This Budget seeks to do the safe thing: make sure that the fiscal deficit comes down and stays within committed levels, there are no excesses going forward (although the 4.8% in FY14 could be a little optimistic), and it offers a little bit for growth. It is a bit of a cautious Budget, but it does put the fiscal house in order. The finance minister probably also believes that this will provide the platform for better growth when the time is right. The fiscal outlook for FY13 is pretty good. The government has fairly impressively achieved a 5.2% fiscal deficit target, through very aggressive Plan expenditure control (19% lower than budgeted). It also laid out a fairly aggressive 4.8% target for FY14. This might be a little optimistic, given its reliance on 19%-plus revenue growth (13.4% nominal GDP growth), and substantially enhanced gains from divestment/telecom sales. We do, however, see some cushion here: a 16% growth in expenditure could offer some room to scale back if things do not go per plan and there is the FY13 track record to fall back on. While the controlled fiscal deficit was expected leading into the Budget, it should not be underestimated given almost no one believed meeting this number was possible even as recently as three months ago.
But it will disappoint those expecting a kick-start for the economy: fiscal consolidation sounds good, but every one really looks out for growth. It is no different with the Indian equity market?particularly given its fairly positive momentum over the last quarter. On this count, the Budget disappoints. There is a little bit in the form of an investment allowance, a kicker for mortgages, and some efforts at widening the savings and capital markets. But these measures are not particularly big, cannot in themselves turn around things in the near term, and will almost certainly disappoint the market bulls.
This is also a Budget that is largely top-down. Its bottom up implications for industries, sectors and businesses are relatively limited. It should also hurt overall earnings growth by about 1-15%, as the surcharge plays through to corporates. We do also believe higher end consumption could take a bit of a hit with income tax surcharge and import duties, but these really are the fringe, rather than the swing, elements of the economy.
The Budget is an event and not necessarily a change event. The market and all of us commentators do tend to hype up the Budget. It matters, and probably more so in the challenging times that we are currently in. But given that there is a lot of policymaking activity going on these days outside the Budget, it probably does not matter as much. So, if the economic, investment and corporate earnings cycle was always going to be slow to bounce back, that continues to remain the case. It is not a reason to get more bearish but a time to be patient, which is what you need to be when times are tough. The FM is positioning it that way?it is not a very bullish way to look at things, but a relatively fair way to look at it.