D R Dogra
The Indian economy has displayed mixed tendencies in FY16 with stable economic growth but declining investment. Also price conditions have been favourable with the RBI also lowering interest rates. The fiscal deficit for FY16 appears to be on target notwithstanding the absence of momentum on disinvestment. Quite clearly the government is on much firmer ground today to address some issues within its domain in the budget that goes beyond the various policy measures invoked during the course of the year.
The Union Budget for FY17 is very significant for two reasons. First there is a major challenge of investment not taking place which has been a concern for the economy. This has to be stepped up to create a strong foundation for future growth. The fact that growth has been reasonably high at 7.6% despite lower investment is significant as it signifies that more can be attained by giving a push here.
The second is that the recent episode of high NPAs in the system has cast a shadow on future possibilities. The public sector banks that have been affected quite negatively this year would have to be put on a strong footing and this is where the Budget has to play its part by providing direction.
Today the government is the only entity which is in a position to spend on infrastructure. This is so as it is able to borrow resources at a relatively low rate in the region of 7.5-8% which is not possible for private sector companies. Further with there being some degree of apprehension on laws relating to both land and environment, there is some hesitance on the part of private players. The government has the ability to provide an impetus here.
In the last few years it has been observed that while we have targeted big numbers for infra spending, there have been compromises made towards the end of the year when revenue does not increase. Infra expenditure has been compromised as it is discretionary in nature. One does hope that this did not happen last year and will be replicated in FY17. As we are expecting higher growth in GDP in FY17 it is reasonable to expect that revenue collection will be on the mark. Further, with global commodity prices expected to rein low, there will be less pressure on the subsidy front.
Higher government expenditure on infrastructure will provide the backward linkages to sectors such as cement, steel, machinery, electrical equipment etc. This will be good for manufacturing too as when demand increases and capacity utilization rates improves, there will be a tendency for manufacturing investment to increase at the second stage.
The other area which is of concern is the banking sector. With high NPAs being witnessed in the public sector banks, there would be pressure for future funding unless their balance sheets are strengthened. Here two expectations are there, of which one is more certain. This pertains to the recapitalization of banks. The government has already announced last year that there would be around Rs 25,000 cr being provided in FY17 which can be taken as given. However, it may have to be increased given the status of some of the banks whose net worth has been pressurized.
The second aspect pertains to privatization of these banks. This has been a long standing issue which has been accepted in theory but not implemented. This is one way of improving governance as well as raising funds, which has to be done at some point of time given the capital requirements. Both these aspects would find a mention, and hopefully will be emphasized in the Budget.
From the point of view of the markets, there is some apprehension on the equity front where clarification is needed. The issue of retrospective taxation has also come up again and it is hoped that the government addresses this once and for all because just when we are trying to get in more foreign investment, we could be retarding the process. Last year there was considerable volatility in the debt market when the tax rules were amended on FMPs and while we may not expect this to be rolled back, doing the same to equity would impact the market negatively. Therefore no action would be good news for the market.
Last the disinvestment programme should be more credible in the sense that the amount should be pragmatic and more importantly achieved as this can provide a boost to the equity market at a time when the world markets are becoming progressively volatile.
Hence, the three areas i.e. investment, bank capitalization and markets could be thrust areas this time.Author is MD & CEO of CARE Ratings