Lakshmi Iyer
It is that time of the year when the crystal ball gazing has begun..not only in India, but across the globe.. No – it's not about the outcome of a trade war or US election outcome, but what Budget FY 2021 in India has in store!
As always there would be a series of wishlist from pretty much every strata of the society. I won’t be surprised if Bollywood sneaks in its own wish list too! After all Har Khwaab aruri hai (every dream is essential). But for now, let's keep films aside and focus on finance.
The current phase of the economy is unenviable - growth slowdown, upward-trending headline retail inflation (CPI), lack of adequate monetary transmission to the real sector etc. However transient the current rise in CPI were to be, it has yet managed to put breaks into an otherwise accommodative monetary policy action.
The month of December saw a status quo on benchmark interest rates and looks like we would be like that for some time till CPI starts to ebb.
Revenue expenditure has been growing at a time when nominal GDP growth has been sluggish. The loud cry is being made from some sections of the financial fraternity to let go of the fiscal deficit to aid better growth prospects. This reminds me of the famous dialogue in Bollywood movie Dilwale Dulhaniya Le Jayenge where Amrish Puri tells his daughter Kajol (Simran) – 'Ja, jee le apni zindagi..' (Go live your life).
How easy can it be to let go of the leash on fiscal discipline? That is the key question which the markets hope the budget will seek to answer in a credible manner.
Assuming the government actually walks the path of fiscal profligacy, the next question is – how will the additional deficit be funded? Foreign portfolio investors (FPIs) were net sellers in India bonds for 2 consecutive calendar years 2018 and 2019 by Rs 45,400 crore and Rs 12,300 crore respectively.
While the amounts are not alarmingly high, one of the potent levers of demand is clearly absent.
On the domestic front too, there isn’t much appetite from institutional investors like mutual funds, or maybe sporadic demand for long bonds from Insurance companies.
Most banks in India are holding excess government bonds in the form of SLR (Statutory Liquidity Ratio) and hence incremental demand may pose a challenge, especially when credit needs also need to be addressed.
Given the above, budget 2020 will have to be a tight rope walk aspiring to manage growth considerations, yet not running the risk of being too extravagant. While markets have priced in a fiscal slippage, the quantum of the slippage will be key.
For FY 2020, the fiscal deficit is at 3.3 percent of GDP. Any slippage of up to ~50 bps is largely in the prices. Anything materially beyond that would need a credible expenditure plan, failing which bond markets could be a tad disappointed. Equally important is to invoke demand levers – like India’s inclusion in the EM bond index to reduce the intensity of rise in yields if any.
There may be many nuances being announced in the budget like always, but the key for markets would be a fiscal deficit and the texture of spending planned for the coming year. Delivery and action both are key to ensure – Zor ka jhatke deere se ho….
(The author is Chief Investment Officer (Debt) & Head-Products, Kotak Mahindra Asset Management Company (KMAMC)
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