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Centre chooses to play it safe by announcing no big expenditure
The government chose to stay in its safe zone and announced no big bang expenditure in the budget. But that also meant there is no serious digression from the path of fiscal consolidation, and that came as a relief.
The government chose to stay in its safe zone and announced no big bang expenditure in the budget. But that also meant there is no serious digression from the path of fiscal consolidation, and that came as a relief.
Most of the allocations were kept at the same level as announced in the Interim budget in February. Rural markets got operational enhancements as the scope of existing schemes was increased and some initiatives were added to the existing flagship schemes.
The relaxed movement of the so-called fear gauge NSE India Volatilty Index (India VIX) ahead of the Union Budget indicated that expectations weren’t very high to start with. After minor spikes during the Budget speech, India VIX ended the day’s session down 3.75% at extremely low levels of 13.
The blow to equity markets lies in the announcement of two things. The government increased the threshold of public shareholding in companies to 35% from the current 25%. Essentially, this means promoters will have to offload stake which will bring in a deluge of stocks on sale. It is natural that this supply will worsen the price dynamics and dilute valuations.
“For larger companies themselves, around Rs 3 trillion to 4 trillion of equity will have to be sold in the market. But if a time-frame of three years is given, this much supply of stocks is manageable; it will be absorbed,” said Ratnesh Kumar, MD & CEO, BOB Capital Markets Ltd. Another sentiment dampener came in the form of higher taxes on the super rich, through an enhanced surcharge.
Then there was the withdrawal of a tax exemption on buyback of shares for listed companies. While this was largely a loophole fixed, investors of companies that wish to buy back their shares will now have to contend with lesser realisations.
To be fair, the budget announced several reforms that are salutary in the medium to long term. Aware of the constraints in the domestic economy, the budget has resorted to attracting foreign capital by relaxing foreign direct investment policy and even said it is willing to borrow from foreign shores to fund its own deficit. Incentives to increase the production and use of electric vehicles, and freeing up land owned by public firms for housing were other such measures.
The Rs 70,000 crore capital infusion for public banks is expected to prod lenders to disburse credit more freely to an economy in need for it. The government is willing to take on the first loss in the securitized loan pools of non-bank finance companies whenever these are bought by the banks it owns. That means non-bank lenders will get the much needed money to put their finances in order.
But there is no short-term boost that could kindle the animal spirits of the economy. This means that growth will largely remain modest in the current year, rural demand, depend on the monsoon, and the burden of healing the economy, fall on monetary policy.
To be fair, finance minister Nirmala Sitharaman can hardly fling cash with both hands tied by fiscal frugality. Therefore, markets are willing to take the absence of a stimulus in their stride given the commitment to fiscal discipline. The budget lowered fiscal deficit target to 3.3% of GDP from 3.4% stated just four months back in the interim budget.
This is the biggest relief from the budget. Bond yields dropped over 10 basis points intraday, cheering the lowered fiscal deficit and the indication that the government is willing to borrow from foreign shores. Given the dollar inflows this could bring, the rupee too gained. “The fact that the government will now be seeking external funds for sovereign needs reflects a fundamental shift in the budgeting process and in the budgeting philosophy in our view,” said Abheek Barua, chief economist at HDFC Bank.
While there was initial excitement about the proposal on sovereign dollar bonds, this was later viewed with more scepticism. To be sure, borrowing offshore would mean the government will end up taking exchange rate risk on its balance sheet. Also, this would mean that bond investors will have the option to buy abroad, essentially taking away some liquidity and depth from the domestic bond market.
