We felt it was an expenditure focused budget, keeping in mind the upcoming elections. Few grand schemes were announced, but we found the Budget lacking in clarity on how these schemes will be financed. The fiscal deficit at 3.3% was on the expected lines, but the bond markets are not too convinced that the fiscal maths would hold. We are hopeful that GST revenues will enhance for next year.

The Government focused on boosting rural incomes, creating rural infrastructure and job creation. Setting MSP to 1.5 times of cost for Kharif crops is something that could worsen fiscal deficit and inflation in the second half of FY 2019, but boost rural sentiment. Focus on onion, potato and tomato inflation, animal husbandry and fisheries fund, and e-NAM are all good elements of the budget. We expected more guidance on how few schemes announced last year such as Universal Crop Insurance were shaping up. The government continued its focus on affordable housing via a dedicated fund.

The second big announcement was the healthcare cover scheme, covering 10 crore families, for expenses up to 5 lakhs. We feel it will be big positive for the health sector, but there is little clarity on how the scheme will be financed.

On the taxation front, the Budget is a mixed bag. The positive was the cut in corporate tax for small firms, up to the revenue of 250 cr. However, raising the indirect taxes and across the board increase in cess by 1% would hurt sentiment. On the capital gains’ tax front, it was smartly packaged with the grandfathered status, so that taxation is prospective and not retrospective. We are hopeful that STT would also be phased out soon. The 10% rate, while it raises the hurdle rate of equities, it should not dissuade incremental flows into equities. The introduction of dividend distribution tax on equity mutual funds at 10%, will impact certain categories such as arbitrage funds and few categories of hybrid funds.

Another important announcement for a financial investor, was SEBI’s push to large corporates to tap bond markets for 25% of fund raising. This step should deepen the bond market in the country (at the cost of bank credit), signalling a continuing migration trend toward capital markets from banks. Government would also ask regulators to allow investment mandates to allow A rated bonds in portfolios. This step should come as a boost to corporate credit bonds, and will benefit credit opportunities debt fund category.

Government interest in using financial products as avenue for fund raising is also clear: we can hope for equity ETFs as avenue for divestments, also we can expect more widespread use of InvITs for monetizing road assets.

On the whole, we feel that Budget was clearly focused on the rural economy, which is good for the country, but was slightly disappointing for the corporate sector.

Budget 2018 impact on financial investors:

10% tax on dividends from equity schemes: It will impact arbitrage funds, which used to enjoy almost tax free status due to daily dividend option. Now post tax arbitrage returns will get compressed by 10%, but these would still be better than liquid funds and most of the ultra short funds.

LTCG on equities, but with grandfatheree status: While investors will pay 10% on incremental long term equity gains from here on, the expected returns from Indian equities is still better than other asset classes. We don’t think this will drive away investors from the market. Hopefully STT be removed in due course too.

SEBI to ask large corporate’s to use bond markets for 25% of borrowing: This should augur well for the bond market development.

Govt to ask regulators to allow investment mandates to expand beyond AA to A rated bonds: This will increase interest in A rated bonds, and will benefit credit opportunities funds as institutions chase yield by incorporating A rated bonds in their portfolios.

Corporate tax rate of 25% for firms below 250 cr revenue: This is 5% tax cut is a positive for many of our business owners in our universe, although the cess increase from 3% to 4% is taxing.

Budget 2018 impact on CryptoCurrency:

Government cracked down on cryptocurrency bubble in India, which accounts for a large chunk of the global cryptocurrency trade; close to 10% of global Bitcoin trade originate out of India. With today’ budget announcement government is making its stand very clear that it is on path to making investing and trading in Bitcoin and other cryptocurrencies illegal. In response, we expect existing cryptocurrency investors to head for the door, and cause a sharp drop in Bitcoin prices in India, and globally. We do not think new investors should chase cryptocurrencies at this stage, as it is fraught with a lot of risk. Earlier it was only price risk, now there is clear regulatory risk. In fact, we do not think cryptocurrency of an asset class as there is no cash generation component associated with it. It is not a commodity as it does not function as an input to anything; it is not a currency, as it is not recognized as a legal tender; and it is not a store of value as it is extremely volatile.

At the same time, we are very hopeful on the underlying block chain technology. In this budget, government mentioned that it is hopeful on blockchains, especially for delivering e-governance systems. This is a good move, as blockchains can dramatically reduce the time and cost of doing transactions. However, block chain can expose system to hitherto unknown risks such as cyber hacks. Also, blockchain requires a broader ecosystem to be effective, which is currently missing in India. Globally too, widespread practical applications of blockchains are few, with many compelling use cases in pilot stages.



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