Budget 2020: Personal income tax cut unlikely to solve all areas of economic slowdown, according to Prakarsh Gagdani of 5paisa.com

Even as most market experts are speculating a personal income tax cut in the Union Budget 2020, Prakarsh Gagdani of 5paisa.com said the government reforms should focus on arresting the current slowdown in real estate and banking sector rather than consumer spending.

In an interview with Mousumi Paul, Gagdani said he expects reforms that will boost consumption levels rather than consumer spending. Gagdani is the CEO of discount broking firm 5paisa.com. He has about 14 years of expertise in advisory, P & L Management, and product development. Here's the edited excerpts:

A: An income tax cut is unlikely to solve all areas of the economic slowdown because most taxpayers are in the lower-income bracket and an effective tax rate cut may not have any impact on the ground. However, a cut in goods and services tax (GST) standard rate could provide a much bigger impetus to the economy.

In addition, if the government announces more social spending initiatives or expands the scope of current social initiatives, we may see a significant pick up in consumption and demand from both rural and urban segments.

A: I think fiscal deficit is likely to widen further, considering the government's efforts towards aiding the economy through increased spending. However, as the economy recovers and revenue income goes up things should settle for better.

Many economists have suggested that a minor increase in fiscal deficit should not worrisome as long as demand and consumption are on track. However, it would be a tightrope walk.

A: The government is aware of the ongoing slowdown in the economy and has been trying various ways to get it on track. For example, the corporate tax rate cut was a significant milestone in the reform space. However, the required results are yet to manifest as demand is not picking up and corporate earnings are yet to catch up.

At this stage, the government should create an environment for an effective credit cycle where banks should easily lend to corporates and corporates should be able to effectively create capacity. This would help in job creation, boost demand and consumption cycles.

The government should also focus on infrastructure and rural development spending to aid the recovery.

A: The industry has been demanding to remove the anomalies regarding the taxation of raw materials and other inputs. Inverted duty structure impacts the domestic industry adversely as manufacturers have to pay a higher price for raw material in terms of duty, while the finished product lands at lower duty and cost. Chemical and electronics industries are particularly asking for rectifications. The government is likely to address this issue in the Budget.

A: The recent uptick in the inflation print is most likely a one-off case because of the higher cost of agricultural commodities battered by unseasonal rains. The numbers are likely to show a downward trend, believe most economists.

As long as inflation remains in the RBI’s accepted range, the government should focus on boosting consumption, even though it might add to some inflationary concerns in the near-term.

The liquidity situation is improving and the government should keep its focus on all the schemes it has initiated to improve liquidity. As discussed earlier,  creating an atmosphere for an effective credit cycle would be the key to boost liquidity in the system and bring the economy on the track.

A: We feel this year both smallcaps and midcaps will outperform the benchmark indices and largecaps.

Many smallcaps and midcaps are down 50-60 percent. For the last two years, smallcaps have given negative returns while midcaps have largely been flat.

Most of the SIP money through mutual funds have gone to high-quality largecap stocks. Even the indices overall upside is driven about ten largecaps. Since they are overvalued, we believe good quality midcap and smallcap stocks will find investors' interest and outperform.

A: Most of the sector’s problems are in expensive residential real estate in cities like Mumbai and Delhi, where overcapacity has led to demand slowdown and affected both builders and lenders.

In the affordable segment and smaller cities, the real estate sector is doing good. The government and the private sector players are working towards last-mile funding to ensure stuck projects are finished and buyers’ interest is taken care of, which should bring some relief to the sector.