 "Jyotivardhan Jaipuria")
Proposals regarding General Anti Avoidance Rule (GAAR), Dividend Distribution Tax and the amount provided for PSU bank recapitalisation were some of the elements in Budget 2016-17 that disappointed the Street. Jyotivardhan Jaipuria, founder and managing director, Veda Investment Managers, who until recently was the India head of research, Bank of America Merrill Lynch, tells Puneet Wadhwa that the government will need to come up with a comprehensive package to restore confidence in the market that the PSU recap is under control. Edited excerpts:
What are your key takeaways from the Budget 2016?
What are your key takeaways from the Budget 2016?
Read our full coverage on Union Budget 2016
The Budget 2016, as is true for the budget in any year, is a juggling exercise with limited resources and very high expectations. To my mind, the big message the budget sent out was the commitment to meet the fiscal deficit target of 3.5 per cent as mandated under the Fiscal Responsibility and Budget Management (FRBM) in spite of pressure from some sections to relax this target to boost growth. This has now lobbed the ball back in the Reserve Bank of India (RBI’s) court and probably provided some room for monetary stimulus.
The second surprise was an amnesty scheme for undeclared income. Since the Finance Minister has not provided any amount from this in the fiscal estimates, there could be more room for him during the year to provide more capex.
The third big announcement is the Dispute Resolution scheme for retrospective cases. If this helps sort out high profile cases like the Vodafone tax dispute, it could remove some of the negative impression re India amongst foreign investors.
While the Finance Minister has tried to simplify the tax laws, I think this is still an area where more work needs to be done. There are too many cesses and surcharges and we now have three different corporate tax rates for companies post this budget. Hopefully, as the Finance Minister said this is just the transition phase and we move to a much simpler law over next few years.
Union Budget 2016 was expected to usher in “big bang” reforms that would help to kick start economic growth and spur investments across sectors. Do you think that the FM has been able to achieve this?
Frankly, my view has been that we over-hype the importance of the budget and expect a "big bang" budget ever year. I think there are three reasons why over the past decade, budgets are getting more predictable. Firstly, there is more transparency in the budget making process. Secondly, lot of reforms need to be done outside the budget and indeed at the state level too. Thirdly, tax rates are low already and hence changes are marginal that by itself will not dramatically change growth rate.
Having said that, from the budget point of view, the Finance Minister has done what he could to help growth and investments. Firstly, he has by keeping the fiscal deficit in check provided room for the RBI to cut rates. This should help growth. Secondly, in spite of the fiscal constraints, he has provided for a 15 per cent increase in infrastructure outlay though overall capex growth is only 4 per cent. This, along with other measures outside the budget should, to my mind, drive a slow but steady recovery in the economy.
Is the over emphasis on social / rural sector and the allocations worrying you? Will the proposals be able to provide the much needed impetus to the rural economy?
In any budget year, the Finance Minister has to provide maximum tax concessions to the sector that has done badly over the past 18 months and raise taxes on the sector that has done well. With the rural sector struggling over past two years due to poor monsoons and low MSP prices, we have understandably seen an increase in allocations to the sector. The worry here remains the leakage - if the rural allocations reach the targeted poor, it will be positive for the economy. In this regard, I am very excited by the move to provide statutory status to Aadhar and expand the JAM (Jan Dhan Yojana, Aadhar, Mobile numbers) to cover more areas like fertilizers.
Are the various amnesty schemes announced workable for India Inc?
The amnesty scheme was a bold and unexpected move. There are 2 reasons why it could work: (a) the tax rate at 45 per cent is relatively low; (b) it provides immunity from prosecution. The good thing is that the Finance Minister has not taken any receipts from the amnesty scheme in his budget estimates. Hence, he could have some money to play around with if the scheme is a success.
Given these Budget proposals and the road ahead of the economy, do you think that the Reserve Bank of India (RBI) will now be enticed to cut back rates, and how soon?
The fact that the Finance Minister has retained the fiscal deficit at 3.5 per cent for FY17 in line with the FMRB target is a big positive for the RBI. As Governor Rajan had said, monetary policy and fiscal deficit both need to share the burden. With the fiscal consolidation in the budget, the ball is back in the RBI camp. I would expect a 25 bps rate cut near-term and probably another 25-50 bps cut over the next year.
There have been proposals relating to implementation of General Anti Avoidance Rule (GAAR) and dividend distribution tax. What is your reaction to these statements?
I am disappointed by the move to tax dividend in the hands of the investor. I understand the need to tax the well-off Indians. But this move leads to taxing the same income twice – once at the company end and then at the investor end. Considering that dividend is paid from post-tax income by companies, it effectively means triple income in some sense.
When the Dividend Distribution Tax (DDT) was introduced it was to replace the taxation in the hand of the individual. Now effectively, you have retained the DDT but also brought back the old dividend tax. For GAAR, the Government has reinforced the April 2017 date but my guess is we will hear more of it in the next 12 months.
What are your thoughts regarding measures for the banking sector – PSU recapitalisation, consolidation and privatisation initiatives? Are any stocks from this sector, PSU or private, worth a look at the current levels?
The budget has provided Rs 25,000 crores for PSU recapitalisation, an amount below market expectations. The fear of the market has is that the Government is under-estimating the size of the problem. My view is that this fear of the market may not necessarily be correct. The Government has various proposals for the PSUs including: (a) providing greater autonomy and changing management; (b) consolidation of the PSU banks; (c) setting up the Bank Board Bureau that will help banks in setting strategies and raising capital; (d) the Bankruptcy Bill that will make it easier to recover NPLs.
Also, the lower bond yields due to the fiscal consolidation helps the PSU banks mark to market on their bond holdings. However, the Government on its part will need to move urgently to come with a comprehensive package to restore confidence in the market that the PSU recap is an issue under control. From a stock perspective I would continue to prefer the private sector banks over the PSU banks in the near term. NPAs will continue to be focus in the next quarter too for all banks.
What are your overweights and underweights sectors?
I would continue to be overweight consumption plays – urban consumption has been my favourite theme and rural consumption plays are now looking cheap too. There are select areas in the infra space that I like including roads and some plays that benefit from higher railway and defence expenditure. I would stay away from the global commodities and the telecom sector where competitive intensity is going to rise.
What is the road ahead for corporate earnings for the next 12 months? Where do you see the Sensex, Nifty by December 2016-end?
Overall, we think corporate earnings are going to see a slow recovery and in FY17 we could end with a 10-12% growth, higher than in FY16 but lower than the current consensus estimates. In the near-term, the market is vulnerable to global factors but I think second half will see market returns mirror earnings growth.
Has the Budget done enough for the foreign investors (FIIs) and long funds to look at India as an investment destination given how the macros may shape up?
India has been a favoured destination for foreign investors since the macros are shining out in an uncertain world. The current account deficit is low, GDP growth is amongst the strongest in the world and there is space for rate cuts. With the budget commitment on fiscal consolidation, the attractive macros have got reiterated. However, the global equity environment continues to remain uncertain and Global Emerging markets (GEM) funds are facing sharp redemptions. In this environment India too will see FII outflows.
Do you think that the government will be able to stick to its fiscal deficit target and market borrowing program through the year or can one expect a revision as we go along? How are the bond markets likely to play out over the next 6 – 12 months?
The tax revenue assumptions of the Government are reasonable and I think they will be able to achieve this. However, the non-tax revenues appear optimistic and I think there will be a slippage on the disinvestment target as well as the spectrum assumptions.
Overall, however, I think the Government will be able to meet their fiscal deficit targets and the market borrowing numbers as tax revenues could slightly beat estimates. A cut in interest rates should help the bond markets. The other likelihood is that the infusion of liquidity should help lower the current steep yield curve.
