Union Budget 2020 disappointed the markets in many ways. The special trading session on Saturday ended with Nifty losing 300 points and the Sensex losing nearly 1000 points. The markets were disappointed by the fiscal deficit scaling up to 3.8%. But there were also other factors. The dividend distribution tax was scrapped but that was replaced dividend tax. There was no word on the aspect of withdrawing tax on long term capital gains. The much anticipated tax cuts for individuals ended up being a damp squib as the optional tax regime would end up with taxpayers losing out on exemptions.
In a big move, the government announced in the Union Budget that LIC stake would be partially disinvested during the fiscal year 2020-21. However, the finance secretary has confirmed that the process may take close to a year. The stake sale percentage has not been announced but the government has surely factored the stake sale in LIC in its disinvestment target which stands at a record Rs.210,000 crore for the next fiscal. However, the finance minister has confirmed that despite the stake sale, the sovereign guarantee on LIC policies would continue. Valuation is expected at $150 billion.
Even as the Chinese Corona Virus death toll got closer to the 300 mark, it has left thousands directly and indirectly affected. With the WHO declaring a health emergency, most countries have placed an embargo on travel to and from China. Meanwhile, the Chinese government has decided to infuse close to $175 billion into the markets to support the prices. Chinese markets had crashed sharply in the last few weeks due to the virus scare, which was taking on epidemic proportions. It is already estimated that the total loss to the global economy due to the virus could be upwards of $1.50 trillion.
Foreign portfolio investors (FPIs) remained net buyers for the fourth month in succession. For the month of January the equity infusion by FPIs was close to Rs.12,100 crore. However, this comes on top of Rs.46,000 crore infused in the previous three months since the FM announced the corporate tax cuts. However, close to Rs.11,100 crore was withdrawn from debt in the month of January leaving the net inflows into India in January at just Rs.1000 crore. Foreign investors had been wary about putting money in debt due to the high rates of inflation and the consequent negative rates of real interest rates.
A day after Britain seceded from the European Union, it laid out tough terms and conditions for trade talks with other nations. Britain underlined that in all their discussions, the sovereignty of Britain would come and foremost. This was specifically made with reference to frictionless trade with European nations. There will be a one year standstill agreement with the EU during which they can negotiate terms of trade and explore if the special relationship can continue on a selective basis. The EU has also underlined that any special access to the EU market for Britain will depend on level playing field that Britain provides the EU in terms of labour standards and environmental regulation. EU needs London as an access point to the global financial markets as well as the support of Britain in dealing with the US.
The big question after the budget announcement is the attraction of life and health insurance as well as mutual fund ELSS schemes. The budget has proposed a new tax model wherein investors can opt for lower tax rates by forgoing the exemptions under Section 80C and Section 80D, among others. Most insurance observers are worried that this could impact the demand for life and health products. While there may be a temporary drop in the demand for these products, in the long run financial plans still need these to be fulfilled. Hence, investment decisions will now be more merit based.
