Interim budgets are usually intended to keep administration going for a short while, but the latest one seems to show sign s of a government confident of returning to power.
There are two standout features, which no one seemed to bargain for: One, the fiscal consolidation exemplified by the sharp reduction in fiscal deficit to 5.1 percent; Two, a continuum in policy with capex allocation rising by 11 percent. This in spite of the Government assuming a very conservative increase in tax revenues, given the buoyancy in actual collections.
By not choosing to go overboard, it has in fact created borrowing space for private sector by slashing projected borrowings by nearly 3 percent. Bond markets have already given a thumbs up with long-term yields falling to around 7.1 percent, which will reduce borrowing costs not only for the Government but for the private corporate sector as well.
Capex And Growth Momentum
The continued focus on capex spending with allocation going up by 11 percent, which on top of the 37 percent increase in the previous budget, is a definitive growth positive. To be sure, spending details need to be analysed but one could expect roads, bridges and highways, apart from Railways, to get the lion’s share. The thrust on rural housing (2 million rural houses over 5 years) is an added positive for the construction and related sectors.
But it is the fiscal consolidation that is expected to boost the banking and insurance sector’s fortunes. For one, the lower yields are expected to result in a sharp uptick in valuation gains, which could lead to net profits surging. The improved fiscal situation is likely to expedite foreign inflows into bonds, consequent to the inclusion into the JP Morgan index. This will be another positive for banks as it could free a large part of resources hitherto utilised for funding Government borrowing.
Improved Fiscal Management
Overall, banks and financial services are expected to do well, which is also clear from the enhanced dividends the Government expects to receive from them. More than anything, the Government hopes that the visibly improved fisc will get agencies to up India’s investment rating which could further reduce borrowing costs. All in all, fiscal management has been the standout feature more than even targeted spending.
The big question of course will be if Government is able to stick to its reduced borrowing target but given that it has been conservative in assuming modest tax revenue growth of under 12 percent and also a more modest GDP growth of only 10.5 percent, perhaps it reckons it has sufficient room to feel confident.
Overall, it appears to be a seemingly impossible combination of continuum of earlier policies and lower fiscal deficit, both of which would suggest a growth oriented budget.
SA Raghu is a columnist who writes on economics, banking and finance. Views are personal, and do not represent the stand of this publication.
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