India’s Finance Minister Nirmala Sitharaman recently unveiled the country’s new budget, which aims to give the economy a boost via tax cuts and other measures to stimulate foreign investment. Franklin Templeton Emerging Markets Equity Director of Portfolio Management Sukumar Rajah says the fiscal math looks credible and the targets seem achievable, with the assumption of improving Goods and Services Tax compliance. He says while there are likely to be some winners and losers from an investment standpoint, overall, the government seems to be moving in the right direction to spur economic growth.
印度财政部长 Nirmala Sitharaman 最近公布了该国的新预算案，以期通过减税等措施，刺激外国投资，促进经济发展。富兰克林邓普顿新兴市场股票团队投资组合管理总监 Sukumar Rajah 表示，在提高商品和服务税合规性的前提下，这笔财政的账看起来较为合理，目标亦是可实现的。他说，虽然从投资的角度来看，可能会有赢有输，但总体而言，政府似乎正朝着正确的方向推动经济增长。
The Indian government has delivered its final budget for fiscal year 2020, which ends in March 2020.
We believe the India Union Budget shows the government is moving in the right direction by focusing on improving the investment climate and diversifying the source of government funding, which should lower the cost of capital in the long run. As a result, we retain our positive outlook for India equities in the medium to long term.
Balancing Growth with Fiscal Discipline
India’s robust gross domestic product (GDP) growth has been slowing this year, so this budget helps outline government efforts to stimulate the economy while preserving policy continuity.
We believe the Indian government continues to balance growth priorities with fiscal discipline, while diversifying funding sources. The government has lowered its fiscal deficit target from 3.4% as announced in the February 2019 budget to 3.3% of GDP for the 2020 fiscal year.
我们相信，印度政府将继续用财政纪律平衡增长优先事项，同时扩大政府资金来源。政府已将二零二零财年财政赤字占 GDP 比例的目标从二零一九年二月宣布的 3.4 % 降至 3.3%。
In our opinion, the fiscal math looks credible and the targets seem achievable to us, provided the government can improve compliance with the Goods and Services Tax (GST), which would in turn boost government revenues. We’re already seeing signs of increased enforcement of tax compliance following Prime Minister Narendra Modi’s re-election in May. Continued disinvestment should also help boost government revenues in the medium to long term.
For businesses, a plan to cut the corporate tax rate from 30% to 25% for Indian firms with annual revenues lower than 4 billion rupees (US$58 million) looks to benefit smaller domestic companies, which make up the bulk of the market. There are tax incentives and exemptions for larger companies as well.
对于企业来说，年收入低于 40 亿卢比（5.8 千万美元）的印度企业的税率或将从 30% 下调至 25%，这项计划有望惠及占印度市场大部分较小规模的本土企业。大企业也能享受到税收优惠和免税政策。
Improving Ease of Doing Business in India
There are also continuous efforts to improve the ease of doing business in India. There are direct and indirect tax incentives to attract high-tech manufacturing in products such as electronic chip manufacturing, laptops, computer servers, among others, in a move towards Digital India—the government’s initiative to improve online infrastructure and internet access across the country. The government also proposed relaxation in foreign direct investment norms for sectors such as aviation, media, and insurance to attract more overseas investment. There are also efforts to simplify labor laws, a meaningful positive as this could result in a more flexible labor market and alleviate concerns from foreign investors (labor laws have traditionally been one of the key hurdles for foreign investment in the past).
There is also continued strengthening of infrastructure and a focus on affordable housing. A railway station modernization program will be launched this year, and Indian Railways has plans to invest more in suburban rail networks and enhance metro rail networks through public-private partnerships. The Indian government is also committed to building 19.5 million houses by 2022, as well as increasing incentives on housing loans to boost low-cost housing demand. Piped water is planned to be provided for every household by 2024, thereby improving living conditions in rural areas.
持续强化基础设施建设，重点关注经济适用房。今年将启动一项火车站现代化计划，印度铁路部门计划在郊区铁路网络上加大投资，并通过公私伙伴关系优化地铁铁路网络。印度政府还承诺，到二零二二年建造 1,950 万套住房，并增加住房贷款激励措施，刺激低成本住房需求。计划到二零二四年，实现自来水进入每个家庭，进而改善农村地区生活条件。
Separately, there are also proposed measures to revive non-banking finance companies (NBFCs) and recapitalize state-run banks. The stress in India’s NBFCs sector has contributed to slowdown in consumption as mutual funds and the banking system have been cautious in providing liquidity to such NBFCs. To enhance liquidity access for the sector, the government will provide a guarantee on the first 10% loss to banks for purchasing consolidated high-rated pooled assets of “financially-sound” NBFCs in the next 6 months. The US$10 billion capital infusion in respective public-sector banks is also a positive for state banks to boost lending and revive the economy, although the timing of the injection remains to be confirmed.
此外，还提出了重振非银行金融企业（NBFC）和对国有银行进行资本重组的措施。印度非银行金融板块的压力导致消费放缓，因为在向此类非银行金融企业提供流动性方面，互惠基金和银行体系一直持谨慎态度。为了提高该板块的流动性，在未来六个月内，政府将为银行购买“财务状况良好”的非银行金融企业的综合高评级集合资产提供 10% 的损失担保。对国有银行而言，向各自的公共部门银行注资 100 亿美元，对它们提振放贷和复苏经济也是一个利好，不过注资的时间仍有待确定。
Attracting Foreign Investment
The budget has a focus on attracting foreign capital and boosting investment (both equity and debt). There are several means to do so. One of these is to increase the minimum public float in listed companies to 35% from 25%, in a phased manner.
预算的重点是吸引外资和刺激投资（包括股权和债权）。有几种方法可以做到这一点。其中之一是分阶段将上市企业的最低公众持股比例从 25% 提高至 35%。
Traditionally, Indian equities have had higher private majority shareholder control, with lower free-float available to the public. Hence, raising the minimum public float threshold should ensure wider ownership through institutional investors, adding more market depth and likely leading to better corporate governance.
We also expect the proposal will help attract higher foreign capital and increase India’s weight in MSCI and FTSE emerging market indexes over the next few years. However, the higher threshold could pose a challenge to listed companies, particularly multinationals, as it could impact who has control over the companies. Some companies with low public float may consider delisting, unless they are fine with increasing the public shareholding by another 10%.
Although we think this proposal is viewed as a positive for equities in the long run, it might negatively impact the weight in global benchmark indexes in the short term due to subsequent sales from majority shareholders of some of their stakes. However, the potential impact would depend on the time allowed by the regulator to comply with the new norms.
Potential Sector Impacts
Like nearly all government policies, there are aspects of the budget which are likely to prove more positive for certain sectors of the market than others.
- Real Estate/Housing: Increased tax exemption on interest on housing loans could help boost low-cost housing demand. This looks positive for property developers, housing financing, as well as housing-related goods such as cement, paints and fans.
- Financials (Banks and non-banking finance companies [NBFCs]): Public sector bank recapitalization should help provide some growth capital to these entities and hopefully kickstart credit flow. Apart from better liquidity access from the limited 10% credit guarantee for investment in high-rated NBFC in pooled assets, the additional deduction of income tax on mortgages brings down effective interest rate and should benefit all housing financiers. While public sector bank recapitalization is encouraging for the public banks, we continue to prefer good quality, private retail-focused banks and corporate banks.
- Communication Services (Telecoms): Low interest rates should benefit sectors with traditionally higher leverage such as telecoms and metals.
- Energy (Oil and gas): The increase in duties on petrol and diesel increases working capital (i.e. debt) for oil marketing companies, so this isn’t an area we favor at this time.
- Consumer (Luxury goods): The increase in customs duty on gold from 10.0% to 12.5% could impact near-term demand until consumers get used to the higher price-level. The increased income tax for higher income households could also be a potential negative for consumption of high-ticket items. Additionally, the much-anticipated boost to rural household incomes was not provided, which could be negative for sentiment towards consumer staples companies in the near term.
- Information Technology (IT): Buyback of shares by listed companies will now be taxed at 20% (to be paid by the company doing the buyback on the distributed income), similar to dividends. This could be relatively negative for IT companies, as Indian companies have traditionally used share buybacks to pay out shareholders with a lower tax impact. The removal of this loophole could lead to a reduction in dividend payouts from IT companies. In addition, foreign bond issuance could lead to some rupee appreciation, which would be a negative for exporters such as IT services companies. Separately on a positive note, the government has emphasized initiatives to encourage high-tech spending. It has identified IT as one of 12 “champion service sectors” and has set up a US$745.82 million fund for realizing the potential of these champion service sectors.1
- Financials (Insurance): The government proposed an increase in the foreign investment limit on insurance intermediaries to 100% from 49%. This should help capital inflow for companies investing in technology solutions for the insurance sector to achieve better penetration rates.
- 金融（银行和非银行金融企业 [NBFC]）：公共部门银行资本重组应有助于为这些实体提供一些成长资本，并有望启动信贷资金流动。为投资非银行金融企业高评级集合资产提供最高 10%的信用担保将提供更好的流动性，除此以外，抵押贷款所得税的额外扣除降低实际利率，并应使所有住房贷款提供方受益。虽然公共部门银行的资本重组提振了业内信心，但我们仍然偏好高质量、以零售业务为主的私人银行和企业银行。
- 消费品（奢侈品）：黄金关税从 10.0% 增加到 12.5%，可能会影响短期需求，直到消费者习惯于更高的价格水平。高收入家庭所得税增加也可能对高价产品的消费产生潜在的负面影响。此外，备受期待的提振农村家庭收入的举措并未出台，短期内对消费必需品企业的市场情绪或将受到抑制。
- 信息科技 (IT)：如今，上市企业回购股份将适用 20% 的税率（由进行回购的企业以已分配收益支付），与派息类似。这对 IT 企业来说或是相对不利的，因为印度企业传统上利用股票回购的形式向股东派息，这种方式税收影响较小。消除这个漏洞后，可能会导致 IT 企业减少股息支出。此外，发行外国债券可能导致卢比升值，这将对 IT 服务企业等出口商造成负面影响。另外一个积极的方面，政府正积极推进鼓励高科技支出的举措。它已 将 IT 确定为 12 个“冠军服务板块”之一，并设立了一个 7.4582 亿美元的基金，挖掘这些冠军服务行业的潜力。
- 金融（保险）：政府提议将保险中介机构的外国投资限额从 49% 提高至 100%。这将有助于投资于保险板块技术解决方案的企业的资本流入，提升渗透率。
Outlook on India
While most aspects of the budget look encouraging, clarity is still required in some areas, such as the sources of funding for infrastructure outside of the budget, the quantum of US dollar-denominated bond issuances by the government, or the timeline for increase public float in listed equities.
But now with the elections behind us, we expect market focus to shift to the fundamentals, such as earnings growth, inflation and fiscal prudence.
We are seeing signs of a recovery in India’s industrial sector and expect to see a continued increase in capacity utilization, which we think should prompt companies to start investing again. This in turn would be likely to lift profitability.
The risks we currently see are related to global factors, such as trade tensions, US Federal Reserve policy and rising oil prices. A global slowdown in growth could affect segments of the Indian economy that are more dependent on exports. That said, rising domestic consumption has tilted India’s economy to be less reliant on the export sector, which makes India less vulnerable to adverse global factors, in our view.
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What Are the Risks?
All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.
1. Source: India Brand Equity Foundation, Ministry of Commerce & Industry, Government of India, updated June 2019.