Striking a Balance Between Social Spending & Capex
Emphasis on long-term growth while sticking to stated fiscal trajectory EXPERT TAKE
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.