5 signals from Economic Survey on Budget for Dalal Street investors

NEW DELHI: Will Budget 2020 be a pro-market one? Well, Economic Survey suggests so, say analysts.

The Survey, presented by the Chief Economic Adviser, pegged FY21 GDP growth at 6-6.5 per cent and called for easing of fiscal deficit targets, sending ample cues on what Dalal Street investors can really expect in Saturday’s Union Budget.

“The emphasis on wealth creation and it's beneficial effects on the economy is laudable. The argument in favour of pro- business policies, the need for aggressive divestment of CPSEs, concerns over the injurious effects of freebies and debt waivers are all pro-market views that are to be welcomed,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

The Survey leaves little room for doubt about economic thinking, he said, adding that the big question now is whether the Budget too will reflect the same thinking

Here are a few pointers to the Budget from Eco Survey 2020:

Aggressive divestment target: The Survey underlined the need for aggressive disinvestment of CPSEs to ensure higher profitability, promote efficiency, increase competitiveness and promote professionalism. Based on a study of an analysis of before-after performance of 11 CPSEs, which underwent strategic disinvestment from 1999-2000 to 2003-04, the Survey found significant improvement in financial indicators such as net worth, net profit, return on assets (ROA) and return on equity (ROE).

Dalal Street analysts largely expect the unfulfilled disinvestment targets for FY20 to be carried forward, which may result in another year of Rs 1 lakh crore-plus divestment target.

Lift to infra, power road sectors: The Survey emphasised the need to raise capital expenditure that leads to asset creation. It estimated requirement of $1.4 trillion in infrastructure during FY 2020-2025 to meet the $5 trillion GDP goal. “The massive infrastructure investment announced by the government earlier suggests it is already taking the necessary steps in that direction,” said Rumki Majumdar, Economist of Deloitte India.

The Survey noted that financing of the recently-launched National Infrastructure Pipeline will be a challenge, but it hoped that a bouquet of well-prepared projects will attract good response from central and state governments, urban local government, banks and financial institutions, PE funds and private investors, both local and foreign. “Power shortages, inadequate transport and poor connectivity affect overall growth.,” it noted.

Tapping export potential: The Survey suggested that given India’s comparative advantage in labour-intensive activities and the imperative of creating employment for a growing labour force, there are two groups of industries that hold the greatest potential for export growth and job creation. “First, there exists a significant unexploited export potential in India’s traditional unskilled labour-intensive industries such as textiles, clothing footwear and toys. Secondly, India has huge potential to emerge as a major hub for final assembly in a range of products, referred to as ‘network products’,” the Survey noted.

Big announcements on PSU banks: The Economic Survey said the state of the banking sector in India needs urgent attention. It called for improving governance in PSU banks and ensuring more disclosures to build trust. It called for efficiently scaling up the banking sector to be proportionate to the size of the economy. It also called for tracking the health of the shadow banking sector.

The Survey noted that if Indian banks were proportionately large in relation to the size of the economy, India should have at least six banks in the global Top 100 than just one currently -- largest PSB State Bank of India (SBI) -- which is the 55th largest bank globally.

It, meanwhile, proposed that a portion of the government stakes can be transferred to employees exhibiting good performance across all levels of the organisation through Employee Stock Option Plans (ESOPs).

MSMEs as Growth Drivers: India’s medium and small-scale industries are being driven by primarily consumer spending, and economic growth has to now come from greater investments there, Survey noted. It identified MSMEs as an important segment of the economy that fosters entrepreneurship and generates employment opportunities at lower capital cost. “The Survey emphasised the need for investment-led growth. There is a focus on reviving the MSME sector, which is the major source of employment in India,” said Majumdar of Deloitte India.

The survey noted that a one-time restructuring of existing loans to MSMEs, that were in default, with asset classification as ‘standard’ as on January 1, were permitted without an asset classification downgrade. The restructuring will have to be implemented by March 31, 2020.