Push to growth, no surprises

Focus on rural India and affordable housing positive; fiscal deficit target not easy

Going into the Budget, there was some scepticism, not to forget the pain inflicted by note ban and protectionist measures of US President Donald Trump. The Budget proposals suggest the finance minister had his ears fully clued to the ground. Not only has he ensured there are no big negative surprises but he has attempted to provide benefits for many sections of the society that are currently reeling under pressure, while ensuring there are enough proposals to keep the growth going.
 
The biggest area of focus is rural India and the agriculture-driven economy, followed by the infrastructure sector and the middle-class. In agriculture, for instance, apart from higher crop insurance coverage, allocation for irrigation schemes has been hiked sharply and a fund for promoting dairy activities has been announced. In all, there has been a 11.7 per cent hike in total allocation to nearly Rs 1,87,000 crore for the rural and agricultural economy. On a similar note, the infrastructure sector, with roads taking the lion's share, has seen allocation of nearly Rs 4,00,000 crore, up 10.5 per cent. While it still means a good increase, how much of it results in execution needs to be seen, given that the 2016-17 Budget estimates for roads were revised lower. Railways have also seen an increase in allocations by eight per cent, though execution has been better. “The crucial thing here will be the ability of the government to speed up execution,” said a head of research with a domestic brokerage, who on the whole is positive on the Budget.
 
The cascading effect of increased rural and infrastructure spending, as well as boost to affordable housing, should spur economic activity, thereby increasing consumption, and demand for goods and services, say experts. Not surprisingly, stocks from the realty, automobile, fast-moving consumer goods and infrastructure sectors were among top gainers. “This is a comprehensive Budget that is on the whole positive and a step in the right direction towards stimulating further economic growth. The focus on increasing expenditure in rural areas and boosting infrastructure, as well as the moves to improve the tax structure, are consistent with the government's intentions to drive consumption-led growth,” says Mihir Doshi, Credit Suisse India chief executive.
 

Not touching upon the sensitive issues pertaining to long-term capital gains and providing tax clarity for foreign investors also gave relief to markets.
 
While there are external headwinds in the form of firm crude oil prices, and protectionist measures by the new US president, which may hurt India's software and pharmaceutical exports to the world's largest market, the Budget also leaves some question marks.
 
Even as one hopes the monsoon will not mess up financial calculations, fiscal deficit target may not be easy. For one, the finance minister has set a disinvestment target of Rs 72,500 crore for 2017-18. The initial disinvestment target of Rs 56,500 crore for 2016-17 has been revised lower to Rs 45,500 crore, and in the past, too, the government has fallen short of its targets. So, a near 60 per cent increase for 2017-18 looks a tough task. Direct tax collections are also pegged to increase 25 per cent to Rs 3,45,776 crore, despite a higher base of 2016-17 (estimated to rise 23 per cent). Allocation for public sector banks' capitalisation has also been low at Rs 10,000 crore, though there is room for upward review. The previous two years had seen allocations of Rs 22,000- 25,000 crore.
 
Among key factors to achieve the fiscal deficit target of 3.2 per cent of gross domestic product is through higher economic growth and government's ability to drive higher taxes by improving compliance, both of which don't seem an easy task for now, especially the former, given subdued sentiments. The growth and fiscal deficit goals are also crucial from the stock markets' perspective, given implications for earnings, bond yields (interest rates), and currency.