Union Budget and Market outlook

By: Navneet Munot, CFA,  CIO – SBI Funds Management Private Limited and Director, IAIP
February 28, 2015

This budget has been presented in the backdrop of a statistical boost to GDP growth, fall in inflation helped by soft global commodity prices and a benign global liquidity environment. Expectations have been running high given the political mandate. As Chief Economic Adviser has said that big bang reform are done during the crisis time. The FM rightly mentioned last year that reforms are an ‘art of possibility’. Similar voices have been made by various parts of the government recently. One must keep in mind the difficulties faced in getting some of the legislative changes (FDI in insurance, changes in Land Acquisition Act) approved in the parliament. Unlike most of the other countries, the Union Budget in India is not only a statement of government’s income and expenditure but also a platform to outline its entire socio-economic and political agenda. Hence the mandatory mention of every section of the society and parts of the country in the Budget speech. The Finance minister did a good job of ensuring the continuity of that “tradition” but underneath there is a visible shift in the economic agenda.

 
The budget document should be read in conjunction with the report of the 14th Finance Commission, Expenditure commission (to rationalize government expenditure, subsidies), NITI Aayog replacing planning commission and the new template of infrastructure development and natural resource allocation (for example, the coal mines and spectrum auction). From a mindset of ‘dole-outs’ and centralized planning, we are moving towards a system of “outcome based spending” and “co-operative federalism”. A competitive, transparent way of bidding natural resources instead of ad-hoc allotment is underway. Clarity of contracts with a proper redressal mechanism and risk-sharing by the sovereign substituting the PPP model with inherent flaws will pave the way for the next leg of Infrastructure development. State governments will play a bigger role in the economic development with lot more resources at their disposal and a helping hand from the central government.

 
The Government’s intent and efforts on Financial inclusion are laudable given that Indians have been under-banked, under-funded, under-insured and under-secured. The measures announced will also help in giving a boost to domestic savings which will get channelized into productive investments. Measures for financialisation of real estate and Gold market will also transform the saving and investment patterns. These, along with measures to discourage black money creation and promotion of digital finance, will put the “parallel cash economy” on a permanent descend.

 
Similarly, the budget made incremental efforts to institutionalize Prime Minister’s goals of Clean India, Digitization, Make in India, “ease of doing business” and better governance. There is a genuine effort on simplification of not only the tax regime but overall regulatory regime for all stakeholders in business. Could a lot more be done in this Budget? Undoubtedly yes. But as mentioned earlier, Budget speech can’t be looked in isolation. As long as the government is moving in the right direction with the right intent and intensity, a lot can be achieved given India’s inherent structural strengths.

Fiscal numbers seem credible with realistic underlying assumptions. We think the minister has kept some cushion to actually spend more money on infrastructure if GDP growth or tax buoyancy surprises on the upside. Fiscal deficit at 3.9% of GDP is higher than earlier projection of 3.6%. Nevertheless, a shift towards higher capital expenditure, containing wasteful expenditure and credible assumptions would be looked at positively by the RBI, rating agencies and the markets, in our view.

Given the relative attractiveness of India, and dearth of similar opportunities in peer space, foreign investors are likely to remain positive. We expect domestic investors to increase allocations to equities in a sustained manner. Higher valuations and surge of equity issuance are likely to keep the upside checked in the near term but liquidity flows will keep the downside protected. While expecting markets to consolidate their gains in the near term, we reiterate our positive view on the equity market from a long term perspective.

Considering the government’s commitment on fiscal consolidation, resolve to tackle inflation with supply augmentation, a strong global deflationary environment and expectations of front-loaded rate cuts by RBI, we expect bond yields to soften further.

– NM