Strik­ing a Bal­ance Be­tween So­cial Spend­ing & Capex

Em­pha­sis on long-term growth while stick­ing to stated fis­cal tra­jec­tory EX­PERT TAKE

The Economic Times - - Front Page -

THE BUD­GET brings a long-term fo­cus to growth which is spelt out in its three-pronged agenda of Trans­form-En­er­gise-Clean.

This is further ac­cen­tu­ated by an in­creased out­lay for in­fra­struc­ture, which has the high­est mul­ti­plier ef­fect on the econ­omy, a strong em­pha­sis on en­hanc­ing the dig­i­tal fo­cus in the coun­try, sup­port to small and medium en­ter­prises, so­cial mea­sures and re­forms to curb black money as enu­mer­ated in the Bud­get pro­posal.

This Bud­get comes in the mi­lieu of a growth shock de­liv­ered by de­mon­eti­sa­tion, ris­ing global crude oil prices and mod­est room avail­able for further mon­e­tary eas­ing.

Un­like the pre­vi­ous Budgets by the NDA gov­ern­ment wherein the fo­cus was pri­mar­ily to sup­port growth ac­cel­er­a­tion, this one en­deav­ours to strike a bal­ance be­tween so­cial spend­ing and cap­i­tal ex­pen­di­ture growth. How­ever, one im­por­tant thing to note, is that the Bud­get has steered clear of adopt­ing pop­ulist mea­sures. The eq­uity mar­ket has re­acted positively to the Bud­get. Against the mar­ket con­cern of an in­crease in long-term cap­i­tal gains for eq­uity from the present one year to three years, the fi­nance min­is­ter kept it un­changed,which­led­toan­im­me­di­ate re­lief rally in the eq­uity mar­kets.

We view the Bud­get as be­ing dis­ci­plinedinthatit­fo­cus­eson­long-term growth while stick­ing to the stated fis­cal tra­jec­tory. Com­pared to rev­enue ex­pen­di­ture, the Bud­get places higher em­pha­sis on more pro­duc­tive cap­i­tal ex­pen­di­ture (in­fra­struc­ture)asev­i­dent­fro­man­ear13%rise in the cap­i­tal out­lay (ex­clud­ing de­fence) in 2017-18 over 2016-17.

The fis­cal deficit tar­get for 2017-18 is pegged at 3.2% and 3% for next three years can be con­strued as a pos­i­tive for the econ­omy as it im­plies lower mar­ket bor­row­ings, and in turn, softer in­ter­est rates.

Tax buoy­ancy in the cur­rent year is at­trib­ut­able to higher tax rev­enues from the oil sec­tor. If oil price re­mains range-bound, we ex­pect the tax buoy­ancy to not de­te­ri­o­rate. The Bud­get builds in a rea­son­able level of tax buoy­ancy from growth in per­sonal tax, ac­count­ing for an im­prove­ment in tax com­pli­ance in the next year.

Cheaper bor­row­ing rates are ex­pected to boost dis­cre­tionary con­sump­tion in the In­dian econ­omy, while so­cial mea­sures in­clud­ing en­hanced agri­cul­tural credit limit, in­creased crop in­sur­ance cov­er­age and plat­form to im­prove re­al­i­sa­tions for farm­ers’ pro­duce could con­trib­ute to bet­ter farm in­come and sup­port ag­gre­gate de­mand.

From an in­vestor’s per­spec­tive, eq­uity funds with core ex­po­sure to large caps and pru­dent risk tak­ing in mid/small-cap space may be well po­si­tioned to cap­ture the op­por­tu­ni­ties pre­sented by pre­vail­ing val­u­a­tion­sand­ex­pect­edearn­ings­growth.

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