India's equity markets seemed in two minds on what to make of the 2016-17 Union budget. The benchmark Nifty 50 index yo-yoed wildly before settling for a 0.6% decline from last week's close. Bond market investors were far more certain. Yields on the benchmark 10-year paper fell steadily and ended the day 15 basis points lower.
They were evidently excited about the government's decision to stay with the fiscal consolidation road map it had set last year. Besides, the government's prudence, they believe, will cause the Reserve Bank of India to respond by cutting interest rates. The big question is if the central bank will play along. If it doesn't, yields can be expected to return to pre-budget levels.
As far as the equity markets go, fiscal consolidation won't move the needle much when it comes to investor sentiment. The amount the government has set aside for recapitalization of public sector banks is far too inadequate, and it also did not disclose any plans to set the banking industry back on track. If growth is expected to pick up, as the government has assumed in its budget, the banking industry may well find itself ill-equipped to service this growth. Another disappointment, as far as the equity markets go, was that the government didn't go ahead with its plans to lower the tax rate for all companies.
And while the fiscal consolidation road map looks good, prima facie, there are some question marks about the math behind the lower-than-expected fiscal deficit of 3.5% for 2016-17.
Most investors had taken for granted that there would be some slippage on this front. After all, the coming year's budget includes the double whammy of higher salaries on account of the implementation of the Seventh Pay Commission and higher pensions for defence personnel. The government has not only accounted for these twin blows in its expenditure budget, but has increased outlays for infrastructure spending and for alleviating rural distress.
What about its income expectations? To start with, the expectation that nominal GDP (gross domestic product) growth will rise to 11% in fiscal 2017, from 8.6% in fiscal 2016 looks like a stretch. Besides, the government has budgeted for an income of nearly ₹1 trillion from the sale of spectrum to telecom companies, as well as ongoing spectrum and licence fees. This is higher than the ₹88,000 crore worth combined receipts under this head in the past two years. And while the government's plan to raise ₹28,500 crore in fiscal 2016 through strategic disinvestments has come a cropper, it has budgeted ₹20,500 crore under this head for the next year.
It's quite understandable then, that some experts are worried about slippage on the fiscal front.
As far as the positives go, the rumour on expanding the scope of long-term capital gains tax didn't come true. Securities transaction tax for options trading has been raised by 200%. While this will hit traded volumes in this segment, it should not impact investor sentiment in any way. And while the government has resorted to double taxation of dividends, it only applies to entities earning more than ₹10 lakh as dividend income.
All told, if the government's seeming fiscal prudence is backed by a rate cut from the central bank, bond investors will be happy to overlook some of the worries about the math behind the budget. The government has done well on the messaging front-fiscal consolidation will soothe the nerves of foreign investors, who have been net sellers of bonds and equities worth $3.6 billion so far this year. But with global markets where they are, it's unlikely that this factor alone will move the needle materially as far as the outlook for Indian equities goes.
In arrangement with HT Syndication | MINT
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