Watch out for the life insurance sector and the AMCs
The life insurance companies have done extremely well in the last one year as they have managed to increase market share. However, the big thrust to insurance could come from an expanded Section 80C as the limits are expected to be increased from Rs1,50,000 to Rs2,50,000 or more. The budget is also expected to extend the NPS tax benefits to pension plans of insurance companies and mutual funds. Mutual fund AMCs have benefited from the increased financialization of savings. In addition, AMCs are also expecting positive cues in the form of rationalization of DDT and LTCG, possible introduction of tax breaks on debt schemes and reducing the equity component to 51% for equity classification. All these should favour the insurance and the AMCs in India.
Positive cues for realty sector and HFCs
The two sectors are closely related and they have both been under pressure post the NBFC crisis of 2018. Union Budget 2020 is expected to announce a higher limit for Section 24 (interest on home loans) from the current Rs2 lakhs. That would be more in tune with realty rates in most cities. In addition, the big challenge for the HFCs is making adequate funding available at reasonable rates. The budget is expected to make the NBFC liquidity program more robust and flexible.
Domestic and foreign companies can expect macro shifts
In September 2019, when the corporate tax rates were slashed, there was a lot of confusion over the 15% tax rate on new manufacturing projects. The budget could extend this 15% tax even to new projects by existing companies to make it more effective. In addition, the September tax rate cut was only for domestic companies. Most MNCs have also demanded a proportionate tax cut since most of these MNCs are high tax paying entities. This could have a positive macro impact on manufacturers across the board.
Telecom sector could look for a big boost from the Union Budget
The AGR debate is becoming more academic as most of the companies where the DOT imposed AGR, are already dissolved or merged out. Of the 3 large players, the AGR charges could push Vodafone Idea into the danger zone with respect to financial solvency. The government is expected to adopt a more business-friendly approach to AGR to ensure that the telecom sector does not become a duopoly. In addition, the budget is also expected to announce a more flexible dispute resolution mechanism, which could substantially benefit sectors like telecom with a long history of disputes.
Boost for manufacturing sector
The domestic manufacturing sector is likely to benefit from a plethora of benefits. The government is expected to announce big infrastructure measures to boost domestic growth and spending. That will benefit the manufacturing sector. The budget may also look at the idea of a border adjustment tax (BAT) to offset the international price cuts aided by weak currencies. In addition, the budget could give another boost to domestic manufacturing through tax and fiscal incentives and, in a way, reviving the Make in India program that has remained in cold storage.
Good news for consumption
The budget is anticipating a number of serious measures to tackle the slowdown in consumption. For example, the tax breaks and the likely relaxation of taxable limits will be positive for consumption sectors like FMCG, food products, consumer durables, airlines, etc. While competition and margin pressures may still be there, a series of macro boosters will at least make the valuations of these sectors look reasonable.
Rural story – Tractors, agrochemicals and seeds
This will be a major focus area for the Union Budget 2020. Rural incomes are under stress and doubling of farm incomes by 2022 looks increasingly difficult. Some possible measures could be increased rural spending, focus on rural infrastructure and post harvest logistics, expansion of guaranteed employment scheme s and even some form of helicopter money.
The budget is built on hopes and aspirations but there is a real financial crunch to contend with. It is up to the FM to find a reasonable middle path.