Budget 2015: A fine balance

Though originally attributed to Voltaire, it was the movie Spiderman that immortalized the line “With great power, comes great responsibility”. To tweak that a bit to suit the current context it was “great promise” that had created heightened expectations. Every year budgets come and go, but big expectations had been building up ahead of this budget owing to Prime Minister Narendra Modi’s statement last November that it should be full of new ideas with transformational and measurable deliverables. Come February and markets had opted to shrug off a pretty dismal earnings report card for the third quarter of fiscal 2014-15 and trained its sights on the budget with the benchmark Nifty being up 7% year-to-date in anticipation. When expectations are running high, it often sets the stage for a disappointment. The roller coaster movement of the market on budget day suggest that it may not have fuelled the urge for instant gratification of those market participants who had made concentrated bets on specific sectors in the hope of big bang announcements. In fact, much like the railway budget that sought to lay a roadmap for the years to come, the Union budget too made attempts to look beyond the immediate fiscal year. Lower corporate taxes in the coming years, simpler exemption framework, abolishment of wealth tax and clarification on issues such as General Anti Avoidance Rule (GAAR) have all been steps in the right direction.

add_main_imageMarkets were focused on whether the government would use the serendipitous gains from lower commodity prices for kick-starting the sluggish investment cycle and whether the fiscal deficit targets would be loosened a bit to accommodate counter-cyclical spending. Recognizing the need that the government will have to do much of the heavy lifting before the private sector can contribute, the budget has given an appreciable push toward capital spending. The capital expenditure at Rs2.4 trillion is estimated to grow 25% over current year’s revised estimates. It should be noted that in the current year, the centre will end up spending 15% lower on capital expenditure versus budget estimates made last year. So while next year’s number may still appear to be below 2% of gross domestic product (GDP), it is important to actually spend what is budgeted. Allocation for equity contributions to government-owned infrastructure agencies that can further leverage this amount to fund capital expenditure should further bolster spending. Moreover public sector undertakings and states which are benefiting from higher devolvement of taxes should also contribute to increasing spends. In that context the 14th Finance Commission recommendations are path breaking, particularly in the context that studies have shown that state-level capital spending often results in a higher GDP multiplier for the economy.

This budget is a fine balance between social spending and capital spending. Markets were probably building a more decisive tilt towards the latter, almost a 180 degree shift from the stance adopted by the previous government. The crux of the issue lies in the implementation of both social programmes and infrastructure projects. Attempts to plug leakages and making the economy cashless through direct benefit transfers and encouraging use of credit cards are steps in the right direction.NextMAds

Overall the fiscal estimates appear quite credible. Gross taxes are expected to grow about 16% which appears realistic considering the revision in rates for excise and service tax. Also the fact that a provision has been made for fuel subsidy despite lower crude oil prices is encouraging. Moreover, controlling revenue expenditure to 3% over current year will be a step in the right direction. All in all, this budget, unlike many in the past, will be remembered for its credibility, clarity and for setting a roadmap for the future.

Swanand Kelkar and Amay Hattangadi work with Morgan Stanley Investment Management. These are their personal views.

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