Budget 2018: A balancing effort which financial market would like to forget soon

Budget 2018: The financial markets seem to be quite disappointed with the budget; the bond market was disappointed with the fact that the fiscal deficit is much higher than market estimates. The Equity market got a bit of hiccup in form of reintroduction of long term capital gains tax.

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Budget 2018: The present NDA government has been trying to deglamorize the Union Budget since the beginning of their tenor. (Image: Reuters)

By Alok Singh

Budget 2018: The present NDA government has been trying to deglamorize the Union Budget since the beginning of their tenor. They have been trying to keep most of major policy initiatives outside the budget speech. But as they say, “Old habits die hard” – so, today was no different. However, the Union Budget is always looked at with great expectations on various issues. The Finance minister was clearly seen struggling between political compulsions and the fiscal prudence to maintain a finance balance. Though the pressure of 9 forth coming assembly elections and then the General Elections over the next 14 months forced him to sacrifice fiscal prudence and focus on rural/agricultural economy, which actually has been struggling for some time, at the same time it’s also true that the Indian agricultural sector does need a lot of bold structural reform to become sustainable and for which only few budget announcements like guaranteeing that the Minimum Support Price (MSP) for all kharif crops will be set at 1.5 times the cost incurred by the farmers are not sufficient. The good part of the budget was that the Government continued with its capex. The Government Capex is budgeted to grow in FY19 at 10% comparable to the FY18 figure of -4%. In absolute terms, the Government capex will amount to Rs. 3 lac crores as compared to Rs. 2.7 lac crore in FY18 revised estimates.

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The financial markets seem to be quite disappointed with the budget; the bond market was disappointed with the fact that the fiscal deficit is much higher than market estimates. Though the fiscal deficit as a percentage of GDP is expected to be 3.3% for the next year, which is lower than 3.5% for this year, the absolute amount of bond to be issued by the Government will be higher than the last year. The Government’s bias towards elongating the maturity profile of the Government debt means that this increased amount of bonds will most likely be long dated. In the current environment global yields are rising and RBI is concerned about inflation. The bond market is not ready to handed supply side pressures. The bond yields have already risen over 100bps in last 6months and may continue to remain elevated.

Also read: Know how Arun Jaitley’s Budget 2018 will impact your tax liability with this Income Tax Calculator

The Equity market which has been the morning star of India’s great growth story got a bit of hiccup in form of reintroduction of long term capital gains tax (CGT) at the rate of 10%, without any change to the Securities Transaction Tax (STT). This may impact some of the trading activity in the markets but from the long term investor’s point of view equity remains an attractive asset class. This belief becomes sanguine if you look at it in the light of recent quarterly results announced by various listed corporates.

Also Read: Budget 2018: FM Arun Jaitley announces modest increase in disinvestment target to Rs 80,000 crore

Finally to be fair to the Government, in the present economic circumstances and the election pressures, the Finance Minister has delivered a budget which promises to support the economic recovery, and at the same time does not push the economy on the path of fiscal imprudence as we have seen in the pre-election budgets of the past. I also strongly believe that the Indian Juggernaut will continue to roll forwards and this budget will soon be forgotten by the financial markets.

Alok Singh, Chief Investment Officer, BOI AXA Investment Managers

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