Budget 2014-15 to be presented on July 10th is going to be the NDA government’s litmus test. Expectations are high, while resources are low. So will Finance Minister Arun Jaitley, who has so far been making the right noises while clearly hinting that these are tough times, be able to discern between populism and pragmatism? Will he bite the bullet and take tough calls or will he bow to the complexities of politics with an eye on the forthcoming assembly polls in a number of states? Will the markets continue to run wild or will a correction unfold? Thursday will tell...
Thursday is going to be a big day for the economy as also the capital markets, both of which, as of now are moving in contrasting directions. While pessimism around the economy remains unabated, the markets, always forward looking seem to be taking the fiscal shortcomings in its stride, perhaps bolstered by the substantial FII inflows over the past month and more. The economy ofcourse is plagued with a large fiscal deficit, unabating inflation, rising crude prices and slowing investments and GDP growth.
On the markets front there is little to worry. For FII’s it’s the most sought after destination among emerging markets. After all it has been the best performing one clocking an average return of 22% Year on Year as against neighbouring China’s -2%. Perhaps India can be assumed to have been the best performing equity market across the world and still seems to have a lot of steam left. So there is not much worry on that front. “If pragmatism and a clearly defined road-map is reflected in the budget, than an additional 15 - 20% run in fiscal 2014-15 cannot be ruled out,” is the view of most fund managers.
But these are tough times and many issues need attention and clear cut directions. In fact Care Ratings in a recent report has put these concerns appropriately. According to it “two major problems for the economy which have emerged in recent times are the possibility of a sub-normal monsoon and elevated crude oil prices on account of the crisis in Iraq. These issues would have to be kept in mind when drawing up the Budget. The government has already increased railways tariffs which are an indication that the government would be walking the path of fiscal prudence and is likely to link any benefit to be given with a return in terms of fulfillment of economic objective.
It believes that “firstly and most importantly the budget would require measures to revive GDP growth. It would have to strike a balance between fiscal consolidation and public spending while maintaining sustainable inclusive growth. In particular it would have to take a stance on subsidies and hence indicate policy relating to fuel pricing. The ultimate targeted number will be indicative of the policy that will be followed during the year on calibrating prices of diesel, LPG and kerosene to the market.
Focusing on increasing infrastructure investments which can provide a big push to the economy also remains important, as does moving towards the implementation of GST and DTC. While these will not be possible in this Budget a road map is likely to provide the market clues.
Measures to revive financial savings which have been declining in the last couple of years are also getting reflected in pressure on the CAD; This and improving investor confidence by addressing issues that have caused apprehension in the past needs attention.
And industry remains equally concerned. Says Sanjeev Ranjan, Managing Director, International Copper Association India (ICAI), “the biggest challenge the Finance minister will face in his budget preparation will be on how to balance Growth v/s Inflation and at the same time help in creating new jobs especially in the manufacturing sector. Currently manufacturing contributes just 16 % to India’s GDP which needs to be at least 25%, if we are to address 12 million people joining the workforce. In the face of rising oil prices, poor monsoon and CPI already nearing double digits, the challenges become even more testing. Considering that the government has taken over mid-way in the year, we will look more from the directional point of view on what policy interventions are being planned in the short to medium term”.
He believes, “clear transparent policies and their implementation is a must, if any investment cycle is to be started in any segment. Policies on FDI investment in real estate, infrastructure including power sector with well-planned initiatives to help restart stalled projects particularly in the Power, Coal, Roads and Railways will be of great help to the growth of economy.
We expect government to announce fiscal incentives for new capex where we can see encouraging participation from sovereign debt funds of countries like – Japan, China, Germany, France, Saudi Arabia. This will do well to balance the shortfall in $1 trillion investment plan which the 12th five year plan talks about for infrastructure development” he said.
Adds Anil Chaudhary, Country President And MD, Schneider Electric India “The Union budget will be the first indication of the intent of the new government towards the country’s economic growth. We are hopeful that the budget will seek to introduce measures and reforms that will be growth-oriented and will help in reviving the economy. It will be important that the budget brings in a policy framework that will instill confidence and help re-start the stalled investment cycle. The budget will also need to address the key inherent issues of the energy sector like fuel linkage, generation capacity, grid stability and strengthening of distribution network for ensuing quality and availability of power that will support the growth story of India. The budget needs to introduce clear and firm reforms that will pave the way for overall economic growth.”
Even economists concur with the views. Says Dr. Arun Singh, Senior Economist, Dun & Bradstreet, India, “There are a significant number of expectations from the new finance minister in his maiden budget. The new government with its mantra of ‘minimum government and maximum governance’ had already announced a few measures to change the mode of governance. Given that the government might have a new modus-operandi, we do expect some surprise measures in the Union Budget 2014-15.
Since the consensus for growth this year would be around 5.0% – 6.0%, we expect the government to present a more realistic budget on these lines which would help in reducing the gross borrowing for the year partly reducing the strain on availability of finances for the private sector. The biggest challenge would be therefore to set the path for fiscal consolidation while focusing on revival in growth. India needs a robust fiscal policy to support growth and monetary policy going ahead. Expectations are high on how the government will present an adjustment to the former government's budget and execute and implement its own strategy. It would be worthwhile to note that provisioning of food subsidy and the implementation of the 7th Pay Commission would be the two major road blocks towards attainment of fiscal deficit target going ahead.
Given that growth is expected to recover at a modest pace during the year, there would not be a significant revenue augmentation. Nonetheless, if the government announces any definite measures which would either lead to broadening of the tax base or increase in tax compliance, a modest increase in revenue cannot be rule out. However, improvement in tax buoyancy could only result from bringing about structural changes in the tax structure such as implementation of GST and DTC. We also expect the government to take a strong stance on some of the impending tax-related disputes relating to retrospective changes to tax laws, transfer pricing laws and General Anti-Avoidance Rules (GAAR). We would also expect the government to give a clear outline of its intentions on disinvestment which would also help in assessing the resources available for its expenditure.
Nonetheless, the focus would be on how the government charts out its expenditure. There is a need to reassess the quality of expenditure and re-balance the composition of expenditure to achieve higher capital formation. Hopefully, this time the plan capital expenditure receives a greater share of the overall plan expenditure.
We expect more focus on the infrastructure sectors and announcement of some measures to facilitate infrastructure financing. ‘Investment-linked incentives could incentivize the private sector investments during the current period of slowdown. Sector-wise coal, power with special focus on nuclear power as well new and renewable energy, transport and information technology besides urbanization is expected to receive a boost in the upcoming budget.”
As regards the equity markets, Dipen Shah, Head- Private Client Group Research, Kotak Securities believes “The markets closed the week with a new high on the benchmark indices. Market sentiment was buoyed by the comments coming from the PM and FM about modernizing the railways and taming inflation, respectively.
Going ahead, he says “we see the monsoon progress and the budget to be the two most important triggers for the markets. We feel that, a progressive budget as well as other reform initiatives will likely lead to continued out-performance of Indian indices v/s emerging market peers. The rise in railway passenger fares and freight charges has raised hopes of a reforms-oriented budget. However, if there is a continued rise in crude price, it will be a negative from the CAD, rupee and inflation perspective. Monsoons have also been erratic and it is a risk from the inflation perspective.”
On the markets this week, it can be assumed that the equities will gyrate wildly .Says Jayant Manglik, President-retail distribution, Religare Securities “We have several crucial events lined up in the coming week and they’ll set the tone of the markets. Majorly investors, be it domestic or global, are eyeing the Union Budget for 2014-15. Finance Minister Arun Jaitley will present the final Union Budget for 2014-15 onThursday, 10 July 2014. A day before that i.e. on Wednesday, 9 July 2014, the Finance Ministry will table Economic Survey for 2013-14. Railway Minister Sadananda Gowda will present the final Railway Budget for 2014-15 on Tuesday, 8 July 2014.Expectations that the finance minister will announce measures in the Budget aimed at bolstering economic growth may keep stock prices firm ahead of the Budget announcement on 10 July 2014. The week also marks the beginning of the Q1 June 2014 corporate earnings season. Besides, the government will unveil industrial production data for May 2014 on Friday.
Considering the events, volatility will tend to remain quite high hence one should opt for strict risk management rules. For fresh buying, one can consider select Midcaps from the IT pack alongside with Banking, Pharma and Infra.”
Several crucial events have been lined up in the coming week and they’ll set the tone of the markets. Majorly investors, be it domestic or global, are eyeing the Union Budget for 2014-15. Finance Minister Arun Jaitley will present the final Union Budget for 2014-15 onThursday, July 10. A day before on Wednesday, the Finance Ministry will table Economic Survey for 2013-14. Railway Minister Sadananda Gowda will present the final Railway Budget for 2014-15 on Tuesday, 8 July 2014. The week also marks the beginning of the Q1 June 2014 corporate earnings season. Besides, the government will unveil industrial production data for May 2014 on Friday
Expectations are high on how the government will present an adjustment to the former government's budget and execute and implement its own strategy. It would be worthwhile to note that provisioning of food subsidy and the implementation of the 7th Pay Commission would be the two major road blocks towards attainment of fiscal deficit target going ahead
The FY15 budget needs to...
- Invoke measures to revive GDP growth.
- Strike a balance between fiscal consolidation and public spending while maintaining sustainable inclusive growth
- Take a stance on subsidies and hence indicate policy relating to fuel pricing. The ultimate targeted number will be indicative of the policy that will be followed during the year on calibrating prices of diesel, LPG and kerosene to the market.
- Focus on increasing infrastructure investment which can provide a big push to the economy.
- Move towards implementation of GST and DTC. While these will not be possible in this Budget a roadmap is likely to provide the market clues.
- Infuse measures to revive financial savings which have been declining in the last couple of years and also getting reflected in pressure on CAD.
- Improve investor confidence by addressing issues that have caused apprehension in the past.