Interim Budget 2019: Quantum's Critical Evaluation

Today, the Interim Budget was announced by the Union Finance Minister - Mr. Piyush Goyal. This is the last Budget of the NDA government led by Prime Minister Narendra Modi before the Lok Sabha elections are due by May 2019.

Quantum's View

View by Mr. Jimmy Patel, MD & CEO:
It is a populist interim budget catering to the poor & marginalised strata of the society, farmers and rural India. Much was expected by the middle class but there don't seem to be too many benefits for the middle class. With increase tax rebate, it is expected that surplus cash will be available in the hands of the consumers thus resulting in a slight off-take of consumption. With assured income to the farmers a small but firm step has been taken however the need of the hour is more financial discipline. The budget is silent for encouraging private sector in infrastructure development while it is one of 9 stated priority sectors for government.

View by Mr. Nilesh Shetty, Associate Fund Manager, Equity:
The budget was along expected lines with the Finance minister trying to please two large voting constituents (i.e Farmers and Salaried Class) just before national elections. Direct transfer of INR 6000 p.a to farmers owning less than 2 hectares and tax rebate of up to INR 12500 for individuals with taxable income of up to 5 lakhs, should on the margin give some fillip to consumption. Tax collection numbers for current year and next year seem to be aggressive and there is a high probability of exceeding the fiscal deficit target. Overall for equity markets nothing significant has been announced in the budget outside of the minor consumption boost to significantly change perception of growth in respective sectors.

View by the Mr.Pankaj Pathak, Fund Manager, Fixed Income:
Budgets have the most significance for the Bond market. The Budget, stripped of the speech and political statements, is a statement of the current years Revenue and Expenditure and the estimate of the next fiscal year's Revenue and Expenditure. The Government of India spends more than its earns in any given year, resulting in a 'fiscal' deficit which is then pre-dominantly met by borrowing in the bond markets through the issuance of Government securities. Higher the fiscal deficit, higher is the need to issue government securities, which then leads to higher interest rates in the market and vice versa.

This being the last budget of the current Modi Government before elections in May 2019, the bond market was fearing was that the government will announce 'populist' schemes and spend more in order to boost their chances of winning elections and thus increase the fiscal deficit. The Government did announce a Farmer Income Support Scheme and provided some tax relief to low income earning 'middle class'.

For the fourth consecutive year, the government has kept the fiscal deficit higher than the mandated. Even for the current year (FY 19) the fiscal deficit was revised higher to 3.4% of GDP and for (FY 20) the fiscal deficit is assumed at 3.4% / GDP as against the mandated level of 3.1% of GDP. The Bond market reacted negatively to this outcomes as reflected in the market yield of the 10 year government bond rising by 12 bps (0.12%); the price of the bond falling by (0.8%)

Not only has the government assumed higher expenditure, we also believe that some of the tax growth assumptions especially on GST and Excise taxes are aggressive and may not be realized. There is a genuine worry the bond markets will assume a lower tax growth for the next year and thus budget for an even higher fiscal deficit number.

The Monetary Policy Committee (MPC) of the Reserve Bank of India, meets on 6th February, wherein they are expected to reduce interest rates. Given the compromise on fiscal prudence, the inflationary nature of higher government expenditure, the MPC may be prudent to leave interest rates unchanged. This might further impact the sentiment on the bond market and can lead to higher bond yields and market interest rates.

We would advise investors to remain cautious on their bond market investments and should continue to prefer safety and liquidity over returns from bond funds this year.

To Conclude...Keep your Investments Simple and Stay Invested!!
We reiterate what we have been always saying - The Indian markets offer great potential for the long term investor. As such, budget announcements do not alter the economy or your investments. Quantum is "famous" for insisting to our investors to ignore the budget. We stand by that, that whatever is the outcome of the budget, the accounts and the projections for the next year should not affect your long term financial goals.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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