Sanjay Shah
The fabled Alladin’s lamp could grant only three wishes at a time. However, since each person expected something out of the Budget, many of these wishes have remained unfulfilled as can be seen from many of the post-Budget reactions. This in fact, is a logical outcome. We think that the Finance Minister has done a fine job of prioritising the wish list based on the impact on growth and inflation.
There are some points that we wish to highlight - there is a clear focus on Institution building, Infrastructure building and Pragmatism.
Institution buildingNew economy needs to revamp institutions like the Reserve Bank of India (RBI), better indirect taxation and the bank holding companies. Government has announced the Monetary Policy Committee, which will be entrusted with inflation management. Indirect taxation will be moving to Goods and Service Tax (GST), which will reduce hassles for traders / producers in the current multiple taxation system. Bank holding companies will help public sector banks to garner additional capital and bring in the needed transparency. Allocation of more taxes to states has been a pragmatic step, which will open a lot of fiscal space for states.
Infrastructure buildingInfrastructure spends have increased through over 30 percent higher central plan allocation in plan expenditure. Over and above, the infrastructure debt fund allocation of INR 200 billion can also be leveraged to create additional funds for Infrastructure spends. Higher spend allocation to railways, tax free infrastructure bonds and the four new ultra mega power projects are going to be the measures, which support infrastructure growth.
Ambitious housing and sanitation programme will drive the growth in infrastructure spending as well.
PragmatismSmall increase in services tax as a bridge towards eventual GST rates, gradual reduction in corporate tax and some relaxation on the fiscal consolidation target to support economic growth are the steps towards pragmatism. Also, other measures announced or implemented in the budget such as extension of Direct Benefit Transfer (DBT), coal auction, telecom spectrum auctions, rationalisation of subsidies and willingness to increase diesel prices are the efforts in the right direction.
Inspite of increase in the fiscal deficit, there is lower pressure on the market borrowing given that the government has budgeted to rely more on divestments.
ConclusionWith the given constraints, the government has done maximum to kick-start long term growth and at the same time balance out the pressure on all the constituents. The focus on long-term is clearly apparent from institution building and infrastructure focus. As we had stated earlier strong decisive government and an astute central bank remain the corner stones for the structural shift in India assuming oil prices continue to remain benign. Investors should focus on these three factors which will provide a long term perspective and avoid short term speculations.
From a fixed income perspective, we believe that long duration bond funds may provide a good opportunity as the demand supply equation remains largely balanced. Short-term bond funds may provide steady returns on account of lower supply, thanks to infra bonds, and reasonable demand due to the foreign portfolio investors.
Author is Head of fixed income at HSBC Global Asset Management India
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