The Union Budget presented by Finance Minister Nirmala Sitharaman was well received by equity markets, mainly because it was not populist, as some feared, and also because of pushing growth on the supply side. It remained on the course set in the previous budgets to increase investment and spend capex, among others. However, revival of demand seems to be hampered by the fact that rural allocations (expected reduction in food and fertilizer subsidies and increase versus reduction in MGNREGA allocation) have been cut and are higher than the fiscal deficit of FY13. Interest rates are rising. And there is no provision to enable inclusion of sovereign bonds of India in global bond indices. This may lead to shifting of investment from costly sectors to cyclical sectors.
Having said that, the budget is growth spurring and does the heavy lifting by sharply increasing capital expenditure. An underlying emphasis on sectors such as startups, modern mobility and clean energy along with boosting manufacturing shows that FM has prioritized long-term growth. Major increase in allocation of roads and bridges over Rs 113,875 crore in Revised Estimates of FY 2012 180,301 crore is a huge jump and there could be a trickle-down effect on input industries (steel, cement) and improved road infrastructure. However, implementation remains the main challenge to take full advantage of it.
Individual taxpayers may feel a little disappointed by the lack of direct tax deductions, but this Budget sets the ground for multi-year growth. Income tax changes have been minimal, apart from plugging some loopholes, while customs rates have seen a large number of changes. This could be due to pressure from the WTO or to fix the inverted tariff structure.
Market borrowings are expected to grow 32.2% in FY13, putting pressure on domestic money markets. Unless Indian sovereign bonds are included in global indices soon, interest rates cannot fall in a hurry.
The fiscal deficit of 6.4% for FY13 has come in higher than expected. Let us hope that interest rates and inflation do not remain high for long as they have the potential to become spoilsport. Inflation is expected to be 3.5-4.5% in FY13. Though the budget has not laid out a fiscal deficit roadmap for the next two years, the government will take a comprehensive route of fiscal consolidation to achieve the fiscal deficit level of less than 4.5 per cent of GDP by FY 2025-26. With elections due in May 2024, this seems like a daunting task.
FY22 tax estimates look conservative and may be exceeded. This could result in a 6.9% reduction in the fiscal deficit unless it is offset by unforeseen expenses. The estimates for FY23 also look conservative and achievable. The tax to GDP ratio (10.8% in FY 2012 vs 9.9% in FY 2010) has been rising in the last few years following relentless tax reforms by the government.
The 4.5% growth rate in revenue expenditure in FY13 is marginally lower despite interest expense rising at 15.5%. Fertilizer subsidy may be cut in FY23 if commodity prices are not correct.
Whether adequate consolation has been provided to the MSME sector (despite increase in allocation) remains to be seen. This segment has been badly hit in recent times and is the biggest job creator.
Though the budget has seen a big jump in capital expenditure, import duty on machinery and project imports has been cut keeping local manufacturers on toes, although some cut in import duty on raw materials has also been proposed) .
disinvestment target FY23 Vs. 65,000 crore in 78,000 crore (FY22 RE and .) 175,000 FY22 OE) appears to be at a lower level. Concrete proposals to tap asset monetization through the National Land Monetization Corporation are missing, though that doesn’t stop the government from moving forward during the year.
As far as the impact of the Union Budget on the capital market is concerned, the impact of the Budget on the course of the market will be over in a couple of days. We have global monetary tightening and RBI policy is ahead of us. Post Budget, the market usually feels relieved as no bad news is considered good news. However, macro issues and micro performance will soon emerge, even though the Q3 results season has turned out to be softer than expected. The technical factor of fund flow from FPIs is one of the key determinants of market direction after the next few days and if FPIs are in a favorable mood, our market may continue to buy interest again and again, while the absence of such An improvement in mood may be in store after a couple of weeks when negative triggers can come back.
(Deepak Jason, Retail Research, HDFC Securities)
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