Neelkanth Mishra, managing director and India equity strategist, Credit Suisse in an exclusive interview with CNBC-TV18 on Monday discussed various aspects of Budget 2020-21, which was presented by finance minister Nirmala Sitharaman on Saturday.
Mishra delved into critical issues related to the Budget such as revenue sharing between the central and state governments, GST compensation, resource allocation to agriculture, and LIC IPO, among others. Here are the edited excerpts of the interview:
Q: We have gone through various aspects of the Budget with others. One aspect which we did not go through, I want to start with you. The transfer to states number is distinctly lower now. The Budget of June had estimated that the amount of money that will go to the states would be Rs 8.09 lakh crore in the current year. However, now we understand in the revised estimates that only Rs 6.56 lakh crore will go, which means less money will go to the states and they are the guys who actually indulge in rural development or all those activities where you were expecting aggregate demand to come. Likewise in the Budget estimate for FY21, although it is Rs 7.84 lakh crore and therefore higher than the revised estimates, it is much lower than last year's Budget estimate, so only Rs 7.84 lakh crore will go. So, first up that question because we have not tackled it. Will this be a bit of a bother in terms of aggregate demand growth or the liquidity in the system because states will not make payments? A: There is a very sharp change in how much the states are getting from the central tax collections. The 14th Finance Commission has recommended 42 percent devolution. The numbers seen in the gross versus net that comes in the central budget is a bit different because there are things like surcharges; the income tax surcharges that are levied are not shareable, there are certain types of duties on petrol and diesel which we are not shareable with states. So it's never 42 percent. It's generally slightly less than that.
However, what is remarkable is that FY20 - this number has fallen to about 30 percent. In FY21, it's budgeted to rise slightly but it has fallen very sharply. In fact, the Rs 3 lakh crore shortfall in gross tax collections for the Centre, the drop in transfer to states is Rs 1.5 lakh crore. So the state share drop is about 50 percent.
One of the reason which exacerbates this issue is how the goods and services tax (GST) compensation is treated. The Rs 109,000 crore of GST compensation is not part of this tax transfer issue; it used to be so if you adjust for that this is less distorted but it is still an issue.
It is still a very meaningful problem and therefore more importantly than in prior years I have been a big proponent of the fact that state budgets matters much more than the central budget. This year's state budgets will be much more interesting and it will be important for us to understand how the fiscal impulse is breaking out because unlike the Centre they do not have an escape clause and their borrowings get frozen by September-October. So whatever is the tax shortfall is an expenditure cut.
So all of this that you hear that government is not paying - we assume that government is Delhi but it actually may not be Delhi because Delhi has actually been very proactive in pushing departments to make the payments on time. If you see the expenditure cuts this year, there are no cuts at all. In fact on many departments the expenditure has gone up. They have even pushed the central PSUs to make the payment. I think the delayed payments are mostly coming from state governments.
Q: From the markets point of view one argument is that this government in particular makes most of the big announcements outside the Budget. So this sulking of that market that you have right now, do you think that is presenting a buying opportunity especially considering that the market had also gone into the budget with light positions? A: I am not sure it had gone into the budget with light positions. From what I gathered I think expectations were very high and there were also very vague expectations.
So if you ask people who are very excited, they will say something will happen. However I don't think anyone was clear on what exactly is going to happen.
Therefore, in the next couple of days, once we have seen all the adjustments on tobacco and insurance and all of those things, once that is done, I think we will move on to tracking the economic momentum, we will move on to tracking why despite all the inventory correction, the primary sales of auto makers are still down 5 percent in January and the fact that there doesn't seem to be any evidence that January was better than December in terms of monthly sales , the comments coming from various companies.
So, outside of cement where we have seen some price increases, I think the problem is that the economic momentum which had stabilised at a low level is not showing any signs of picking up.
Q: Since you track this whole rural and agri space very closely, were you disappointed with the fact that there was just a negligible increase in the budgeted allocation towards agri and rural? it has come in at just about Rs 2.83 lakh crore versus last year's budgeted allocation of Rs 2.79 lakh crore. Were you expecting more and how do you see this whole space play out now? A: The cut in expenditure in agri that we have seen BE versus RE I FY20 is mostly because of PM Kisan. The government assumed that in the agricultural census there were 145 million farmers but if only 75-80 want to claim the PM Kisan benefit then you need to cut down that allocation.
There are some cuts elsewhere as well in other parts of the budget but we have to remember that there is a lot more happening on the agri side in terms of market access. In fact, one of the fascinating feature of recent onion price spike is a lot of the gains have gone to the farmers; earlier the onion price increase used to benefit the traders and the farmers would not get incentivized. So, there are many other things that are happening in terms of market access, in terms of access to infrastructure, access to credit and all of those things matter a lot more than specific rupees that are to be transferred to farmer's pocket.
Will there be a recovery? Agriculture has a very and this is something that economic survey brought out that we keep talking about and we were the first to highlight it that look this is a big income problem for farmers that the food price is not growing but now it has gone to other extreme where people are saying it is so good to have high food inflation because now the farmers will feel better.
There are food consumers as well and this is what the economic survey does bring out that if you have low food prices it actually helps significant savings for poor families who may not be in the food producing business. So, we need to balance it out.
On the farming side my sense remains that it is a structural problem, we do not need so many farmers, there is only so much food that you can consume and productivity needs to be raised more and those are the structural solutions that I would look out for rather than just some dole in the budget.
Q: When terms of trade go towards agriculture they do not move for one season, they normally stay and even global food prices have risen, so do you think there is a transfer of purchasing power anyway? From a stock market point of view, is it worth betting on those stocks that are dependent on rural demand? A: I am not convinced yet, I can see the signs, we can all see the data that palm oil prices had spiked up before the recent fall. If crude falls then the whole edible oil system starts to fall in sympathy.
There has been a spike in pork prices in China, there is problem with onions and possibly potatoes in India. So there are isolated instances that are emerging and therefore it is very tempting to believe that food prices could be reversing the downward trend that we have seen. I think it is very early days to say that. I am not convinced at this is actually going to last.
So, you may have seen that the onion prices for example are down 45 percent from the beginning of January to the end of January. This is seasonal, this is bound to happen. Even on the reduced rates the year on year inflation is still high but the direction shows that supply response is finally in action and this may not last very long. So the price increases are starting to fade now. I would not bet on this sustaining.
Q: In your note you have mentioned that LIC IPO is a big policy statement, what do you mean by that? And what is the overall takeaway from the market point of view here? A: It is important to highlight that expenditure to GDP is budgeted to rise in FY20 and FY21 which is an important policy statement that when the economy is slowing down the government is trying to spend; given the fiscal constraint they cannot do much.
So, it is much more prudent to use non-tax revenues in these times and, therefore, the telecom sector spike that we have seen in the budgeted numbers in FY21 and the disinvestment spike that we have seen in FY21 as well.
So together 2.1 + 1.33; I would say 1 trillion from telecom, which is extra, about 1.5 percent of GDP is to come from these 2 angles which is important counter-cyclical support to the economy.
Now is it possible? On the LIC side there are logistical issues. The time taken to take such a large firm to become IPO ready in terms of quarterly results and all of those things can be substantial. It will require a lot of preparation, a lot of ground work, it will require a lot of hard work to get it done in FY21.
However, from a policy perspective, this is the largest cash cow that exists for the government and it manages Rs 36-40 trillion of assets. To actually open it up for scrutiny, to actually list it out and then put constraints on how the government infrastructure uses or misuses it, I think it is a very big positive.Look at what happened after Coal India got listed, whatever may happen to coal demand and the multiples that Coal India trades at, the fact is that most people did not even know that Coal India was the largest coal manufacturer in the world. So, that kind of scrutiny and then how it changes organisation from inside, all of these are very important positives, so it is a very important announcement from that point of view.