The fixed-income foreign investor wanted India to maintain its fiscal target. The greenfield investor wanted a less tangled tax system and a more open investment door. The overseas equity player wanted greater spending overall. They all got something in the budget. But what will be the real positive for rest of the world is the conservativeness of the budget.
“Post-Trump and other fireworks elsewhere in the world,” says Manu Kumar of Moore Capital, “there isn’t too much focus on India.” In times of economic volatility, not being on the radar is actually a compliment.
India’s decision to hold to a fiscal deficit of 3.2% of GDP, well within expectations, will go down well at a time when most governments are printing money, especially as it will go along with a drop in the revenue deficit. While 3.2% is slightly above target, it is within market expectations.
That the extra red ink is being directed to boosting rural demand and upholding infrastructure spending, too, will go down well. How much of the money goes to capex and to a “real rural push” is one of thing we will be looking out for, says Rahul Saberwal of Soros Fund.
The abolition of the Foreign Investment Promotion Board has raised some uncertainty. Some, like Amit Jain, partner, tax consultants BMR & Associates, has interpreted it to mean all FDI will come under the automatic route. “Effectively, there is no government approval required even in the sensitive sectors, which is a great development,” he argues.
Finance minister Arun Jaitley listed three major external risks to India’s economic prospects.
The first is the US Federal Reserve Bank raising interest rates and foreign capital flowing away from emerging economies. Maintaining fiscal targets and relatively high growth rates would potentially bring some of that money back. But, the expected turmoil of adopting GST is likely to keep many investors away, at least for a while. In comparison, US treasuries would be seen as a safe haven.
The second is the price of crude. Jaitley reflected the general view of the market that US shale production would largely balance the ongoing cuts in OPEC production and keep oil prices from spiking.
Nonetheless, prices in the $50 a barrel region will now be the norm. How the government maintains fiscal targets given that low prices contributed such a huge revenue windfall last year will be watched closely.
US President Donald Trump will be an ally on this front. His plans for a massive expansion in US oil and gas production and exports should keep energy prices down.
Trump, however, is a villain of the piece when it comes to the third challenge: The rising protectionist sentiment across the world and its impact on India’s exports. Trump’s planned restrictions on H-1B visas and pharmaceutical products have raised alarm bells about two of India’s key exports.
As chief economic advisor Arvind Subramanian noted, export growth will be crucial for India to sustain its growth rate at a time when private investment is in a trough. He has said “we need to push our FTAs with Europe and the UK” to compensate and generally take a “leadership role” in upholding the global trade. But India’s overall exports may still rise, thanks to an expected surge in demand from a Trump-stimulated US economy.
Jay Desai of Universal Consulting says India will have to be nimble in its response to a world in upheaval. “I think US businesses will defocus on Indian FDI for this year, for fear of being perceived as creating jobs outside the US. But with Brexit, however, UK and European Investors are now more likely to see India as an FDI destination in 2017.”
As for the worst-case scenarios – like a US-China currency war – India has no response other than to hope its record foreign exchange reserves will stand the test.