Businesses, markets, people, in general, are all eagerly awaiting Budget 2.0.
July 5th will reveal how the government plans to take India’s economic reforms journey forward.
The medium-term mission statement already contains a clear road map on which some aspirational milestones which include doubling of farm incomes by 2022 and making India a $ 5 trn economy by 2025.
Then there’s the apparent intent to pragmatically redeploy national resources. This could be a way of RBI reserves, an optimization of PSU divestment on a likely golden share formula, etc.
Thirdly, a new approach to ‘Make in India’ aligned to an FDI-friendly, coastal SEZ approach is already the whisper on the street.
Be that as it may, the immediate backdrop is a tad murky with global trade face-offs, GDP momentum at multi-year low and funding for the recent election promises that could unsettle the fiscal balance.
Can the new FM subsume these undercurrents and leverage the parliamentary majority to score a century on debut?
The farm income target implies a double-digit CAGR in Agri-GDP till FY2022-23 while the overall GDP target builds in a8.5%+ GDP growth to FY2024-25. Surely, these appear to be a stretch vis-à-vis the past 3-year CAGR achieved at 4.26% for Agri and 6.87% for overall GDP. And, the upcoming budget must lay a strong runway for such a take-off.
The Agri target depends on rapid yet superior execution of more crop per drop, yield enhancement and switch from foodgrains to pulses/ horticulture and a transparent e-NAM, etc. Being a state subject, it has hitherto suffered from a yo-yo approach. Implicit is the share of Agri-GDP must rise by 300bps. So, can we expect a mega shift from subsidies to suppliers to DBT to empower farmers and a step up in the institutional credit target for the farm sector (almost stagnant for the past 3 years)?
The recent deceleration in IIP is substantially underpinned by liquidity constraints arising from a relapse of the Bank NPA saga exacerbated by the NBFC crisis. Maybe a Mudra fillip (Rs 3 trn disbursal in FY2018-19) and a radical Railway reform could be the antidote further augmented with tax incentives for corporate Capex linked to job creation? A moot point is whether rail passenger fares can be hiked materially (say 20%+) with refunds to economically weaker sections akin to the LPG scheme?
The interim budget FY2019-20 factored an11.8% growth in indirect tax revenue versus 14.3% attained in the previous year. GST collections in April-June are up 7.2%yoy. On the other hand, forecasts for crude prices (despite the recent rally) point to the average for the current fiscal being below the previous year. Besides, the global rate cycle is turning benign and G-sec yields are down 47bps over the first three months. These could be latent positives going through FY2019-20.
The ‘electoral promises’ equation is the 800-pound Gorilla in the budget calculations. By how much would the Rs 61,000cr healthcare allocation in the interim budget be stepped up as also the allocation for direct income support to small farmers (Rs 75,000crper annum)? Assuming a stiff 20% increase would expand the fiscal deficit by Rs 27,200cr (appx 0.13% of GDP); then add to it a further Rs 85,200 cr (5% below interim budget) shortfall in net tax revenues and the aggregate gap widens to Rs 1,12,400cr(equivalent to 3.9% of GDP). A mere coincidence, this uncannily matches the Rs 1,00,000cr speculation of RBI reserves transfer for the current fiscal! ‘From each according to ability and to each as per need,’ said Karl Marx. Extending the argument, the Budget might leave little leeway for the new FM to play Lady Santa Claus to the corporate, middle and stock market classes. They need to wait expectantly (Buy & Hold), for a potential bonanza ahead.
Through Modi 1.0, markets witnessed the strongest P/E expansion in an electoral cycle despite a sub-par earnings growth trajectory of just 4.5%, that too with two years of degrowth. Obviously, the fresh breath of change and focus on rollout enhanced investor confidence to invest with a ‘buy on expectation, ignoring valuations, to sell on conception thereof’ mindset.
The onus, then, is on the FM to convince investors that the transition in Modi 2.0 from strategy & plan to actual implementation (Read: Big SocialSpend!) is being executed in a prudent, calibrated manner. She will also have to deliver a degree of assurance that desirable outcomes, which could trigger multiple J-curves over the medium term, will be achieved.
In summary, the upcoming Budget will likely be similar to a mega project (with a high RoCE business plan) taken up for implementation by an entity that is a tad stretched in its finances but has sound management acumen. By the same token, it may cap any further material re-rating of the market till the much-vaunted 22-25% Nifty EPS growth for FY19-20 begins to manifest (unlikely before 2QFY20) while keeping a hawk-eye on how the Government finances playout on an uneven pitch.
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