Budget Priorities to revolve around growth (in core sectors) and revenue expansion
Financial Budget is all about making both ends meet, with basic objective of not borrowing to fund unproductive consumption. India has been doing this all these years, and it is time to change with the theme of "borrow and invest for growth" to retain the pent-up optimism on India. In this sense, it will be a "make-or-break" Budget 2015 for FY16. The change has to be from combination of cost rationalisation, capacity expansion and revenue maximisation. The external factors continue to stay supportive; cues (and expectations) from prices of imported commodity items and availability of external liquidity stay in favour, and what matters now is to establish pull impact from domestic cues (and developments). The outcome has to be a combination of policy initiatives and tax rationalisation to create opportunities for investment where it is in critical need, and to dilute the risk with desired reward for shift of investors (and lenders) appetite to core sectors. It would mean lowering the net yield/return on risk-off assets and dilution of risk premium on risk-on credit. This Budget is all to do with creation of desired growth capital (equity & debt) for capacity (and revenue) expansion.
Fiscal prudence is not risk in play
It is given that the FM is not going to surprise the markets with upward revision in fiscal deficit estimate; FY15 target at 4.1% of GDP is sacrosanct (red-line can't afford to be breached) and FY16 estimate at 3.6% not seen as ambitious; small push to "business-as-usual" combined with supportive external tailwinds will help to achieve this. The "awe" feeling will emerge from delivery to "what more" expectation build! For this, it is important to focus on cost rationalisation (cutting subsidy burden, reducing interest cost of borrowing, building financial efficiency, measured by expense versus revenue ratio, growth/revenue expansion through higher utilisation of invested capacity, building higher consumption for capacity expansion and removal of leakages in revenue collection (through higher and efficient coverage). It is all about creating opportunities that would earn to the exchequer more than what is spent for the purpose, and to build public sector efficiency to generate desired return on their investments. The "awe" vibes will be from rationalisation of unproductive costs and squeezing monies for productive investments.
Concerns on creation of viable investment opportunities and flow of public money remain a worry
It is all about bridging demand-supply dynamics through investor-consumer behaviour (and appetite). The issue arises from putting to work the private monies lead by public investments, which will in turn open up the external FDI flood gate. Most domestic private liquidity is either parked in unproductive non financial assets (real estate and Gold) or invested in risk-off sovereign and/or AAA corporate assets, while FDI supply is miniscule to the demand. It is less said the better on public monies; surplus cash with Navrathna PSU entities are idle, while Government continues to stay in "borrow for consumption" mode. Diverting domestic liquidity into where it is needed, providing business viability (and feasibility) comfort to external investors (and lenders) and creating budgetary band-width to divert public investments into core sectors are essential to convert the pent-up India euophoria for shift into "walk-the-talk" mode. The system demand for liquidity (equity & debt) is huge, and key to success is by bridging the need with adequate (and desired) supply. The expectation from Mr.Jaitley will revolve around these themes of expansion of private investments in financial assets, divert private monies to core sectors through shift of risk sentiment from off to on and ensure adequate Government/Public sector funding to sectors where demand is not met with adequate flow of liquidity for whatever reasons.
Removal of irritants to make India the best place for doing business to realise the "Make in (and for) India" dream
Lots have been said by experts on measures (across policy, regulatory and administrative initiatives) that would need to be executed to make India a great place to do business; none put monies for love of the country, it would need comfort on capital protection and desired return on the risk capital, obviously more than what it earns on risk-off assets. The issues are across end-to-end from hurdles to bringing in the money for investment, managing the productivity of the business (and assets), removal of inefficiencies in "all adjusted for" returns from the business and ensuring smooth exit to take profit off the table. The resolutions need to be across tax, labour, legal and other irritants in the system. The investor (and lender) community is confident (and clear) on the emerging opportunities, but yet to get the comfort on realisation of desired return on the capital. The monies (domestic and external) are in wait and watch mode at the doorstep and if not pulled in now, it would flow to other destinations (or continue to stay in risk-off assets) causing severe dent on the India euphoria. It is now or would become too late for economic revival, thus hurting social well-being beyond repair.
Focus on consumption pick-up at the mid to lower end of the pyramid
The consumption dynamics revolve around more than 90% of the population in the mass affluent and not affordable categories. It is to do with creation of jobs and putting more monies in their hands for consumption. The hype in financial inclusion at the lower end of the pyramid can't be effective unless surplus monies are there in their pockets to save (or invest) or possess necessary skill sets to encash emerging business opportunities to borrow for putting the money to work; therefore, the intent of financial inclusion has to extend beyond conducting cash less financial transactions to creation of demand for and supply of monies from un-banked and under-banked population. It is not a chicken-and-egg story, as it is obvious that only domestic consumption led economy can stay sustainable over longer time.
Focus on infrastructure, manufacturing and agriculture sectors is the trigger
While the financial and technology infrastructure is relatively robust, economic and social infrastructure lag behind. The issues around economic infrastructure like Road, Power, Port (and related transport logistics), SEZs etc are many; it is less said the better on social infrastructure like water, affordable housing, health (and related basic hygiene), waste management etc that would make living in India comfortable.
The problems around economic and social infrastructure are many, which would engage revival of existing projects and simultaneously expand capacity. It is all to do with policy measures (and execution) and ensuring desired flow of equity & debt capital, giving adequate comfort on returns and at affordable cost. This is where the challenge lies; if this is achieved, major hurdles will be behind. If the coverage is expanded to manufacturing and agriculture sectors, there will emerge hope for realisation of pent-up euphoria at ground level for tangible impact.
High time for Arun Jaitley to make believe Narendra Modi mantras
The system stake-holders have heard a lot from Modi to set up current euphoria and sharp re-rating in Indian financial markets since February-May 2014. The noise around "red tape off and red carpet on", ensuring "good and effective governance", building "skills, scale at great speed", "Make-in-India" ambition to boost investments for export growth, federal and cooperative collaboration with State Governments, and establishing strong bond with global heavyweight economies etc have to get translated into tangible and quantifiable executive actions. All taken, expectations from stakeholders are high and it is important to avoid sending "shock vibes" given the limited band-width to deliver "awe feeling" in the 1st full budget of the new Government. The post-budget impact on financial markets will be neutral if unpleasant surprise signals are avoided. An out-of-the-box budget with bold measures (staying light on populist measures, avoiding playing to the gallery) will be good to restore bullish consolidation ahead.
Impact on fnancial markets: neutral bias
India equity market is seen in consolidation mode with NIFTY at 8450/8600-9000/9150 and Bank NIFTY at 18200/18450-19650/19900, break-out either-way not expected to sustain.
India 10Y benchmark bond yield seen steady at 7.50-7.75% on high probability of delivery of 25 bps rate-cut on or before April monetary policy review. Meeting fiscal deficit target and resultant lower demand for funds from the market are positive when demand is in plenty.
Rupee seen firm (against RBI appetite for USD) at 61.20/61.45-62.20/62.45, not ruling out minor risk of pressure into 63.00 before establishing stability at 61-63.
All combined, vibrant Narendra Modi will ensure that Budget FY16 provides positive signals to global rating agencies to get comfort on the sustainability of improving macroeconomic fundamentals (dilution in growth-inflation conflicts) for sovereign rating upgrade in 2015. While it is not sensible to stay over-weight, it is prudent to stay neutral (to light) in the absence of run-away moves either-way! In all probability, Budget FY16 may go non-event delivering to expectation on fiscal prudence, economic capacity expansion, investor (and consumer) confidence and establishing growth momentum into higher end of 5.5-7.5%.
Let's hope for the good, if not the best!
Moses Harding
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