Jyotivardhan Jaipuria, head of research at Bank of America Merrill Lynch, tells Malini Bhupta how the Budget will impact the economy and sectors Much was expected from the Modi government's maiden Budget. What is your verdict? We have been positive on the markets on expectations that we will continue to see reforms that will lead to a re-rating of the markets. Our view is that a lot of reforms are not part of the Budget but outside it. Given the limited time the finance minister had as well as the constraint on resources, we think he has done a great juggling exercise in the Budget. The Budget has a little piece for everyone from middle classes to industries, but does it answer the sticky questions that need resolution? Overall, the government has to address a few critical areas (a) fiscal consolidation (b) reviving the investment climate (c) enhancing FDI in the country. We think the Budget can only do so much to resolve all these issues - many of these require reforms that are outside the Budget. In terms of fiscal consolidation, the minister has committed to meet the earlier 4.1 per cent fiscal deficit target as well as aim for a 3 per cent deficit over next two years. We think the target for this year is challenging. For the 3 per cent target, he needs to cut costs which are likely to be visible in the next Budget post the Expenditure Commission recommendations. We think there will be subsidy reductions in oil and fertiliser. For reviving the investment climate, tax sops are a small part of the challenge. Faster clearances, land acquisition and improving the business climate is more critical. On his part the finance minister has opened the door for infra funding through REITS, reserve requirement concessions to banks for raising funds for infra and allowing banks to have a 5/25 structure for infra loans. Do you think the target is too ambitious? The finance minister has set himself a very stiff challenge. The markets would have been satisfied with a target close to 4.5 per cent also. One buffer which the finance minister has is that even if the deficit slips a bit he can run down the government's surplus with RBI. Thus the government's borrowing may not change even with a slightly higher fiscal deficit.
This will allay some of the market's concerns. What about revenue growth assumptions? The revenue growth target in our view is a bit optimistic. Given the sluggish economy, the revenue growth is likely to slip below the target. However, a possible trick up the finance minister's sleeve may be the possibility of settling some of the disputed tax collections which aggregate over Rs 4 lakh crore. What measures will impact growth positively? On the investment side, three measures that clearly stand out: (a) easing the norms of REITs and Investment Trusts which could help kick-start spending in fixed asset creation, (b) allowing banks to raise long term funds for funding infrastructure, and (c) allowing banks more flexibility in the infra loans they provide, especially allowing the 5/25 structure wherein the loan can have a 25 year tenor and rolled over every five years. This will ease the ALM risk and also provide a fillip to take-out financing. Do you think the measures on manufacturing sectors will show results this year itself? While we are convinced on the direction of the growth path, we believe it will take another six to nine months before the actual impact of the reforms and improved business confidence will be felt by the sectors. Not only by those in the Budget but measures outside the Budget too. How will FIIs react to the Budget failure to give a roadmap on subsidies? As the finance minister candidly admitted in the beginning of his speech, he had only six weeks to prepare the Budget. He has set up an Expenditure Commission which will look at all expenditure including rationalisation of subsidy. We expect a gradual price hike in LPG on the lines of urea will start by the year-end and an urea price hike before the fiscal end. Recapitalisation of PSU banks was a major concern; it now appears the government will depend on retail investors. How much of a concern is this? We think domestic retail investors will be attracted to the equity markets over the next few years and hence would participate in PSU bank equity also. However, in some banks, the government may need to provide capital if it does not want to dilute equity below 51 per cent. Its' early days yet for the government and we expect innovations like the holding company structure will be put on the table to meet the capital requirements of PSU banks. How will the FDI liberalisation help? Step up in FDI in insurance should help deepen insurance penetration and would enable their listing. Increase in FDI in defence equipment would improve the Indian defence capabilities, thus lowering India's dependence on imports which would in-turn help our CAD. Relaxing the norms for FDI in townships would help the government in its mission of housing for all as well as would lead to job creation. Do you see the capex cycle reviving? We are convinced that the investment cycle has troughed and is on the path of recovery. However, we believe recovery will take another 12-18 months before the actual impact of the reforms and improved business confidence will be felt. The relaxation in rules for banks raising funds for infra will enable banks to reduce the asset-liability mismatch and lend for long gestation infra projects. Has enough been done for power and mining sectors? The problems of these sectors arise mostly from issues that are outside the purview of the Budget. The finance minister has extended 80IA benefit which is a positive for power companies. He also extended the investment allowance.