A foundation laid in the Budget: Manishi Raychaudhuri

Finance Minister Arun Jaitley’s FY15 Budget isn’t spectacular. But then, a six-week-old government’s first budget isn’t expected to be. We believe the Budget lays a foundation. The aggressive fiscal deficit targets of 3.6 per cent in FY16 and three per cent in FY17, though bereft of details about how these would be achieved, are encouraging and send a signal about the government’s longer-term fiscal discipline intentions.

On the expenditure side, rather than allocate more resources to infrastructure or asset-creation, the Budget tries to create an enabling environment for private-sector investments.

Other main signals from the Budget are: (1) a boost to consumption and savings at the base of the pyramid, through adjustments to the tax exemption limit and the section 80C limit; (2) support to infrastructure through CRR (cash reserve ratio) and SLR (statutory liquidity ratio) reduction for banks on new loans raised for infrastructure, and tax benefits to Reits (real estate investment trusts); (3) encouragement to FDI (foreign direct investment) through a rise in limits in insurance and defence (a follow-on from a similar announcement on railway infrastructure in the Railway Budget).

The worrying bit is the aggressive tax revenue growth assumption (19.7 per cent), which could make the fiscal deficit target difficult to meet. Also, a more decisive pronouncement on retrospective tax laws would have been welcome.

We believe the markets could consolidate in the near term. Significant outperformance through the past seven-eight months has taken Indian equity valuations to a large premium over the Asian average, almost a couple of standard deviations higher than the long-term mean. Now that the elections and the Budget are behind us, some natural mean reversion could set in. That said, through the longer term, India remains one of the best among emerging markets because of the policy environment turnaround, an improvement in the earnings environment and a potential growth recovery.

Manishi Raychaudhuri
Asia-Pacific equity strategist, BNP Paribas