The budget presented amidst a backdrop of slowing economy is not bold but has quite a few good steps which if implemented well could lead to a broad based and inclusive growth.
The market expectations were high especially for LTCG abolition and a drastic cut in personal income tax. These did not happen and there were no big bang measures announced to stimulate the economy. However, there were lots of positive steps and these combined with the various announcements during the past few months are likely to support the currently slowing economy. My view therefore is that the market can continue to build up on the progress it has made since August 2019, though the trajectory upwards might be slow and meandering.
Some of the budget proposals include major push and financing for infrastructure projects, giving tax incentives to sovereign wealth funds, deepening debt markets, mechanism to improve liquidity in the financial markets, aggressive disinvestment targets, maintaining macroeconomic stability by not taking fiscal deficit beyond the permitted deviation, providing incentives to starts ups and MSMEs, reducing tax harassment through a tax charter, multiple agriculture and energy proposals, a major push for technology and digital infrastructure and reforms to make banking system more robust.
Announcement of new personal tax slabs is interesting, though one can utilize it only by giving up exemptions. It is cleverly thought through since people earning more than Rs 15 lakhs annually utilize many exemptions and are likely to remain with the old system. However, people in lower income slabs utilize exemptions much less and the new slabs will give them more money. Their propensity to spend extra is also greater and it can help in increasing demand.
Dividend distribution tax has been abolished but it will now be taxed in the hands of recipients. Accordingly, TDS will be deducted at 10% for resident Indians (dividends more than Rs 5000) and 20% for NRIs. We have always recommended growth option of mutual funds and it becomes even more favourable now. For monthly income generation, systematic withdrawal is lot better than depending on dividends. There is no change in TDS on capital gains of mutual funds, so zero for residents and 10% of gains for NRIs.
10 year bond yield fell by 10 basis points when the markets opened on Monday Feb 3, 2020. Stock indices are also regaining what they lost on the Saturday budget session. Latest GDP growth figure available presently is that of Nov 29, 2019 for quarter ending Sep 30, 2019 and it was a dismal 4.5%. It will be interesting to see the figures in late February, some better manufacturing numbers came out recently and the present quarter is likely to show a better growth number in May 2020.
Overall, I feel that a good foundation is being set where there is macroeconomic stability and growth will be broad based and inclusive. Infrastructure implementation is always slow but once it starts picking up, we could see a structural up move in the markets which can last for some time.
Therefore from the portfolio perspective, for long term money, we should stay invested in equities. We should utilize any dips for adding long term money to the portfolio. Fund managers are seeing opportunities in consumer and infrastructure sectors. SIPs should definitely be continued. Basic principles of investing in equity markets including long term horizon, diversification and valuation should be followed always.
Resilience and holding power are keys to generating good returns in the equity market. A confluence of good and positive factors happens inevitably in an economy which is growing and has sound fundamentals. Scheme selection remains as important as ever since performance range of schemes is very wide and importantly, divergent valuations exist for large, mid and small caps.