The government came out kings and queens (if not aces) this budget, given the limitations. The budget was possibly themed on 1) giving infrastructure sector a big push, 2) keeping the taxation levels largely unchanged and to 3) improve the ease of doing business.
The biggest takeaway from this budget has been the government’s disciplined approach in maintaining the quality and quantity of the fiscal deficit. Government stuck to its fiscal deficit projection of 3.5 per cent (of the GDP) for FY17. Infact, it has been pretty conservative in estimating some of the likely revenue generation possibilities for the year (from items such as voluntary disclosures, incentivised settlement of long pending IT litigations etc). This diligence on the fiscal deficit has raised India’s prestige and its standing globally. This will translate into more respectful assessment by FIIs and credit rating agencies in the time to come.
On the net basis, the market borrowings for FY17 are project at around Rs 425,000 crore level which is almost same as previous year. As a result the projected supply is lesser than the projected demand and will lead to a rally in the bond market. More importantly, the finance ministry seems to have kept its end of the bargain and has provided the incentive for RBI to act more firmly on the repo rate. We expect a followup rate cut soon by RBI in the coming days.
The consequent rally in the bond market may accrue nearly 30-50,000 crore for the PSU banks from MTM gains. This, along with the Rs 25,000 cr capitalisation of the PSU banks will improve the bank balancesheets and also create a pivot for consolidation, privatisation and professionalization in this sector. This fiscal leadership reduces the capital cost in the economy, provides ground to boost credit growth and stimulate private sector borrowing.
In closing, we believe that a path is being created towards a sustainable double-digit growth with 2-3 year’s timeframe. The expectation of a good monsoon this year (due to la Nina effect), reducing borrowing costs, likely parliamentary approval to key reforms bill such bankruptcy code (& also GST) and a strong infrastructure push give strength to this belief.
While debt will be the favoured asset class this year, this will be an opportune time to accrue equities. Because when the pent-up earnings growth will catch up, most of the retail investors will be surprised by the size and level of the leap the equities may take.