No big bang measures

Focus on rural economy, infra, affordable housing should help; but fiscal deficit goal challenging

The Budget 2016-17 did not have any big-bang measures to surprise the markets, but it rightly focused on the key pain areas. For one, the thrust on rural India and farm sector, which is facing distress following two weak monsoons, is a crucial move. Agriculture growth has been poor and has hardly contributed to GDP growth. Slowing rural incomes in the recent past has hurt consumption demand. While the five-year target to double rural income will bear fruit in the coming years, near-term measures like higher allocation to irrigation, devolution of funds to Panchayats, crop insurance scheme and 11 per cent hike in allocation to rural job scheme should have a ripple effect on the economy. It could also help avoid further stress on India's banking system in the form of potential non-performing assets, and more importantly farmer suicides.

Secondly, at time when private capex is missing, continued focus on infrastructure sectors will help further push economic growth and so will the enhanced focus on affordable housing.
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  The other crucial area is public sector banks. While the allocated Rs 25,000 crore for recapitalisation of state-owned banks is below expectations, there are other measures in the offing to strengthen the sector over the long run. The finance minister's repeated assurance that funds will be available when required provides some relief, but a lot more is desired to instil confidence.

Overall, the focus on infrastructure, rural India along with earlier measures with respect to 7th pay commission and One Rank One Pension should lead to higher growth rates, and give a leg-up to corporate earnings.

One crucial area that needs some introspection is the fiscal math. While the fiscal deficit target of 3.5 per cent for FY17 (3.9 per cent for FY16) remains unchanged, some doubt whether it will be achieved.

Soumyajit Niyogi, associate director (credit & market research group) at India Ratings & Research, says, "A closer look at the fiscal arithmetic suggests the government continues to be optimistic in its outlook - projecting an 11 per cent growth for FY17 (nominal) against global slowdown. On the revenue front, reliance on high double-digit growth in income tax, big ticket non tax revenue may warrant caution."

Adds Manish Sonthalia, head of equities - portfolio management services at Motilal Oswal AMC: "The revenue growth and expenditure targets look achievable. But, while the projected telecom auction receipts of Rs 99,000 crore look achievable as the government, unlike in FY16, is going to auction 2G, 3G and 4G spectrum, the disinvestment proceeds pegged at Rs 56,000 crore is in question given the track-record." Never ever has the government raised so much through the disinvestment route. In FY16, too, the figure is close to Rs 25,000 crore. Sonthalia says the sale of SUUTI shares, now worth around Rs 40,000 crore, is the dark horse. Sonal Varma and Neha Saraf of Nomura, though, believe the revenue target is achievable on an overall basis. The bond markets believe the finance minister is on track given the 10-year G-sec bond yield declined by 15 basis points to 7.62 per cent following the Budget. Maintaining fiscal discipline is crucial given that it is India's ability to better its macros, which has provided a cushion amidst recent global headwinds.

Reserve Bank governor Raghuram Rajan had indicated that further rate cuts would depend on the government's ability to spend constructively while continuing to remain prudent. In 2016, India has been amongst the worst performing markets, largely due to selling by foreign institutional investors. If the government is able to walk the talk, these trends could reverse. While the Street would closely monitor progress on fiscal discipline and growth boosting measures going ahead - and there are others such as oil prices, global events that will influence markets - good monsoons are equally crucial.