By: Navneet Munot CFA, Director IAIP and CIO SBI MF
Like every year, the finance minister tried to ensure that no section of society or any part of the country is missed out in getting a mention in the Budget speech. But to his real credit, the finance minister has walked a tightrope to ensure growth engines are revved while maintaining fiscal prudence. The malaise of low growth-high inflation syndrome had its genesis in fiscal profligacy post the global financial crisis and lack of action towards augmenting the supply side. The Budget has shown a commitment towards pursuing a different path whereby focus would be re-oriented towards boosting the savings and investment to achieve sustainable higher growth with low inflation.
The budget speech reflected the focus on 5 Ts (Talent, tradition, tourism, trade, technology) as articulated by the Prime minister during the election campaign. Skill development, e-governance, leveraging technology for social infrastructure (education and healthcare), reviving traditional industries and encouraging entrepreneurship would be some of the critical components of the new growth model. Investment plans for ports, airports, roads, agri-infra, railways, energy including unconventional energy, defense, urbanization and smart cities, water transport, a large numbers of areas were talked about. The balance sheets of government, banks and the infrastructure sector are in such a shape that something innovative and bold had to be thought out to meet the funding needs of the scale that would be required to meet those ambitions. Relaxation on FDI limits, tax incentives like lower withholding tax for all types of bond investments by foreign investors, pass-through status on REITs, Infrastructure investment trust, long term bonds for infrastructure by banks were measures targeted towards achieving that objective. There are measures to augment the savings and channelize those savings into the productive assets. We expect the focus of the Budget to move from “outlays” to measurable “outcome” in line with the long term vision of the government.
Though these are early days for the government, it has been pursuing the agenda of creating a business friendly environment and focusing on clearing the bottlenecks. It has gone ahead with the proposed fuel price hikes and has taken tough decisions like increasing railway fares. Measures have been taken to deal with potential price rise in food products in the backdrop of poor monsoon.
The budget didn’t throw much light on the plan towards introducing the unified Goods and Services Tax (GST) and a concrete plan of rationalization of subsidies (Food, fuel, fertilizer). The uncertainty created by retrospective taxation measures need to be permanently put behind. Budget estimates on revenue growth and subsidy payments may be tough to achieve, though the FM might have kept some cushion elsewhere.
The event is behind us, equity market’s attention would move to global events, corporate earnings and real ‘action’ on the ground. The markets are likely to consolidate the recent gains with focus shifting back to individual stock picking. While FIIs continue to pour money, domestic investors have started participating. We must keep in mind, equity issuance are likely to pick up as well.
Considering the government’s reform intentions, commitment on fiscal consolidation, resolve to tackle inflation with supply augmentation and the improved monetary policy credibility augur well for long term investors in the bond market. In the very near term, we expect bond yields to remain range bound.