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Thursday, October 29, 2020

It’s execution time now

The budget has managed to walk the tightrope between divergent objectives — growth,inflation and fiscal prudence — quite well. Now let actions match words....

Written by Nilesh Shah | March 1, 2010 1:19:11 am

Balance and prudence are the underlying messages of Union Budget 2010-2011. The market was hoping for a clear roadmap on fiscal consolidation and reforms that would improve the fundamentals of the Indian economy and markets and sustain growth. The budget has delivered on these expectations by demonstrating fiscal prudence. It has provided a clear roadmap for fiscal consolidation,pledging to reduce the deficit to 5.5 per cent by FY 11,and further to 4.1 per cent by FY 2013. This resolve on the government’s part is positive and reassuring for the markets.

Ambitious disinvestment target. The divestment estimate of Rs 40,000 crore is the highest for the government till now. The market will keenly watch the execution of this programme. In the global context,this is not a large sum and if the government acts diligently it should not be difficult to achieve. However,the government will have to price the issues such as to leave something on the table for investors to make a success of divestment.

Thrust on consumption. Parallel to managing the fiscal deficit,growth and inflation,the thrust on consumption has continued in this budget. Tax reduction accomplished by the changed tax slabs will result in higher disposable income,which will in turn benefit the economy indirectly. Moreover,the additional deduction of Rs 20,000 over and above the existing limit of Rs 100,000 for investment in long-term infrastructure bonds will further enhance saving. However,tax incentive schemes are more geared towards debt investments; equity does not get similar preference. In future,the government should mull over including infrastructure mutual funds in the deduction bracket so that investors can benefit by participating in the India growth story.

GST for improving tax collection. In the budget,the government has indicated the timeline for implementation of GST (Goods and Services Tax) as 1st April 2011. This is a positive step that will go a long way towards improving the tax to GDP ratio and plugging the leakages in tax collection. Besides,the continued focus on inclusive growth through social sector spending and infrastructure sector allocation,with the thrust being on rural development,will help sustain economic growth.

More regulators. The budget also aims to usher in efficiency by setting up a coal regulatory authority,and an apex financial sector council in order to encourage a prudent and level-playing regulatory environment. It also aims to make the system transparent by bringing all subsidies within the budget framework,thereby ensuring that there are no off-budget items.

Plugging subsidy leakage. The utilisation of subsidies is another issue that has been addressed through UID (unique identity) implementation. The UID initiative will help in proper targeting of beneficiaries and in containing systemic leakages.

All eyes now on RBI. From the interest-rate point of view,the government’s net borrowing programme of Rs 3.45 trillion is below the market’s expectations. However,large targets on 3G and divestment of Rs 0.76 trillion have been viewed sceptically by the market. The market will look forward to execution on these fronts.

The market will also look forward to Reserve Bank of India (RBI) support through open market operations (OMO) and steps like HTM (hold to maturity) hike and SLR (statutory liquidity ratio) hike to gauge the direction of rates. Without the effective support of RBI,rates are likely to head up on account of inflation concerns and the borrowing programme.

A few risks

The budget has been pro growth and has prudently walked the tightrope of growth,inflation and fiscal prudence. However,some risks in the form of execution of divestment and 3G auctions exist. While the government has attempted to address fiscal-deficit concerns,it is worth mentioning that at 36 per cent India’s interest to revenue receipt ratio is reasonably high. Even for countries like Ireland,Greece and Italy,this ratio stands at 13 per cent,16 per cent and 12 per cent respectively (source: Bloomberg). The only solution to the government’s rising interest burden lies in growth and more growth.

In the final analysis,it is the execution and realisation of all reforms that will prove decisive. Ensuring the execution of the plans proposed in this budget over the next one year will be critical.

Take a long-term view

The equity markets rebounded on the presentation of the budget as the latter exceeded market expectations. Now that the deficit is behind us due to the roadmap that has been provided,the market will in future once again focus on micro factors such as quarterly results for FY10,global events and the monsoon.

The markets are trading at fair value,albeit at the higher end of the fair-value range. We recommend that investors should use sharp dips to increase their exposure to equities. From the debt-market point of view,given the magnitude of the borrowing programme,the market will take cues from the support offered by RBI through OMO. This will in turn be contingent upon inflation. If RBI supports the government in its borrowing programme,then yields will remain range bound,otherwise they will inch up.

As the FM said: “The opportunity is great. The time is right.” Hereafter future growth will depend on execution efficacy and speed of delivery. Our advice to investors is to take a long-term view on the Indian equity markets and believe in the fundamental strength of the India growth story. u

The author is deputy managing director,ICICI Prudential Mutual Fund

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