A healthy financial sector is vital as the economy has to fire on all cylinders when credit begins to take off
A closer look at Budget 2016-17 reveals that it has set a firm and sustainable recovery in motion. The finance minister has done this in a constructive way by staying on the course of fiscal prudence. With financial year (FY) 2015-16 targets for fiscal consolidation being met, the finance minister has stayed firmly on course, with a deficit target of 3.5% for FY17. This is easily one of the good decisions taken without compromising on expenditure required for infrastructure.
With the end result in mind, I will put a constructive label on the Budget as it is a vital reminder of the importance of fiscal stability. While the finance minister has not allocated large amounts to investment in infrastructure in the light of fiscal constraints, the amount is still vast enough to keep the growth wheels of the economy running. This shows that the government has set its sights on a slow, gradual, and persistent recovery in the economy.
A lower fiscal deficit and the route to fiscal consolidation has been one of the most debated issues in recent times. But this is also a pre-requisite for lower interest rates in the economy. While consumer inflation has come under control, interest rates in the economy have still not come down meaningfully, largely because fiscal accounts have been challenging. The current account deficit is also projected to be 1.4% of gross domestic product (GDP) in FY17.
In the course of time, interest rates are likely to lower, boosting the prospects of the debt market. The rupee has not been as badly hit as some other emerging-market currencies; hence, if it is well-behaved, we could see reduced rates sooner.
In due time, benefits of lower interest rates will be felt in the Indian industry and this will create a foundation for an economic upswing in coming years. In the short run, though, lower rates would benefit investors in debt instruments.
In the longer run, this would benefit equities as the Budget has not only made lower interest rates possible, but also strived to ratchet up growth through the right infrastructure expenditure.
The finance minister has allocated Rs.2.21 trillion toward infrastructure, and Rs.2.18 trillion toward roads and railways. Infrastructure is one of the critical sectors of the economy and a push here would be good for the overall recovery.
Budget 2016-17 has also focused on the rural economy, which has been reeling under two consecutive bad monsoons leading to lower spending and income levels of the rural population. The Budget proposes to bring more economic activity here. Besides allocating Rs.877.65 billion for rural development schemes, it proposes Rs.385 billion for rural job plans. Also, Rs.85 billion has been allocated in FY17 for electrification of all villages by 2018. It has been proved that significant strides in economic development happen when electricity can be availed by one and all.
Affordable housing got a fillip, which could keep consumption demand high. Small tax payers have received additional tax exemptions on interest payments for loans for small-ticket houses. An equally positive development for many people is incentivising employment generation in the private sector by contributions to the provident fund sector in case of employees drawing lower salaries for the first three years. This would step up private sector employment generation.
On banking, in the wake of the capital requirements, the government has upped allocations for re-capitalising of public sector banks to Rs.25,000 crore.
A healthy financial sector is vital as the economy has to fire on all cylinders when credit begins to take off. Banks have to be adequately capitalised and ready to provide credit facilities to the infrastructure sector in a huge way.
Additionally, corporate tax is being reduced. To begin with, companies that have a lower turnover will see a reduction in their tax rates by 1%. The housing industry has received a boost in the affordable-housing sub-segment, which could keep consumption demand at sustainable levels.
To be sure, the Budget has taken a slightly longer route to corporate sector revival, but it’s a steady and sustainable one to take, which could benefit the industry for many years to come. Hence, in the longer run, equity investors can benefit from this Budget.
The other piece of good news is that while the ground work is being done to consolidate the economy, equity valuations have been coming down because of global re-allocations in financial markets. Lower equity prices are a good opportunity and we suggest going overweight on equities by end-2016.
This article was published on March 09, 2016 in Mint