Mumbai: The Union Budget, which will be tabled on 26 February, must find ways to curtail the fiscal deficit and mounting inflation, Falguni Nayar, managing director of Kotak Mahindra Capital Co. Ltd, said in an interview. While the government will not cut spending to promote inclusive growth, it should look at reducing subsidies in the long term, she said.
“A great fiscal discipline, lower gross fiscal deficit-to-GDP (gross domestic product) ratio, as well as lesser pressure in terms of government borrowing...along with divestment” will help boost investor confidence, Nayar said. Edited excerpts:
Year ahead: Falguni Nayar says fiscal discipline will boost investor confidence in India.
What are your expectations from the Budget?
The Budget is going to be basically resting on four pegs. The macro in India is going to be positive for the market after the first quarter of the next fiscal year. The gross fiscal deficit-to-GDP ratio should be coming down to 5.5% and in my mind that will be achieved through greater fiscal discipline. That means both on the expenditure side, but also raising taxes—both direct and indirect taxes. Getting the act together on the fiscal balance will be read as very positive... We feel that between now and the second quarter, the interest rates may peak and the G-sec (government securities) 10-year yield could go up by about 100 bps (basis points; one basis point is one-hundredth of a percentage point).
But after that peaking, again the interest rates will come down and that could lead to a bond rally and another upmove for the market.
The 10-year G-sec is at 7.8%. Do you expect it to go to 8.8%?
We clearly feel that it could go to 8.5% in the first half of next fiscal year. However, it will peak there and it will come down from there because if you look at the way the inflation is, it is driven by food inflation.
And yes, the inflation number looks high, but it is more (on the) supply side and too much of monitoring tightening at this stage may have lesser impact than fiscal discipline. (So) fiscal discipline both on expenditure and on tax revenue fronts maybe a better way to go at this stage of the cycle.
What could be the impact of a roll-back of the fiscal stimulus?
I am admitting to the negative impact on the industry from any fiscal discipline initiatives that are taken by the government. We are spending on three fronts. One is the entire spending, which is being done with the more inclusive growth, and I don’t see that being rolled back in any substantial manner.
Another bit of spending that is happening is towards all the subsidies and I am hoping that this Budget handles some of those on a long-term basis to try and bring down the fiscal impact of the subsidies over a period of time.
The third one is obviously fiscal discipline through belt tightening... It is not increasing (taxes) from a high base, but it is rolling back some of the gains that (the) market and industry had got over (the) last few years. I am not recommending; I am just saying that these are the choices available to the government and (the) government is going to weigh all these.
I think, from an investor perspective, a great fiscal discipline, lower gross fiscal deficit-to-GDP ratio as well as lesser pressure in terms of (the) government borrowing programme—all these steps can result into that, along with divestment, which is anyway being planned.
Do you think the Budget will have some positives for the market?
I think so. I think the balancing act in the Budget has (to be) done right over medium term, which is post the Budget. Leaving aside the Q1 (first quarter) of next fiscal year, I do see positives in the market. Obviously, it will also be linked to (the) monsoon because India is monsoon-dependent in some ways. But I do see a lot of positive in the market.
If the excise duty is going to go up by 2%, then (the) current fall probably builds that into current prices because the growth in auto demand has been so widespread and it has been because of so much of inclusive growth and none of those factors are going away.
It is very broad based and all that is very positive for auto... Once this tax hike concerns get into the price, markets should move up from those levels.