The Budget has always been a trade-off between increased spend and fiscal discipline. But it was really a Hobson’s choice this time! Given global anaemia, the state of the banking system, etc, it was unlikely that higher spend would have translated into second order growth effects. It may even have increased the economy’s vulnerability, in a scenario of competitive devaluation.
Interest rates are in any case on a downward trajectory, given weak demand and the new regulations on base rate calculations for banks. The Budget now paves the way for the RBI cutting rates. Not surprisingly, bond market yields have already softened as the government has adhered to its part of the deal despite the burden of pay hikes for government employees and bailout costs of electricity discoms. We now await off-Budget moves to resolve NPA and other issues to kick-start credit growth.
Will the RBI buy this? The Budget math looks realistic, with matching assumptions of ~11% for growth of nominal GDP and tax revenues. While the divestment estimate is now a realistic R360 billion, telecom spectrum auction assumptions looks a tad optimistic. Market borrowings of R4.2 trillion also look realistic. The FM has also promised to reclassify expenditures to a more sensible capex versus revenue.
There is a clear thrust to capex with a 15% y-o-y rise. Rural segment is a clear beneficiary with higher allocations on MGNREGA, irrigation and rural roads. Mass housing is also boosted with selective tax breaks. REITS and Infra Investment Trusts can finally take off now — Dividends from SPVs now pass through at SPV and REIT level and taxable in hands of investors directly. DDT at SPV level was the key hurdle impacting investor yields which has now been cleared.
The Budget has taken the ‘Chakravyuha’ term from the Mahabharata used by the Economic Survey rather seriously and endeavoured to work on the “ease of doing business”. Focus has been on dispute resolution; steps such as Renegotiation of PPP contracts are positive, especially for banks. A VDIS scheme for black money with 45% penal tax rate seems quite capable of garnering sizeable revenues. The bankruptcy code for the corporate and financial sector along with the above steps, will rid India of tags such as “socialism with limited entry to a regime of marketism without exit” – the Hotel California syndrome!
Expectations not met, were largely those items related to the banking system (faster NPA resolution, bad bank). While the bankruptcy code may be introduced this session, with no increase in service tax, the GST bill seems to be relegated. A lagniappe of advice to investors — while interpreting the Budget, it is wiser to pay attention to Budget and external factors which affect demand such as allocations, than on tax-rate tinkering.
By Nandan Chakraborty, MD-Institutional Equity Research, Axis Capital