February 1st marked the release of the Interim Budget of 2019 that took the Indian Automotive industry and the Equity markets on two rides, except for the fact that one was pleasant and the other, kind of roller-coaster.
The three highlights responsible for the above experiences commenced right with the granting of a full tax-rebate to individual taxpayers with an annual income of Rs.5 lakhs for the middle-class bracket to arriving at the next station for the Businesses with an annual turnover of less than 5 crores to be allowed to file quarterly returns and finally landing on to our lush green ‘2-hectare lands’ with 6000 rupees in every farmer’s kitty on an annual basis.
Hence, let’s begin this journey and understand the perks and perils as we move on from one station to the other.
As the income up to Rs.5 lakh gets exempted from paying tax, the consumer spending is expected to get a boost. Not only will this rebate benefit those people having taxable income of Rs.5 lakh or less, it also will prove to be positive for FMCG and auto stocks. Here the ride slows down a bit as the question arises, HOW?
This takeaway will no-doubt put more money into the hands of the middle-income families whose benefit will directly be received by the auto companies. The benefits aren’t over yet. The quarterly GST filing up to Rs.5 crore is expected to benefit small auto ancillary companies.
These are the direct benefits but what about the indirect one? The structural income support providing direct benefit transfer to small and marginal farmers is definitely in the right direction. Currently, this category comprises of 72% farmers which is likely to increase to 90% by 2025. The farm income support of Rs.6000 per year will provide a huge sale boost to the two-wheeler and tractor industry. As rural income increases, it will add more purchasing power in the hands of the poor, push consumption and therefore, indirectly benefit auto companies.
Parallel to this, comes another highlight that is sure to provide the much-needed impetus to the auto-industry: the Electric Vehicle Push. Although no rebate slabs have been discussed yet in the budget, the Automobile Industry did welcome the first step that the Government took in making India drive on Electric vehicles. The lowering of customs duty on the import of parts and components will not only promote domestic assembling of electric vehicles but will also focus on the use of clean energy in the transportation sector.
This interim budget, somewhere, regards your Quality of Life as well. If your annual income is below the threshold of Rs.5 lakh, you have an additional Rs.12,500 to spend or invest in the coming year. Business owners would now have to pay GST on a quarterly basis, thereby improving their cash flow as well as reducing their administrative burden, hence, boosting their Quality of Life Quotient (QLQ). Having a second home earlier required paying taxes on notional rent from the property even if not actually leased out. Post-budget boosts QLQ for second-home owners as taxes on notional rent gets scraped off. Turning towards the management of savings and investments; on the inflation front, since the government has been able to keep the fiscal deficit under check at 3.4% of GDP, inflation should remain under control which thereby to help people keep a check on their expenses and thereby manage their savings and investments well. Once again, a clear exemplification of better QLQ.
Brace yourselves as now comes the bumpy ride: MARKETS. A stream of populist measures, as mentioned above, had been announced, but how will they be funded was a question that left the market wondering, dipped the banking sector indices and pushed NSE Bank Nifty down by 209 points on the 1st of February.
They did digest the farm sector relief easily and did raise their excitement at the exemptions given to taxpayers but what spoilt their party spirits was the fine print that revealed that the markets might face more pressure going forward. The immediate future is going to take a toll on the interest rates and the FII money. The cost of financing of the Government giving away nearly Rs.1 lakh crore in the form of farm relief and salary exemption could add pressure on the market. Additionally, the former is expected to make a sharp jump in its borrowing program, from an expectation of Rs.6.5 lakh crore to a 7.6 in number.
This hike in borrowing would result in a likely increase in interest rates affecting not just the banking stocks but primarily the rate-sensitive sectors of the economy and the currency market, both of which would lead to Foreign Investors viewing them with a negative eye.
Another disappointment brought to the markets was, this Budget did not cater to the demands from the sector to the Finance Minister especially the withdrawal of long-term capital gains and Statutory Transition Tax (STT) which could directly benefit the Equity Markets to some extent.
All we can do is watch out if July brings better tidings for the Street without hampering the other picture.
Bidisha Bhattacharya works ScrollStack. Prior to
this she was a Consultant to the Fifteenth Finance Commission, Government of India and has worked as a Political Researcher in Prashant Kishor’s Strategic Research and Insights (SRI) team at I-PAC.