Finance minister Arun Jaitley presented a pragmatic Budget for FY 18. On February 29 last year, when the Jaitley assured market that the government will follow the path of fiscal prudence, foreign institutional investors (FIIs) who were on a selling mode before the announcement was made, turned back to the market. This year, he has maintained the path of fiscal prudence, despite demonetisation-related short-term drag on the economy, setting up a fiscal deficit target of 3.2 per cent of the GDP and 3 per cent for FY19. More importantly, the Budget also set a target of containing debt to GDP ratio at 60 per cent by 2023. Such reassurances may change the perception of rating agencies while reflecting on the state of the Indian economy.
The finance minister also lowered tax rate, leaving more money into the hands of taxpayers to give consumption a boost. He allocated more money to infrastructure for roads, railways and transport sector.
Raising money to increase budgetary resources is a challenge before the government and it needs to undertake steps like strategic divestment, and list insurance and railway undertakings. Jaitley’s statement on tax non-compliance also holds significance as far as increasing tax collection is concerned. Data analytics can be used to ensure that all the deposits made after demonetisation pass through the tax net.
Concern of the FIIs on taxation arising from indirect transfer provisions has also been addressed. Extension of concessional withholding tax of 5 per cent on external commercial borrowings & ‘masala bonds’ can turn around debt outflows.
Benefits given to affordable housing sector have the capacity to create supply necessary to keep real estate prices under check, provide employment to unskilled and create demand for local materials, from cement to tiles.
Banks will be able to deploy credit in safe retail housing loans, but the Rs 10,000 crore allocation for PSU bank recapitalisation appears less, considering the government’s focus on improving credit flows to accelerate growth. However, new laws to improve Section 138 to deal with cheque bounce cases, seizure of local assets of absconders and illegal public deposits by Ponzi schemes will go a long way in improving NPA situation.
The Budget 2018 has focused on improving productivity. Through MNREGA, the government has deepened 10 lakh ponds and made 10,000 composite posts. The Fasal Bima Yojana, Soil Health cards, combined with spot and derivatives in commodities market and Electronic market place will improve the efficiency in agriculture and rural sectors.
From a debt market point of view, the contained gross and net borrowing program will allow the Reserve Bank to cut rates in the week to come. Adequate liquidity, stable inflation and positive direction from RBI can help keep interest rates on the softer side, unless US Federal Reserve raises rates far more aggressively. Debt markets in CY17 will see range-bound pendulum movement of rates, unlike sustained softness witnessed from Mid 2013.
From equity market perspective, this Budget focuses on reviving consumption and rural economy post-demonetisation. Impetus on infrastructure creation also augurs well. Market has witnessed relief rally as possibility of introduction of long-term capital gains tax on equities has been allayed. Currently, domestic flows have been very strong. This is driven by the faith of retail investors and work of distributors on the long-term growth potential. The relative unattractiveness of other asset classes like debt and gold is also fuelling flows in equity. The post-tax return on one-year bank deposit, going forward, is likely to be less than what we saw in many stocks on the Budget day. One good day of stock return is better than one year of post-tax fixed deposit return. Events like the monetary policy announcement on February 8 and Uttar Pradesh polls will impact the market. Globally, how the US Fed raises rates, how the Trump administration take on various issues, and the EU debt crisis, along with China credit bubble will cast its shadow on market over rest of CY 17.