Union Budget 2017- Neither Popular nor Populist

Today, the Finance Minister presented the Union Budget for 2017-18, in his words "when the global economy is in serious crisis". He further added "Global growth has slowed down from 3.4% in 2014 to 3.1% in 2015. Financial markets have been battered and global trade has contracted. Amidst all these global headwinds, the Indian economy has held its ground firmly..."

This is the first budget after the so called "demonetization" move by Prime Minister Narendra Modi on November 8, 2016. Thus we watched, with baited breath, whether the budget will announce sweeping reforms, or be extremely populist, given the fact that the BJP was going into electoral battle in large states like UP and Punjab. We were disappointed on both counts...

Background of the budget
Mr. Jaitley touched upon the fact that global macro-economic and political conditions are far from smooth. However the International Monetary Fund has hailed India as a 'bright spot' amidst a slowing global economy. The World Economic Forum has said that India's growth is 'extraordinarily high'. The Finance Minister also cautioned saying that the risks of further global slowdown and turbulence are mounting by the day.

Some Highlights of Union Budget 2017:
• Budget agenda was to - Transform Energize and Clean India - TEC India.
• Oil prices, rising dollar and volatile commodity prices seen as risks to Indian economy.
• Fiscal deficit for 2017-18 pegged at 3.2 percent of GDP.
• Targeted Fiscal deficit to remain at 3% for the coming years.
• Focus on Rural India - with a commitment to spend around Rs. 187,000 Crore in the coming year on various schemes.
• One crore houses for poor by 2019.
• Focus on digitizing India to continue.
• Aadhaar Pay to be introduced. For senior citizens, Aadhaar based Health Cards will be introduced.
• Service charge on rail tickets booked through IRCTC to be withdrawn.
• Foreign investment promotion board (FIPB) to be abolished.
• Small firms with turnover up to Rs 50 crore to pay 25% tax now, instead of 30%.
• No cash transaction above Rs 3 lakh.
• Maximum cash donation any Political party can receive will be Rs. 2,000 from one source.
• Reduced income tax rate from 10% to 5% for tax slab of Rs 250,000 to Rs 500,000. One page tax filing form for taxable income under Rs.5 lakh.
• Surcharge of 10% for those whose annual income is Rs 50 lakh to 1 crore.
• 15% surcharge on incomes above Rs 1 crore to continue.

The Stock Markets React..
Both the Sensex and the Nifty rose steadily as Mr. Jaitley's speech progressed in the Lok Sabha, and registered gains of around 1 percent by the time he finished. At the end of the trading day, the BSE Sensex added 485 points while Nifty gained 155 points. The major reason for the cheer seems to be associated with fiscal deficit numbers which are likely to be in comfort zone for the year under revision (FY 2016-17) and year to come (FY 2017-18). Markets, investors and rating agencies are likely to comfortable with this stance.

The government took due care to limit the net market borrowing of Government to Rs 3.48 lakh crores after the buyback, much lower than Rs 4.25 lakh crores of the previous year. The projection for the fiscal deficit added to the relief of the stock markets. Fiscal deficit target of 3.2 per cent for the year FY18 calmed investors and rating agencies not just in India but across the globe.

The Quantum View
Commenting on the Budget, Arvind Chari, (Head - Fixed Income & Alternatives, Quantum Advisors) said, "The Budget was neither popular nor populist. It was a rather tepid budget, as has been the case lately".

Atul Kumar, (Head Equities, Quantum AMC) echoes this sentiment, says Atul - "The focus of the budget remains on rural and agriculture sector. Affordable housing has also been given a boost. There were some expectations of tax cut or simplification. Tax for small business reduced to 25% and tinkering of personal income tax at lower income bracket. Overall, budget looks like a continuation of past budgets of current NDA regime. There was nothing transformational."

Atul further said - "Steps were announced to control generation and use of black money. Clean up of political funding is also an initiative in the budget. These are positive from log term perspective if done in right earnest."

Outlook
Despite weak global macro economy cues, the Indian economy has posted a strong GDP growth while keeping inflation and fiscal deficits in check. We liked the governments focus on fiscal prudence and the commitment, although delayed, to move fiscal deficit to 3.0% of GDP next year. Summarizes Arvind "We expect a rate cut from the RBI as budget proposals are not inflationary and thus if food prices remain benign, we could expect some rate cuts by the RBI. The decision to abolish FIPB and political funding reforms could be the key legacy of this budget announcement," he said further while commenting on Union Budget announcements.

Absence of any tinkering to long term capital gains on shares should sooth equity markets. But we believe that, there is nothing significant in the budget to boost the economy and revive the sluggish capex cycle.

The verdict? All in all a tepid budget feels like a missed opportunity by team Modi to push some economic reforms through.

Source : http://indiabudget.nic.in/ub2016-17/bs/bs.pdf

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