Post Budget FY 17 Analysis – Indian Stocks Gain as Budget Deficit Plan Spurs Rate Cut

Sampath Reddy, Chief Investment Officer at Bajaj Allianz Life Insurance

In Budget FY17 the finance minister maintained the fiscal consolidation roadmap as outlined in 2015 with the fiscal deficit target for the coming year at 3.5% of GDP. We believe that the government has made realistic assumptions in terms of its tax revenue targets (11.7% y-o-y vs. 17.2% in FY16), though the assumptions for the telecommunication spectrum auctions (INR990bn vs. INR573bn in FY16) and disinvestment revenues (INR565bn vs. INR253bn in FY16) are optimistic. Total expenditure is slated to grow 10.8%YoY in FY17, which is close to the estimated nominal GDP growth of 11% over the year. The FM has maintained the medium-term fiscal deficit target of 3% of GDP from FY18 onwards but has recommended the formation of a committee to review the FRBM Act and recommend the way forward in the times of global volatility.
An additional concern was whether the Seventh Pay commission hikes have been included in the estimates and the government has indicated that a partial provision for the same has been done. The allocation to the plan expenditure is increased by 15%  which can result in a recovery in the economy as well. Provision for the bank recapitalizations stand at Rs.25,000 crore which is much lower than expectations to revive the stressed public sector banks. These measures clear imply that the focus of the government has been fiscal prudence, while the measures to kick start growth have taken a back seat. With the fiscal deficit target being maintained the gross and net market borrowings also remain well within check and lower than market expectations. With the budget focusing on consolidation further room for monetary easing has been created in a scenario of demand slowdown in the economy, thereby giving the central bank additional levers to support growth in the coming months. Hence, an inter-meeting rate cut by the Reserve Bank of India in the next few days cannot be ruled out.
The focus of this government is clearly towards focussing on rural India, the agriculture sector and on the weaker sections of society. The government has not changed the norms for Dividend Distribution Tax, but a 10% tax will be charged, if the total dividend income exceeds INR 10 Lakh. The government left STT(Securities Transaction Tax) rates unchanged except for STT on options. The government has also clarified that GAAR will be implemented from April 01, 2017.
Also, the increased expenditure towards the Pradhan Mantri Fasal Bima Yojana and the new health protection plan with a higher sum insured for the under privileged will provide the poor and economically weak families a strong sense of economic security. This would improve insurance penetration and enable adequate risk coverage. The initiative we believe will also give the much required boost to the reach and awareness of this financial product in the country.
The finance minister struck the right cords by announcing initiatives like:
Focus on Manufacturing and ease of doing business in the country.
Major push to infrastructure with a greater emphasis on road and rail infrastructure, optimizing the use of natural resources and Greenfield projects in aviation and ports.
Keeping the service tax rates unchanged.
Relief for small tax and individual rent payers
On the sector specific tax measures, marginal increase in taxes would impact a few segments of industry. The automobile sector will be negatively be impacted by a new infrastructure cess of 1-4% on 4-wheelers while the cigarette sector will see excise duty going up by around 10%. Upstream oil exploration companies will be adversely impacted due to higher than expected ad valorem cess rate on crude. A beneficiary would be the aluminum sector which would benefit as the customs duty has been hiked to 7.5% from 5% earlier.
Overall, we are optimistic that the government has focused on fiscal prudence which would provide stability in the domestic markets in a scenario of global turmoil. India would then be well placed to focus on healthy growth in the coming months and would be among the fastest growing economies globally.

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