The finance minister has delivered a Budget which whilst being unfriendly to both the equity and debt markets is focused on stimulating GDP growth and – most importantly – focused on delivering relief to India’s beleaguered rural economy. Whilst it is easy for us to say that FM's focus on delivering big rural stimulus was done with an eye on the ten elections (9 assembly elections and then the General Elections) which the NDA will fight over the next 14 months, it is worth keeping in mind that India’s agricultural economy is currently facing unprecedented distress.
As per the nominal GDP data published by the government earlier this week, nominal agriculture GDP has declined in just three years – FY16, FY03 and now. Against that backdrop the government’s promised handouts to rural India make a lot of sense. As expected, the government has given a massive price support to farmers in an election year by guaranteeing that the Minimum Support Price (MSP) for all kharif crops will be set at 1.5 times the cost incurred by the farmers.
Moreover, all efforts will be made to ensure that if market prices fall below the MSP, the farmers should get a price closer to the MSP. Other than the rural handouts – which look highly likely to stimulate overall GDP growth in FY19 albeit at the expense of higher inflation – the other growth-friendly part of the budget pertains to government capex.
Capex is budgeted to grow in FY19 at 10 percent (comparable to the FY18 figure of -4 percent). In absolute terms, the government capex will amount to Rs 3 trillion (as compared to Rs 2.7 trillion in FY18 revised estimates). We reiterate our FY19 GDP growth estimate of 7.0 percent versus our FY18 estimate of 5.8 percent. We also reiterate that with CPI inflation heading towards an average of 5.5 percent in FY19, the RBI looks likely to hike rates by the summer of 2018.
Disappointing the debt and the equity markets
In-line with our 18 January pre-budget note, the FM announced fiscal slippage of 30 bps in FY18 (ie a budget deficit of 3.5 percent) due to higher than budgeted expenditure and shortfall in telecom receipts.
More worryingly, for FY19 the FM announced a budget deficit of 3.3 percent (as compared to the previous target of 3 percent given for FY19). Given the amount of electoral pressure that the government will face in a busy election year and given the range of social welfare schemes (ranging from farm price support to health insurance to free gas and subsidised housing) that the government has announced, it will be major achievement if the Finance Minister can deliver a 3.3 percent budget deficit in FY19.
Over the past three years, India’s stock market has been the one bright spot in an otherwise sluggish economy. By introducing long term capital gains tax (CGT) at the rate of 10 percent the FM took away some of the luster from India’s booming stock market.
Furthermore, the fact that the Securities Transaction Tax on equity trading also remains (at 0.1 percent of the transaction value on both buy and sell legs) now makes trading in the Indian market that much more unattractive compared to doing the same trades in, say, Singapore. We would not be surprised to see more trading volume in Indian stocks migrating to Singapore.
Given the fiscal slippage (due to deficit indirect tax revenues) and given the imminence of major elections, the FM had his back to the wall. In trying circumstances he has delivered a budget which promises to help support an incipient economic recovery albeit at the cost of some credibility lost in both the debt and equity capital markets. Given the track record of previous governments – some of which have completely abandoned fiscal discipline in a pre-General Election budget – we have learned to be grateful for small mercies.
Saurabh Mukherjea and Sumit Shekhar are the CEO and economist of Ambit Capital respectively. The views expressed are personal.
Updated Date: Feb 01, 2018 18:09 PM