Union Budget 2019 India: This is the Budget to take India to a $5-trillion economy. It has accepted entrepreneurs as job creator & working for profit. It has shown path breaking intent on strategic divestment of PSUs and reduce government holdings below 51%.
Counting holdings of government controlled entities in the 51% limit is a master stroke. Opening up of gilt market for FPIs, including a potential sovereign bond issuance, is another path breaking intent to raise non-tax revenue without crowding out private sector investment or raising domestic interest rates. Becoming part of Bond Index for stable as well as long term capital flows will be the final destination.
Deepening of bond market and increasing retail participation in gilt market through interoperability of depositories is a welcome step. Implementation of the Khan Committee report will be a logical follow up.
Budget has focussed on getting higher FDI and FPI flows, recognising the limitations of domestic savings, which has fallen over last decade by more than 8% of GDP. Augmenting local savings with global savings is necessary to achieve faster growth. Interactions during Annual Investor summit will act as a catalyst for more FPI and FDI flows.
Increasing public holding in listed cos and FII limit in government cos which are part of Index will increase our weight in MSCI EM index and create fresh demand from FPIs. The increased supply potential has unnerved the market and hence focus should be on creating demand. Increased participation by PF funds in equity market or tax incentive for MFs will create the necessary demand.
Monetisation of surplus land by the government and PSUs for affordable housing is a step in the right direction but execution is key. Setting up of payment platform for government entities for MSME should be extended to all suppliers as delayed and disputed payment from government is one big reason for slowdown in India Inc. Incentive for EV vehicle as well as affordable housing will boost growth in this sectors but similar steps should be taken to support demand in auto and real estate market.
Controlling fiscal deficit at 3.3% is remarkable achievement. Care should be taken to limit off budget borrowing so that private sector investment is not crowded out. Providing First Loss Guarantee on securitisation of good NBFCs is an innovative move. Such benefit should be available to all investors and not just banks. Provision of `70,000 cr for PSB capitalisation looks inadequate for the growth aspiration. Hopefully the Jalan Committee report will provide additional resources for PSB capitalisation.
While the objective for increasing import duty on gold to deter gold consumption is laudable, care should be taken to ensure that gold smuggling isn’t encouraged.
(The author is Managing Director, Kotak Mahindra Asset Management.)