BackBudget not the only litmus test ahead for the government
At the macro level, the biggest challenge for the finance minister will be to revive investments
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Going by the anticipation and excitement on the street, the Union budget on 28 February will have to be “special" if the government intends to reach anywhere closer to meeting expectations. And hopes are not entirely unjustified. After all, this will be the first full budget of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government, which was voted to power in May 2014 with the largest mandate in three decades.
For the stock market, the budget will have to be out of the ordinary just to justify the enthusiasm shown by investors ever since this government took office. If it fails to please, markets could be headed for a rough ride, as there is almost nothing that will hold stocks at a higher level in the short term. Corporate earnings have been disappointing and if markets begin to lose hope from the policy side, certainly, bulls will have to look for cover. Also, in the absence of policy support, the expectation of earnings revival itself will have to be readjusted. And all this will get reflected in prices at some point.
At the macro level, the biggest challenge for finance minister Arun Jaitley will be to revive investments with the constraints of fiscal consolidation. According to a recent survey of 192 companies by Crisil Ltd in areas such as infrastructure, energy and cement, capital expenditure is expected to decline by 4% in the next fiscal. Worryingly, among the private sector companies polled, the capital expenditure is likely to contract by as much as 11%. This is certainly not going to help growth. Since the private sector is not investing, or is not in a position to invest because of various reasons such as leveraged balance sheet, it is being argued that the government should take charge of reviving investment through infrastructure spending. However, as things stand today, the government does not have the required fiscal space to push investment.
It is also being suggested that the government could increase capital expenditure by allowing some slippage in deficit, and markets or rating agencies won’t mind as they will look at the quality of spending.
The need for infrastructure spending in India, perhaps, cannot be overstated. But increased spending, even on infrastructure, at the cost of fiscal discipline will only create problems in the medium term. Also, the case for fiscal stimulus is weak because the economy is on the path of a cyclical recovery. Therefore, the government should avoid the idea of reviving investment with higher deficit and fiscal consolidation roadmap should be treated as sacrosanct. Further, it is important to note that the fiscal space created by the crash in commodity prices should not be treated as permanent and used judiciously.
Some complications are also expected to arise on the fiscal front because of the recommendation of the 14th Finance Commission (FFC), which the government has accepted. The Commission has recommended a 10 percentage point increase in states’ share from the divisible pool of central taxes to 42%. It is of the view that this will not materially affect finances of the Centre, but the government thinks that it will. A clear picture will only emerge on 28 February. This will also decide to the extent the central government would be in a position to actually spend on investment activities.
Interestingly, FFC recommendations on public sector companies, if implemented, can help raise resources. “If the private sector is in a position to provide the goods currently being provided by public enterprises, there is a case for unlocking investments in public enterprises to utilize them to provide basic public goods and services," noted the FFC. The approach highlighted by the FFC says that public sector units can be classified as high priority, priority, low priority and non-priority. The FFC identified 88 central public sector enterprises where each entity has less than 1% market share in their respective businesses. These entities can be classified as non-priority and can be sold by the government.
FFC has also reiterated the recommendation made by the 13th Finance Commission to take all receipts from disinvestment in the Consolidated Fund of India, which can then be used for capital expenditure. The government, therefore, can use disinvestment in a big way to raise resources for capital expenditure, though the track record so far has not been encouraging.
Apart from the budget and the government’s ability to create space for capital expenditure with the given fiscal constraints, markets this time will be interested in the entire session of Parliament. Remember, all laws brought through the ordinance route need to be ratified by both houses of Parliament. If the government is unable get them passed, questions will be raised on its ability to push reforms. As of now, the government is facing serious resistance in Parliament on amendments it made in laws related to land acquisition and insurance. It will hurt sentiments if the government is unable to get these laws passed or compromises on its earlier position. Since May 2014, markets have been busy factoring in possibilities, but to what extent they can get translated into reality will be known this Saturday.
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