What is your view on Budget 2016?
The Union Budget 2016-2017 has signalled the government's intention to remain responsible to fiscal targets, while at the same time being cognizant of the investment and consumption challenges posed to the Indian economy. Adhering to the 3.5% fiscal deficit target for FY2017 has been a big positive emerging out of this budget. While rural, social and infrastructure sector reforms have been the major thrust of this Budget; I take it to be a balanced and progressive budget which has addressed all the major panaceas facing the economy. While there has been lower than expected allocation for recapitalisation of public sector banks, I feel it will actually be a positive step pushing the Banks to be proactive in balance sheet clean up.
The fiscal deficit target was one major talking point in the run-up to the Budget and the FM has set all speculation at rest by sticking to the 3.5% numbers. But at the same time he is betting too much on a significant revenue growth, a sizeable disinvestment and mopup from spectrum sale to achieve that target. Does that make the target look daunting?
We believe that the tax revenue growth expectation of 11.7% YoY and nominal GDP growth of 11% YoY is realistic and indeed conservative. The overall fiscal arithmetic seems to be building in some cushion on crude oil prices. However, the reliance on revenue of INR1trn from telecom spectrum and the divestment target of INR565bn is optimistic.
The government's disinvestment revenue is falling far short of target this year. We have no guarantee the market will do well next financial year and all the share sale candidates are commodities businesses. Does not the share sale target for FY17 look a little tight?
Surely going by the track record, the divestment target of INR565bn (much higher than FY16 RE of INR253bn) appears optimistic. Volatile market conditions have affected the government's disinvestment plan, which mostly has commodity and oil stocks in the pipeline. However, target is achievable if the strategic stake sale amongst PSUs is accelerated. One has to wait and see.
The fiscal deficit target was one major variable in all talk about further rate cut by the RBI. With the big push on agri side to address supply side issue, do you think RBI will be too happy to go ahead and cut rates now? If so, how much rate cut do you expect in 2016 and what are the other key variables now?
The budget sticks to the fiscal consolidation path and the fiscal math is also largely credible. This should create space for monetary easing - we foresee scope of another aprrox.75bps of easing by RBI during FY17. The key variables to watch out will be monsoon this year as it will shape the CPI trajectory.
The government has no doubt spent a lot on rural sector and infrastructure despite limitations. Do you think that can provide the economy the much-needed legup in times of a slowing global economy? Do you buy the government's GDP growth targets for FY17?
Assumption of 11% nominal GDP growth in FY17 and an 11.7% increase in tax revenue appears credible to us. The rural focus of the budget, does provide impetus to the stressed rural economy. Rural demand recovery may be supported by enhanced rural expenditure, but its impact will take time to materialise. In our view, a well distributed monsoon along with the Fiscal push shall bode well for the overall economy in the medium to long term.
The bank recapitalisation amount was not something to tom-tom about and the government instead provides for NPA cleanup and signals consolidation in the industry. What is your reading of the ills afflicting the banking sector and how the government is going to address it?
Bank recapitalisation was lower than what was estimated, especially in the backdrop of heightened asset quality pressure. However government highlighted that this was one of the tranche and if need be they will further augment capital. The government understands the criticality of the issue and has proposed a comprehensive Code on Resolution of Financial Firms to be introduced in the Parliament during FY17. This Code, together with the Insolvency and Bankruptcy Code 2015, when enacted, should ideally provide a comprehensive resolution mechanism. This is a step in the right direction.