The three big positives of the Indian budget
New Delhi: I can’t remember the last time bond, currency and stock markets received an Indian budget as enthusiastically as they have the one that was presented on 29 February.
Sure, the stock markets fell on the day of the budget, with the Sensex, the BSE’s benchmark index, closing down 152 points and the National Stock Exchange of India Ltd’s (NSE’s) Nifty index ending below 7,000, but both indices have recovered smartly in the two days since (this article went to the press on Wednesday, 2 March).
On Tuesday, 1 March, the Sensex posted a gain of 777.35 points, the highest absolute gain in nearly seven years. The rupee fell 0.21 paise to the dollar on Monday but gained 0.55 paise on Tuesday to close at 67.87, the biggest gain (in percentage terms) in six months. The Sensex closed 1.95% (463.63 points) up on Wednesday, 2 March, and the Nifty, 2% (146.5 points).
The bond markets were more instantly appreciative. Yields on 10-year bonds fell the most in a day since June 2015, and closed at 7.62%, down 16 basis points. Yields were flat on Tuesday and Wednesday.
The reason why bond and currency markets are positive about the budget is because India’s finance minister Arun Jaitley has stuck to his commitment of ensuring that the fiscal deficit will be 3.5% of gross domestic product (GDP) in 2016-17, resisting calls from several people, including some in his government, even his ministry, to tolerate a little bit of a slippage in the interests of growth.
If the Reserve Bank of India’s (RBI’s) governor Raghuram Rajan appreciates this by cutting the policy rate—many expect him to do so, even ahead of the next monetary policy review in April, one reason why the stock markets have rallied—India could well see the beginning of what economists term a virtuous cycle.
The fiscal deficit number, then, is one of the big positives in the Indian budget.
Sure, there are concerns whether the government’s math will add up. After all, it did miss its direct tax collections target in 2015-16 and was helped by growth in indirect tax collections, largely on account of low oil prices (as prices have fallen, India has continued to raise the excise tax on oil, passing on less of the benefit of the lower prices to end-users than it could have, but bolstering its own finances in the process). It will also miss its target for the amount to be raised by selling stakes in government firms in 2015-16 by more than half.
And finally, the government managed to meet its fiscal deficit target of 3.9% of GDP in 2015-16 by drawing down on its cash. The government’s net cash balance stands at a deficit of Rs.22,084 crore in 2015-16 against a Rs.12,041 crore surplus in 2014-15.
The government has set ambitious targets in 2016-17. Can it raise Rs.4.9 trillion from corporate taxes? Can it sell stake worth Rs.56,000 crore in government firms? These are questions that need to be pondered over; for now, though, the bond markets seem to believe them.
The other big positive is the promise to give legislative backing to Aadhaar, the programme that has enrolled almost a billion Indians, captured each one’s biometric information and also assigned a unique number to each.
The number is the cornerstone of the government’s direct benefits transfer (DBT) programme, which seeks to transfer subsidies and benefits directly to beneficiaries, ensuring there are no leakages. It is also one of the key drivers of India’s move to a cashless economy that will help the cause of financial inclusion and tackle the menace of black money, or untaxed, unaccounted-for wealth.
The third big positive is the focus on infrastructure, with an allocation of around Rs.2.2 trillion. This is a clear manifestation of the intent of the government to revive the investment cycle through a focus on public investment.
There are other positives, and several negatives as well, including the Indian state’s continuing reluctance to repeal a retrospective tax law, but for anyone looking for the big picture, these three are it.