With the market scaling new highs, cautious eyes have slowly moved away from the Budget and all the promises it makes, but the debate over whether this was a game-changing Budget is not yet put to rest.
In an interview to CNBC-TV18, Pankaj Vaish, MD & HD - Mkts (South Asia), Citi says one shouldn't get too hung on the ieda of what the fiscal deficit will stand at at the end of three years. What is more important, he believes, is the disinflationary growth path the Finance Minister Arun Jaitley is attempting to follow.
As long as capital is going to specific infrastructure investments in a meaningful way so that it adds to capacity and thus is disinflationary in the medium-term, that is actually good for the economy, he explains.
However, he adds that more focus should be on jobs as it has been India's Achilles Heel.
Below is the verbatim transcript of the interview to CNBC-TV18.
Q: As I started off by saying people who are expecting the moon but there is no wow factor as far as this Budget is concerned but as you and Citi have articulated there are several nation changing ideas. Can you elaborate for us what to your mind are the big highlights as far as Budget 2015 are concerned?
A: On the Budget our view has been - and I had done an interview about two or three weeks ago where I had talked about the possibility, like an internal marshal plan our idea that it is not necessary to get too ideological about the fiscal deficit to a specific number as long as it is on a downward trajectory but the need of the hour really is to grow the economy again and to do it in a potentially disinflationary way. That is the important stuff.
People get too hung up on whether it is 3.6 or 3.9 percent and frankly none of us know our own household budgets to the nearest three tenths of a percent. So, I don’t know why we make such a big deal out of it but as long as that money – and it could have been even more as long as it is going to specific infrastructure investments in a meaningful way so that it adds to capacity and thus is disinflationary in the medium-term, that is actually good.
All expenditures are not of the same stripe and we all need to understand that and I say that as a bond vigilante myself. We own at Citi treasury many billions of dollars worth of bonds but I am still relaxed about the Budget because the three tenths doesn’t bother me because this will add to capacity, this will be disinflationary in the longer term. Jobs is an important area where we need to focus on. It has been the Achilles Heel of the Indian economy.
So, it is only fair that we start where the private sector doesn’t have the wherewithal to get the infrastructure spend started. Let it be the government but let it do it in a very responsible, well-managed way so that there are no leakages out of the system. So to me that was the highlight, I was very happy to see that. I was also happy to see the general good concept of get out of all the exemptions for corporate sector but instead lower the tax rate. That is really the right way to go about this and that should stop all these lobbying and it is still funny that the Finance Minister of India has to talk about pan and gutkha industries getting this and nylon is getting that.
It is funny and when I first came to India I found that unbelievable that a Finance Minister has to say that. All of that lobbying and industry specific stuff should go away but the broader tax rate can come down, that is really the right way to move in that direction. So, for me it was definitely a move in the right direction and it is okay if it takes three years rather than two years to get to three percent of Gross Domestic Product (GDP) especially if it is adding to capacity. So, I was pleased.
Q: I agree with you and I don’t think you are in a minority that believes that a slippage on the 3.6 percent number is not really a big deal because the government at least has articulated what it intends to use that money on and a significant portion of that is going to be allocated towards the roads and the railways sector. So, hopefully it will bring back public investment and hopefully it will then crowd in private investment. But on the second issue doing away with exemptions and presenting a roadmap of bringing down corporate taxes to 25 percent over a four year period. There is scepticism on that because we don’t have clarity on which exemptions are going to go. Of course the ones that have a sunset clause. The sun will set as per the preordained time but there is clarity on if the revenue buoyancy isn’t what the government is factoring in, will this four year roadmap then become a six year roadmap or a five year roadmap and for now corporates are going to have to live with higher corporate tax in excess of 34 percent because of the kind of additional surcharges that have come in. How do you respond to that?
A: On the surcharge I am sure there will be some intense lobbying and there will probably be some change or some redrafting of that. It is true that if the general direction is to go from 30 to 25 it doesn’t make sense if in the interim the tax incidents actually go slightly higher. But I still like the general intent of the proposal which is that tax rates are high. If exemptions are making the effective tax rate only 23 percent and Mr Jaitley said it doesn’t make sense to make both sides of the ledger. You do away with both the exemptions and you get the tax rate down that will broaden the base also and it will be much clearer. You don’t have to pay your lawyers and accountants crores of rupees to prepare for all these exemptions. Those are the only ones who should be unhappy about this proposal and we should hold the government to the four year time frame if they have mentioned that and they want to they should stick to it and that is okay. On that aspect we should hold them to side by side the exemption removal as well as the tax rate going on. That makes sense.
Q: Specifically from an FII point of view there were a few clarifications that came in from the government specifically on the clubbing of FDI and FII on the permanent establishment issue. Beyond the macro story that the Budget has presented specifically from an FII point of view how significant is this Budget?
A: Jayant Sinha because he understands this industry really well he is well versed in the language of fund management and he knows that it is good for the country that if the tax laws are very straight forward and simple. We used to get a lot of fund managers tripped up in terms of permanent establishment and thus all this money is being made out of Indian entrepreneurship and Indian hard work and yet the taxes and the revenues are sitting offshore. So, this is a very sensible way, encourage all the fund managers to setup big offices and bring their teams here and pay the taxes that are due here rather than necessarily going through Mauritius route and the others. This is again a very sensible way of doing it and again because Jayant Sinha is quite familiar with the in's and out's of this, he has made it very simple. He has said unequivocally that all the permanent establishment issues are gone and he said if you still have any queries I can bring the head of CBDT to answer your questions. So, it is good to have that clarity. This is not just for the fat cat and the rich people but it lowers the cost of doing business in India even for the investors and that will translate into more efficient capital allocation. Our weight in all the major indices is still so small given the size of our economy and the potential of our equity markets and debt markets that if a lot of this stuff was simplified our weight should be double or triple of what they are right now depending on the asset class you are looking at. So, this is not trivial, this doesn’t just go to the rich, it has a real effect to the capital allocation on the ground to some midcap companies, small cap companies that are looking to raise capital and that is how it affects the common man in India as well.
Q: Taking that point on the clubbing of the FII and FDI ownership specifically in the context of private banks because we have seen the rally in stocks like Axis and Yes Bank after the Finance Minister presented his Budget. Do you believe that the valuations at this point in time as far as private banks are concerned are looking stretched or do you believe that on the back of what has been unveiled we do have much more room?
A: You can get valuations slightly stretched for some periods of time. Our strategists are still quite bullish on the banking sector. They are overweight on it. You are right that there was that one day spurt and in fact even Jayant Sinha knew about it and quipped how many ministers of state and finance in the world would know what the price of a single stock was on the day of the Budget speech but that is how plugged in he is. So, it is true that they are running a little bit fast. However I think that is the nature of the market. Equity markets always discount the stuff that is going to be coming down the pipe and that is how they reward winners. So, I see nothing wrong in that. People who have expenses to take care of in a years time should not be putting their money at this point in time in the private bank stocks but if they have a drawn out investment timeframe and certainly professional fund managers probably should still find it quite attractive. So, our strategists are still overweight on it. However, if you are looking for something in the next 60 day kind of a flip then may be that is not the best idea.
Q: Pankaj, we were talking about the domestic factors but what about the domestic factors but what about the global factors and perhaps the Greek concern was exaggerated, that seems to be not big concern at this point in time. We have seen what the Fed has to say in the Fed minutes. What about the global concerns that could perhaps play spoiler for the India story?
A: So, actually Federal Reserve is the only Central Bank that may even tighten this year and by the way our economists still feel it will be more of a December story rather than a June story and even though Janet Yellen has talked about it and Stanley Fisher lately actually has also been slightly hawkish but given that they have talked about international developments, they have started using those terms in the last two meetings, they have talked about the dollar which is strong, so, they will probably be a bit slow but even if they are not it is like that taper tantrum that we went through two years ago where everybody, Oh my God, the world is coming to an end and guess what we are done with the whole quantitative easing and yield are actually lower than where they were before June of 2013.
So, it will be one of those things which have been talked about for years, when it actually happens it is not going to be that big a deal.
Q: Do you believe on the back of the announcements that we have seen coming in the Budget, we are likely to see an acceleration as far as corporate earnings are concerned and since we were talking about the macros and you were talking about fund inflows, what is the outlook now on the currency?
A: On the currency if it was all left to the markets the rupee would be far stronger but clearly there has been intervention, clearly there has been this view that it helps our experts, even our Chief Economic Advisor was in the press yesterday making the argument that let the currency weaken. With all due respect, my humble suggestion would be we should study this thoroughly before we actually do that. I just thought that the pressure would come from the Industry but I was a bit surprised to see it’s a bit of a government read 2.22 also but it makes sense to study this thoroughly. There is a question mark on how sensitive our exports are to the FX rate, given the basket of our exports these are sophisticated exports, these are the IT sector has nice profit margins so, whether this will make a much of an impact even in 2013 where our currency weakened a lot our exports only grew about single digits. So, it is quite a jump and it is a necessary assumption you have to make that our exports would go up a lot if the rupee weakened because that is the only permanent kind of reserves you get, any portfolio inflows are in a sense temporary. At some stage at least the debt ones will mature and if they don’t rollover. So, you have to study that quite carefully before we have a major run back up to 68 or 69. So, the RBI is there on the bid, they don’t want it for the rupee to strengthen too much. Some gradual depreciation of three-four percent is fine, that is still making it quite attractive for foreign investors who see an eight-nine percent nominal yield including some of the corporate bonds that they are getting into and than a three-four percent depreciation. So, that is ore than what they can get four-five percent than they can get anywhere else in the world in dollar terms. So, the prospects for FX is just a gradual depreciation; if they were to leave it on its own flows, we would be in the high fifties in dollar INR but that does not look like it is going to happen.
On the corporate sector yes, we do expect- the third quarter earnings were very bad so now we do expect an acceleration from here because there were a lot of one time things that were thrown in to it. So, from here our strategists are expecting an improvement in earnings.
Q: So given where things currently stand as far as the macros are concerned and the hope that things like the plug an d play model that the government is talking about, the additional public investment especially for the roads and railways sector, what is this going to mean as far as Indian equities are concerned because there are two camps: one suggesting that Indian equities no longer compelling at these valuations, others that seem to believe that yes while we still see sectoral differences, we could perhaps see another 10-15 percent appreciation fro these levels. What is your own take on where we could see equities by the end of the year?
A: So, our strategist is looking for another 10-11 percent from here. He has a target of 33,000 on the Sensex and at 9,000 you are obviously back to the old house in the Nifty. From here for it to break out into a new zone would be a very meaningful break so that probably needs some more fundamental push behind it, clearly an RBI rate cut would be that kind of a support. The Budget was medium term very positive; there was no fireworks in it right away to get people and we had already rallied into the Budget so there is nothing very dramatic in there to say let’s bust higher right away, an RBI rate cut would do it. Looking out for the rest of the year my sense is we also need to be very careful what the government does going into next round of state elections, the Bihar state elections and all that. It is very important after what happened in Delhi but let’s make sure the kind of policy making is still very prudent and very responsible which is clearly what they have done in the Budget but the temptation of a big state like Bihar elections coming up and given what Aam Aadmi Party (AAP) did in Delhi, we just need to make sure that no wrong conclusions are being drawn from there and free water, free electricity , free homes and all; that is what busts the Budget really big than spending on infrastructure so, that will be a very important point. So, two important ones, RBI and government’s policies going into state elections, those will be the important things.
Q: Do you believe that there is enough that we have seen the government do I terms of consumption demand is concerned because really you have seen a service tax hike and that of course aligns us to the eventual GST rate in 2016 hopefully but the fact is that in the interim we are going to see prices moving up as far as the consumers are concerned. There haven’t really been any significant giveaways by way of personal tax exemptions. Do you believe that there is enough to spur consumption?
A: We have kind of gotten used to every Budget--the middle class as we call it, what is in it for them and I don’t know maybe this is a very controversial things that but there has to be something in it for them, for anyone every Budget, it should just be a statement of accounts on some prioritisation of where they want the nation to go. We are not children anymore that we all need candy every 28 February and we need to be enticed in to spending money. So, I do not know if pushing consumption is a very big need right now. In any case clearly investment is the area that has suffered very badly over the last four years and that is the push it needs, that is what will provide the jobs and that is what will provide it in a disinflationary way. So, that is the right way to do it rather than necessarily a lot of tax giveaways or lowering duties on televisions or computers or whatever it is. I do not know if that necessarily does very much especially when a lot of these items are being imported. So, the emphasis here is right and over some period of time people will learn that it is not necessary to give sort of gimmies to folks out there every Budget. I do not think that is necessary.
Q: Are you more bullish today than you were prior to February 28?
A: I am, like I said I was just throwing it out there.
Q: Significantly more bullish?
A: Yes, because I was kind of just throwing this whole internal marshal plan idea out there. I was very happy to see the government take the bull by the horns and say we will do something. I wish it were frankly even more money being spent on very specific 20 or 25 projects but I am very happy that they have started that between railways, roads and this new institution that is being set up. Like I said, my counter is about USD15 billion, even if it is 25 every year for the next five years, that will be very meaningful and then private sector will come. It is like the American baseball saying, if you build it they will come and that is what you will follow. You needed somebody to initiate that and government is in the right position to do it.
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