tax on Long-term Capital Gains (LTCG) greater than Rs 1 lakh for equities and equity-oriented funds, while the short term capital gains (STCG) tax rate of 15% is retained on equity holdings up to 1 year. However, the government has provided a grand-fathering clause, to protect the gains accrued so far, but the future gains and investment in equities will attract both long term and short term capital gains tax. This is a bit of a dampener for the equity markets also, although the 10% LTCG tax and 15% STCG tax rates still provide an attractive proposition.

The policyholders of life insurance companies will continue to enjoy the same tax regime as earlier, given that Insurance investors are holding for a minimum of five years.

On the personal tax front, income tax rates have been retained as earlier, but a standard deduction of Rs. 40,000 is provided to salaried individuals in lieu of transport and medical expenses. Some impetus has been provided to senior citizens, with deductions for medical insurance and exemption on interest earned on bank fixed deposits being increased from earlier.

On the divestment front, the government said that it has overachieved its budgetary estimate of Rs. 72,500 crore for FY18 and has further revised this upwards for this fiscal. For FY19, the divestment amount has been budgeted at Rs. 80,000 crore, which is prudent.

Going forward, the markets will soon digest the budget, and move on to the key factor, i.e. how is corporate earnings growth panning out. The macro picture has been good in the past few years, but now some challenges seem to be emerging like the rise in crude oil and commodity prices—thereby stoking inflation. However, we feel that the worst of the corporate earnings growth is behind us, and expect earnings to pick up in H2FY18 and over the coming financial year. Results so far for Q3 FY18 have been broadly in line with expectations, reaffirming that the earnings trajectory is on a recovery path. Economic growth is showing a recovery, and India would be among the fastest growing economies in FY19. This should bode well for investors and they should continue to remain invested to benefit from the India growth story of the coming few years.

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