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Union Budget FY20 - Positive for Rural Consumption; Revenue estimates aggressive though

The incumbent government’s FY20 interim budget bodes well for India’s rural economy, in our view, with a strong impetus of Rs750bn given under Pradhan Mantri Kissan Samman NIddhi (PM-KISAN) scheme. The scheme, which would amount to 2.6-2.8% of nominal Agri GVA for FY19-20, implies an average monthly payment of Rs500 per family. Our calculation (along with NSSO’s 66^th survey) indicates an average monthly inflation-adjusted rural per-capita spend of Rs1,853/month, which makes the contribution from PM-KISAN relatively significant. Also, the current budget sops are expected to reach 150m individuals (to the extent of Rs6000/ per annum) with a total fiscal stimulus of Rs940, thus supporting consumption of small ticket items. While FY20 budget has a clear rural, social and welfare outlook (with benefits for salaried middle class tax payers too), capital expenditure has taken a back seat (GBS + IBER for capex is slated to decline by 1% in FY20). Revenue expenditure, which, is expected to register 14.4% yoy growth (30bp expansion as a percentage of GDP) - in light of the PM-KISAN scheme and upcoming election – may surprise on the upside, in our view. The government expects to contain FY19 and FY20 fiscal deficit at 3.4% of GDP. FY20 and implied remaining 4MFY19 growth assumptions for GST and income tax collections look ambitious and we believe they may have a downside bias, thus posing a risk to fiscal maths calculations. With higher gross borrowing and lower OMO purchases expected in FY20, we expect 10-year G-sec yield to hover at 7.3-7.8% in FY20. We expect HUL, Dabur and Hero to benefit from rural spend and KEC to benefit from electrification and double-laning spend from railways

FY19RE imply aggressive assumptions for last four months of FY19 (for both tax collection as well as expenditure): FY19RE imply a 44% and 46% yoy growth in income tax and GST collection for last four months of FY19 and 57% and 23% yoy growth in capital and revenue expenditure, respectively. We believe these underlying assumptions are ambitious and may surprise on the downside. As tax collections may slip, we expect to see downside to capital expenditure in order to keep FY19 fiscal deficit in check.

Tax collection receipts growth assumptions for FY20 look ambitious; Income tax related perks though positive but to have limited impact; FY20 BE assumes 18% yoy growth in GST collection and a 17% growth in income tax collection, with nominal GDP slated to post 11.5% growth. This implies Centre’s GST to GDP ratio and income tax collection to GDP ratio would both expand 20bp each in FY20, indicating an inherent assumption of higher tax compliance in FY20. Though we expect implementation of the e-way bill post-election to provide support to GST collection, there could be a downside risk to these numbers. Also, income tax-related perks (tax rebate to assesses with net taxable income < Rs0.5m, gratuity and interest TDS limit expansion, real estate-related perks, etc) are marginally positive, but given the overall small scale of impetus (Rs185bn from tax rebate), the same may not impact consumption significantly.

PM-KISAN scheme to provide impetus of 2.6-2.8% Agri GVA; benefit of Rs500/month/family - directly to be transferred to the beneficiary account (rural monthly per capita spend pegged at ~Rs1,853): We believe the PM-KISAN scheme would provide significant impetus to the rural economy (FY20 spend at Rs750bn would amount to 2.6-2.8% of nominal agri GVA for FY19-20) with a multiplier effect. Our calculation (along with NSSO’s 66th consumption survey) pegs the current rural per capita consumption spend at Rs1,853 per month on an inflation-adjusted basis. If we were to assume a family of four, a benefit of Rs500 per month from PM Kisan scheme would augment average rural per capita spend by 6-7%), which would be significant enough to lead to premiumised spend on staples, spend on brown goods and in few cases, on two wheelers.

Capex including gross budgetary support and IBER flat; Expect revenue expenditure to surprise on the upside in FY20: With rural, social and welfare expenditure at the helm of FY20 interim budget, focus on capex has been low, with total capex (including internal and external resources) slated to decline 1% yoy.

Higher gross borrowing to tilt yields to the higher side: Gross dated security borrowings of the Centre stood at Rs7.1trn. We estimate states may also need to borrow Rs5.5trn in FY20E, with cumulative dated supplies at Rs12.6trn. A principle facilitator that helped clear the G-sec market in FY19 was RBI’s large OMO purchases, which we believe could halve in FY20. The above in addition to RBI’s dovish monetary policy stance, could cause the 10-year G-sec yields to have an upward tilt, likely at 7.30-7.80% in FY20.