For the Calendar Years 2018 and 2019, the Mid and the Small Cap indices have been gross under performers. While the Nifty has gained 3.15% in 2018 and 12.02% in 2019, the Mid and the Small Caps have only given losses.
| INDEX | 2018 | 2019 |
| NIFTY | 3.15% | 12.02% |
| NIFTY MIDCAP | -15.42% | – 4.32% |
| NICTY SMALLCAP | -29.08% | – 9.53% |
We believe in the Calendar Year 2020, the Mid and the Small Caps will do better than the Nifty. The reasons are many:
- Two years of continuous and massive under performance has resulted into valuations differences that are now very attractive for any investor.
- The primary reason for their underperformance to begin with lies with two policy changes that happened in 2018.
- Bringing in of LTCG
- Changes in the mutual fund Categorisation
If these issues are revisited, the mid and the small caps will soar. In fact, we are already seeing that happening
| INDEX | 2020 |
| NIFTY | 1.51% |
| NIFTY MIDCAP | 5.68% |
| NICTY SMALLCAP | 7.77% |
The Nifty Small cap Index has formed a bottom in August 2019 and the monthly advance decline ratio has been positive since September of 2019 and is still continuing.
Fiscal Deficit
Fiscal deficit in the first eight months of FY20, stood at 15% above target, mostly driven by weak revenues collections.
Non tax revenues like RBI’s dividends, partial payments by telecom companies following a court ruling, and divestment proceeds are still giving high hopes. But still we feel that the government is likely to miss a fiscal deficit target of 3.3% of GDP because of the recent cut in corporate tax rates and slower than estimated divestment.
We expect FY20 Fiscal deficit to widen to 3.5-3.7% compared to 3.3% budget estimate and FM can revise FY21E Fiscal deficit target to 3.3-3.5% compared to previous 3%.
Insurance
- Potential increase in FDI in insurance companies to 74% from 49% currently.
- Potential caps on ownership by banks/NBFC in insurance companies to 30%/50%respectively.
Income Tax
- Individual taxpayers are hoping for some beneficial tax reforms in the upcoming budget.
- Relief for individuals in taxation could be by rationalizing tax slabs or raising exemption limits.
- The Direct tax code panel has recommended sweeping changes to the personal income tax rates, with the creation of five slabs versus the current three: Rs 2.5-10 lakh: 10 percent (with a full rebate upto Rs 5 lakh) Rs 10-20 lakh: 20 percent Rs 20 lakh-2 crore: 30 percent Rs 2 crore plus: 35 percent.
- The reduction in Personal income tax by any ways could spurt consumption which could be beneficial for Consumer Sector, Financial services
- Any change in Dividend Distribution Tax (Effective tax rate 20.56%) or if duration of long-term capital gain is increased or abolished, then it could be boost for India Equity Markets.
Current Tax slabs & rates
| Income Tax Slabs | Tax Rate for Individual & HUF Below the Age Of 60 Years |
| Up to ₹2,50,000* | Nil |
| ₹2,50,001 to ₹5,00,000 | 5% of total income exceeding Rs 2,50,000 |
| ₹5,00,001 to ₹10,00,000 | Rs 12,500 + 20% of total income exceeding ₹5,00,000 |
| Above ₹10,00,000 | ₹1,12,500 + 30% of total income exceeding ₹10,00,000 |
Income upto 5 lakh will get rebate of Rs 12500. So effectively upto Rs 500000 Income, there is no tax.
Sector wise Expectations
- Agriculture:
- The government is considering decontrolling urea by bringing it under the NBS regime, and that it is also considering transferring fertilizer subsidy directly to farmers (DBT).
- Given the fiscal constraints being faced by the government, allocations to certain schemes may be cut – e.g., the PM-KISAN scheme, in which the number of beneficiaries so far has been lower than expected.
- Banking and Financials:
- Further measures to improve liquidity for NBFCs since the Partial Credit Enhancement scheme has not really worked well so far.
- Notifying time frame for new IBC rules for financial services companies.
- Cement
- Increase in budget allocation for infrastructure projects and PMAY. With Housing for all target by 2022 coming closer allocations for PMAY may increase sharply. We expect -increase in spending to boost cement demand growth for FY21 to 6-7% against 1-2% for FY20.
- Infrastructure:
- Budgeted amount allotted to metro projects should be more than INR200bn, up 10% over REFY20
- The overall railway capital expenditure could be pegged at INR1.74trn.
- Expenditure on roads in excess of INR 724bn, up 10% over RE FY20.
- Expect announcement of Atal Distribution System Improvement Yojana (ADITYA) – scheme involves cutting of losses. Centre to provide funding of upto INR 1.1 trillion which will work in three phases till 2024.
- Focus to reduce overall logistic cost.
- Housing:
- Expand definition of affordable housing by either carpet area and ticket price.
- Increase in deduction limit for home buyers.
- Improving liquidity in real estate sector by relaxing criteria of projects for 250bn AIF fund
