The finance minister did an impressive job of meeting the nearly impossible mix of expectations from various stakeholders. Specifically from a political economy perspective, his speech was largely focused on schemes/allocations for rural/farmers/poor etc. His speech was also focussed on anti-corruption measures towards a cleaner economy. This included measures in terms of restricting cash transactions to R 3 lakh and capping cash deposits by political parties at R2,000 per person.
The cut in income tax rates also met expectations of the middle-class in the face of demonetisation worries. The Budget was popular, thankfully not populist. There were no loan waivers (though has been promised by the BJP for UP elections in its manifesto) or other transfers (to Jan-Dhan accounts or any mention of Universal Basic Income).
The fine balance between being popular without really being “populist” was clearly welcomed by markets. Investors were also reassured in terms of policy stability and some potential negatives not playing out. Global investors’ positive view on India is premised not just on growth story and reforms, but also macro stability, especially given their returns are in dollars. In this context, sticking to fiscal consolidation in FY18 and commitment to the targets in FY19 was clearly reassuring. At the same time, the Budget also steered clear from some lingering fear out there in the market like potentially revising capital gains taxes for local investors. The clarity on indirect transfer provisions for foreign portfolio investors was also reassuring.
The big question still remains: whether this Budget can revive growth? The markets may think that the government is implicitly providing a boost through an increase in spending. Whether this is “stimulus” or not depends on the extent of associated reduction in private spend. Using higher taxes for spending is actually a transfer of income. Given fiscal deficit is being cut, we don’t view this Budget to help revive growth in itself per se. However, fiscal impulse will be less of an incremental drag on growth in FY18 than in previous years. In this context, it is worth highlighting the headline year-on-year spending increase numbers mentioned in the speech and which we have seen flashed around the media. In our view, the underlying spending growth is lower versus these headlines for capex and rural. The role of the government in capex cycle is very limited anyway, in our view.
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Where the government spends more, with or without “stimulus”, has different sectoral implications. The spending plans and broader policy thrust is positive for consumer staples, home improvement and mortgage financiers. Our scenario analysis suggests unattractive risk-reward for Nifty at these levels, with base case of 8,800 by December 17.
By Gautam Chhaochharia, ED & Head of India Research, UBS Securities