Budget 2018: Focus on growth, but revenues need to match up

Updated: February 2, 2018 3:05:29 AM

Budget 2018: The growth slowdown, particularly in rural India and unemployment as also the bearing these could have on the substantial political calendar over the next 12-15 months.

Budget 2018: Budget 2018 FY19E provides the answers to these questions, with increased outlays for priority infrastructure areas – Roads, Railways, Affordable Housing — and flagship rural schemes.Budget 2018: Budget 2018 FY19E provides the answers to these questions, with increased outlays for priority infrastructure areas – Roads, Railways, Affordable Housing — and flagship rural schemes.

Budget 2018: The growth slowdown, particularly in rural India and unemployment as also the bearing these could have on the substantial political calendar over the next 12-15 months — eight state elections are scheduled this year, followed by the national elections in 1H2019 — have been key topics of investor debate and discussion over the recent past. Budget 2018 FY19E provides the answers to these questions, with increased outlays for priority infrastructure areas – Roads, Railways, Affordable Housing — and flagship rural schemes. To alleviate agri sector distress, farmers have been promised support prices 50% higher than the cost of production for their produce. And the Governments new flagship National Health Protection scheme, which aims to insure as many as 500 million people for up to Rs 500,000 per annum is welcome from a social perspective.

Watch: Budget 2018: Acche din for aam aadmi or not?

That said, the bond markets remain a tad unsure about the revenue assumptions, particularly as they pertain to tax buoyancy on indirect taxes and continue to sell off. Stability on the revenue front will be key for the government to deliver on the growth promise.
Introduction of a 10% long term capital gains on listed equities is on fundamentals a de-rating factor for valuations by itself and could be viewed as an irritant by investors. But they would do well to remember that a) existing substantial gains have been grandfathered b) most countries including developed markets and peers in emerging markets do have tax long term capital gains on equities, typically at 15-20%.

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

Market returns over the last few years have been driven by valuations expanding as earnings have disappointed. The broad markets currently trade at about 20x forward earnings, one standard deviation higher than mean. Valuations have likely peaked as a) developed market central banks are now beginning to normalise monetary policy b) the improvement in key local macro variables including the fiscal account, inflation and current account has likely peaked and near term we are seeing some mean reversion.

-Bharat Iyer (MD, JPMorgan India)

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