Budget 2020: Reasonable leeway on fiscal deficit may not be objected by markets, says Dhiraj Relli of HDFC Securities

Updated : January 29, 2020 03:33 PM IST

According to Relli, the main focus should be on increasing investments and raising productivity, though it could take time to show effect

We have seen a muted start to the earnings season although expectation levels were low too, he says

The Union Budget 2020 will be a challenging task for Finance Minister Nirmala Sitharaman given the tight fiscal situation and slowing domestic growth said Dhiraj Relli, MD & CEO, HDFC Securities.

In an interaction with CNBC-TV18, Relli said that a little bit of leeway in fiscal deficit in these conditions may not be objected by the markets. He also spoke about December quarter corporate earnings and recent global developments.

Here are edited excerpts:

What are your expectations from the budget for the markets and for different sectors?

Given the tight fiscal situation and slowing domestic growth, it would be a challenge for the FM to balance the two objectives and kick start growth. Also given the shadow of the global impact due to the coronavirus, the task of the FM has got a bit tougher. If the outbreak is contained soon, we may not see much disruption globally and on India; but if this elongates then we could see further challenging times and bolder steps (under pressure) after the Budget.

In the past, FMs have tried to do too much in the Budgets and try to appease as many constituents as possible, with the result that we have seen revenue shortfall and expenditure that is constrained by smaller revenues and the government departments not having the time or scale to spend so much money. The FM should hence try to do fewer things which are for the overall good of the economy even if they temporarily impact some portions of the population. The main focus should be on increasing investments and raising productivity, though it could take time to show effect.

Consumer-focused and financials may be the key beneficiaries out of the Budget.

Given the low growth scenario, do you think the government will compromise on the fiscal side? If done, how will the markets react?

The Modi government is likely to deviate from its policy of fiscal consolidation for the first time in six years and may go for a higher fiscal deficit to boost growth in the budget on Feb 01. Given the fact that the first two years of any government sees the most reforms undertaken, it is normal to expect some path-breaking announcements in the forthcoming Budget, though a lot can be done outside the Budget. The government needs to give a serious push to improve the business environment. One only hopes that the recent political reverses suffered by the ruling coalition do not bring down its enthusiasm to go the whole hog on the reform path even if hurts some segments of the population temporarily.

We expect FY20 to end with a fiscal deficit of 3.5-3.7 percent versus the original estimate of 3.3 percent of GDP. For FY21, fiscal deficit may be projected at 3.4-3.5 percent of GDP. Fiscal consolidation roadmap may be deferred by one more year. However given the effect of higher fiscal deficit on interest rates, ratings and capital markets, the FM may not budget too high fiscal deficits for FY20 and FY21.

A little bit of leeway in these tough times may not be objected by the markets if the government seems sincere in laying out the target which seems reasonable to be achieved.

Will a major change in personal income tax help?

Though expectations have been built on a sharp cut in personal tax rates following corporate tax cut announced in Sept 2019, we think that two large giveaways in quick succession is hoping for too much. If at all, some tinkering of tax slabs may be possible which may put Rs 5,000-8,000 in the hands of taxpayers. This may not revive consumption in a big way.

Long term capital gains on equities/equity MFs may be abolished (though the holding period may be extended to 2 years vs the current 1 year) as it has not resulted in any significant revenue while dampening the sentiments. Dividend distribution tax may be abolished, but recipients of dividend may be taxed on the whole of dividend received by them.

A large cut in personal tax cut (though less likely) could boost consumption to some extent (and not majorly) as only 6 percent of the population pays income tax and taxpayers paying substantial tax is much lower proportion.

Do you expect a sharp correction in the market if the Budget fails to impress?

Budgets have lately become a non-event except for media and economists and its effect is worn off 2-3 days post the event. Markets may slide ahead of the Budget on apprehensions on Budget and also due to coronavirus scare. However post the announcement of the Budget, once the uncertainty is out, markets may bounce and rise towards the recent highs. However, if this period is accompanied by some other large external negative event, then the markets could correct post Budget.

How do you gauge Q3 earnings so far? What sector do you think performed well during the quarter?

We have seen a muted start to the earnings season although expectation levels were low too.

In terms of the actual outcome so far we have seen Positive results from select Pharma, Paints, SFB, Housing finance, Tyres, AMC, General Insurance, Cables, Plastic, Cigarette companies while Negative results from select Metals companies. We have also seen mixed numbers from select IT, Life insurance, Pvt Banks, NBFC, Infra, Agrochem, and Media companies.

Overall, as far as the Q3FY20 earnings season is concerned, it will be more of the same with Financials driving the quarter and Commodities dragging it. Corporate commentary on the underlying demand scenario and any sequential improvement post-government announcements will be the key monitorable. We believe that FY21 consensus estimates are factoring in a sharp recovery in earnings and have downside risks.

Will we see recovery in Midcaps and Smallcaps in 2020?

Yes, Midcaps and smallcaps have done well over the last few weeks after underperforming in the previous almost two years. These will catch up some more in terms of the index. However one will have to be careful about the individual stocks one is betting on as we may not see a repeat of blanket rise across all small and midcaps, seen in the past. Due to regulatory, technological and financial disruption, a lot of these companies have become less competitive as compared to the past. One will have to be careful in selecting stocks and stick to the top 2-3 stocks in the respective sectors.

What are the global factors that will have significant impact on Indian markets going ahead?

The trend in global economic growth (which in turn is impacted by trade tiffs, geopolitical events, trade protectionism, health epidemics, growth in emerging markets, etc.) is the key factor to track globally. Further, the interest rate policies followed by the Central Banks will determine the risk appetite of investors and the amount of inflows/outflows that India can expect.

Budget 2020: Reasonable leeway on fiscal deficit may not be objected by markets, says Dhiraj Relli of HDFC Securities

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