Budget FY16: Consolidation mode before building scale (for better impact)!

Neutral impact from combination of fiscal and monetary set up

Economic Survey said it before the Budget FY16, on compromising fiscal prudence for investment allocation for growth. It is not a surprise that when revenue leakages is huge (against window dressed fiscal deficit number over previous years), it is tough to make both ends meet; targeting FY16 fiscal deficit at 3.6% and making monies available for investments. It is hard fact, but real! The agenda therefore is to plug revenue leakages; money not lost is revenue earned! There are lot of measures to improve revenue monitoring (and collection) efficiency to arrest big time slippage and avoidance. Another good measure is to take out the non-financial assets in the system to make it interest earning for the investor and putting the asset to work; need to look at the execution bottlenecks. If it works, it is good upside (both from investment and consumption) for economic capacity expansion. Budget FY16 has not absorbed the huge upside from coal and spectrum auctions, thus keeping sufficient room to deliver pleasant surprises by beating set targets (and high expectations). All taken, will give the benefit of disappointment to Mr.Jaitley for being real and upfront without attempting to give ambitious projections, and will give one more year for cleansing the administration with effective governance before catching up! Black money, tax avoidance and benami assets have been tolerated for long, and efforts to eradicate them is long term advantage for the economy, and it is worth a 1 year wait for fiscal prudence.

It is also ensured that RBI does not see this as risk (from higher fiscal deficit) to pursue dovish monetary policy. The retention of CPI tolerance level at 6% (against current 5%) is direction to RBI to move ahead with baby-steps rate-cut (despite higher FY16 fiscal deficit estimate), aligning Repo rate at 1.75-2% spread over actual CPI print. RBI should also take comfort from steady net market borrowing of Rs. 4.5 Trillion, not seen as big burden on the system when FII flows will be in plenty against huge $ appetite from RBI, infusing Rupee liquidity in the system. Both fiscal and monetary dynamics combined, there is no major risk on the economy to send negative vibes to stake-holders.

Thrust on infrastructure on expected lines

The thrust on infrastructure is visible through higher allocation of funds and efforts to make alternate products viable (and attractive) to investors through tax and return efficiency. The FY16 growth momentum is heavily dependent on infrastructure revival (of existing projects) and capacity build-up to support manufacturing and agriculture sectors. FY16 growth momentum is skewed towards what happens in infrastructure sector with plenty of opportunities, challenges and risks.

Disappointment from short of bold reforms and "out of the box" innovation

The Government had to play with limited band-width, while in struggle to push crucial reforms in the Parliament. The strategy is seen to keep it simple (and pro-investment) and stay in consolidation mode for 1-2 years till the number game in Parliament gets better; makes sense! The intent therefore is to stay liberal on rules to attract investments in the next 2 years, before review of off-shore investment policies. This is big positive to open up long term, sustainable (and accelarated) liquidity flow into India now. The concern is from not doing much to make doing business easy in India. Beyond finance (and investments), there is no focus on other irritants (from land, labour, legal etc) that keep investors in wait-and-watch mode.

Matter of fact adjustments in taxation rules

There are minor adjustments thrown here and there with "net-net" insignificant impact. The intent however is to keep taxation rules simple, remove ambiguity (and complexities) and bring transparency (and clarity). The upside here is huge from two counts - one from squeezing the black economy and plug leakages from the white economy. When this is achieved, there will be room for rationalisation to push down tax rates. Till then, cosmetic touches is done to tax the super rich (and the affordable class), and being bit liberal on the middle tax (to put more monies in the hand for investment and consumption).

Government is seen to be planning for long-haul play (for minimum 10 years till 2024), hence taking time to settle down for consolidation

The Government is not seen to be in a hurry seeing a Cricket Test match kind of opportunity ahead, when opposition is down and out. The agenda therefore is on "house keeping" and set up strong platform (as catalyst) to build accelerated growth momentum in the years ahead. The investor (and consumer) confidence is from steps to set up of clean administration, effective governance for higher economic efficiency.

Above average performance score

Mr.Jaitley played for the average score this year considering as work-in-progress for distinction and 10/10 before Budget FY19 (ahead of next election), thus setting up slow but steady pace for long-haul marathon race. Performance evaluation exercise covers both what is delivered and expectations (and capabilities) ahead. While giving an average 5-on-10 for what is delivered, I would tend to add another 3 for what is in store ahead. It is an 8-on-10 rating for the Finance Minister for being real now (FY16-FY17) and building optimism for turning efficient in the years ahead!

Bullish consolidation in financial markets 

All taken, there is nothing to panic on India financial markets. There is nothing to fear or cheer on equity markets, thus into consolidation mode. See NIFTY in consolidation at 8700-9200; support is from pipe-line rate-cuts and resistance is from stretched valuation, hence prudent to play end-to-end. Bank NIFTY is set for consolidation at 19000/19250-20500/20650.

10Y Gilt retains bullish momentum. The outlook is for shift of consolidation range at 7.45-7.55 by on or before first week of April (from current 7.65-7.75%) enroute to 7.25-7.35% in the second half of 2015. Most cues from dilution in growth-inflation conflicts and favourable demand-supply dynamics support bullish momentum ahead.

Rupee bullish undertone gets only better as USD gains everywhere else. Retain USD/INR focus at 61-62 (within the well established long-term strategic support at 58.00-58.35 and resistance at 63.65-64.00. The only risk on Rupee is from the extent of RBI $ bids, as all other factors are supportive to sustainability of Rupee bullish momentum, which would open up bullish extension beyond 61 into 59.50-60.50.

So, Budget FY16 is out of the way giving comfort to stake holders to retain the India optimism; next big event is the 25 bps rate cut on or before 7th April. Stay positive with prudence.

Moses Harding