A CONTRACTIONARY BUDGET, HOPES ON PRIVATE CONSUMPTION & INVESTMENT REVIVAL
The Union Budget has come and gone. A lot will be written about specifics of the Budget etc and I don’t want to get into all of them. My key analysis theme is about the impact of the Budget on the Economy via the various measures taken.
The current year saw the Governments expenditure move up sharply to Rs 34.5 Lakh Crores up from Rs 27 Lakh Crores of last year, much higher than the projected expenditure. This combined with the extraordinary measures of the RBI helped the economy stabilize faster than expected. Low interest rates, cut down in expenses and stabilizing growth helped companies report faster recovery. The Fiscal deficit for the current year came at 9.8% of GDP much higher than expectations. The performance of the economy was also aided by a strong monsoon and a good rural economy. Lower input costs also boosted profitability significantly.
The way forward now requires the entire onus of growth to shift to the private sector both in terms of investments and consumption. While the announcements in the budget were taken by many to mean that there is going to huge additional allocations by the government next year the actual figures do not reflect the same. The government has budgeted to spend almost the same amount next year as they did this year. This essentially means that on an economy which is expected to be 15% bigger next year the expenditure will be the same. This effectively mean a contractionary budget.
The Finance Minister also indicated additional borrowings for the next two months and nearly Rs 12 Lakh Crores of gross borrowings for next year. This will require RBI to remain accommodative and inflation to remain benign for the borrowings to get on smoothly. Global borrowings are no longer being considered and as such the entire borrowing onus will be from the domestic markets. Any spike in bond yields will take the overall deposit and lending rates curve higher. This needs to be closely watched.
Other than this the overall tone of the budget was positive with higher indicated capital expenditure budget, which essentially means the revenue expenditure next year will actually fall 4-5% which has never happened in the past and unlikely to actually play out. There were several measures across various segments where announcements were made for investments spread over 5-6 years. This is actually good where measures are announced across longer periods and then monitored every year.
The other good part of the budget is the revenue expectations actually seem to be practical and realistic and could possibly be surpassed if the economy actually grows by 15% plus in nominal terms. Disinvestment targets are always a grey zone which in my view will not be met even this year. Privatization of PSU Banks as announced will be very tough in light of the kind of protests we are seeing around farm laws. In my view it will be very tough to follow this up. An ARC Model for handling bad loans has also got many excited, however as we have seen with the IBC process it is not an easy process. These are good intentions but tough to carry out.
Order flows to many infrastructure companies have been strong in the near term which increases growth visibility for them and has a good multiplier impact on the economy, the real estate segment is seeing signs of life after several years. The agriculture and rural sectors are doing well and the cropping data for the current season as well as the monsoon forecast are positive. These will help growth next year. However its important that both inflation and interest rates remain low for the growth revival in many of these sectors to sustain.
In conclusion I would say that this is a harmless budget which actually does not push the case of a strong economic revival. Even with governments expenditure not moving up the fiscal deficit is projected to be 6.8% for the Central Government and 4% plus for the combined deficit of the states. This amount of borrowings will be challenging for sure. RBI will have a big role to play to keep rates down. Many commentators come in the media and should “Don’t bother about rating agencies”, however this sets the stage for a downgrade down the line. A rating downgrade will be tough to take for a reviving economy. On balance stock markets will again go back to following global cues soon. Valuations are still steep even after taking into account strong corporate results. The good part is that good results reduce downside risk from where it could have been a quarter back.