Budget should boost domestic capex & infrastructure spends

Nimesh ShahICICI Prudential AMC

The pre-budget rally is well in progress with the broader indices making record highs, up more than 2000 points in the first month of 2015. However, we believe that expectations of a dream budget are entirely misplaced in a scenario where the excise duties, custom duties & income tax have come down to significantly lower levels and the Tax to GDP ratio for the central government is not very high.  

Indeed, what the Indian economy does need from the budget this year is a boost to the domestic capital expenditure (capex) cycle and increased spends on infrastructure, which could begin with efforts from the government.

Government’s capex spend to riseIndian economy has saved ~US$45 bn/year (at US$65/bbl) due to the fall in oil prices which if reinvested in productive activities can stimulate growth. As the government pockets a large part of the gains from oil fall, they should be able to make way for a robust investment cycle.The government’s capex spend has remained stagnant at low levels for over a decade. Even many of the domestic companies are sitting on under-utilized capacities and therefore, are unlikely to increase capex in the immediate future.  Hence, the onus to kick starting the domestic capex cycle now lies with the government.Boost to InfrastructureWe would be enthused if the government reduces the revenue deficit while letting the fiscal deficit remain a little loose, and in the process, opening its purse to spend on infrastructure. India has yet to see the kind of investment in infrastructure that could revive the capex cycle. This implies a large jump in spending on national highways, rural roads, railways, and rural and urban housing. Once the capex kicks in, the private sector will step in, turning it into a virtuous cycle. In particular, rising expenditure on roads and housing should drive a pick-up in demand for cement, paints and other raw materials. Cascading benefits could boost the loan growth and aid the banking sector.DisinvestmentsThere is a huge demand for public sector units. Thus, a strategy from the government to divest certain companies at attractive levels could offer good opportunities to accumulate some equity assets at good prices this year.

GST- a medium term storyWhile Goods and Services Tax (GST) could be one of the biggest and most significant indirect tax reform in India, we believe it cannot be brought in before April 2016. The reform, if & when implemented will allow for amalgamation of large number of central and state taxes into one single tax, would mitigate double taxation in a major way and pave way for a common national market. It will considerably simplify the tax structure in India and fuel India’s economic growth.

How well the government handles all the ordinances with regards to GST and converts them into a comprehensive law remains to be seen; therefore, some action on this front in this budget will be a useful directive for the future. To sum upGovernment’s focus on boosting the capex cycle and smoothening the tax regime is the fastest way to kick-start growth in the country. While unconnected to the budget, we also believe that improving the food supply chain and ease of doing business in India are imperative for the government to bring long-term benefits to the Indian Economy.