The BJP-led government may have hailed Finance Minister Arun Jaitley's last full budget before the general elections for the huge rural focus, the possibly game changing health insurance plan and keeping the fiscal glide path largely in check. However, foreign fund managers and investment bankers don't seem too enthused.
“India budget slips without falling,” said Japan's Nomura Securities. Swiss bank Credit Suisse believed spending was weak and revenue estimates “too low”, while French bank BNP Paribas too felt the budget was “uninspiring”.
While the broader feeling is that there are some aspects in the Budget that could indeed spur consumption over time, however, they are unsure if it will spur a capex recovery soon enough. Concerns also abound over various issues, including the proposal of long-term capital gains tax on equities, disappointing capital expenditure growth and conservative tax expenditures among other things.
Here is how some foreign investment bankers reacted to the Budget.
Neelkanth Mishra, Managing Director and India Equity Strategist, Credit Suisse
As has been the case with this government in prior years, the tax projections seem conservative to us. Corporate tax growth in particular can be meaningfully higher than currently budgeted, particularly as large-corporate profitability is expected to grow strongly next year.
MSP formula change is unlikely to be meaningful. MSPs are only defined for a small part of the agri output. Furthermore, even for rice and wheat, the major crops on which MSPs are somewhat effective, only about a third is procured by the government.
The introduction of a 10 per cent tax on LTCG on equities is negative on sentiment, the marginal dollar saved would be slightly less likely to be invested in Indian equities.
Manishi Raychaudhuri, Head of Asia Pacific Equity Research, BNP Paribas
Target fiscal deficits of 3.5 per cent in FY18 and 3.3 per cent in FY19 were above market expectation – a disappointment but not egregiously so. However, a higher-than-expected deficit could mean bond yields and real interest rates stay elevated longer.
On the expenditure side, the budgeted 9.87 per cent capital expenditure growth for FY19 – lower than overall expenditure growth – could be inadequate to kickstart a capex cycle. However, specific proposals on infrastructure and expenditure on rural and farm sectors are designed to support consumption, and are thus encouraging from an economic perspective.
We think the Indian market is set for a near-term correction given the pre-budget rally seems to be culminating in some disappointment, particularly in the imposition of LTCG. Moreover, India's valuation premium remains at one standard deviation above its long-term average. A reversion to the mean could be on the cards.
Sonal Varma, Chief India Economist, Nomura Securities
Rural and common man were the primary themes in this budget, with a promise to link minimum support prices to a minimum of cost plus 50 per cent and a government – funded healthcare programme. However, the actual rural development outlay has fallen to 0.7 per cent in FY19 from 0.8 per cent in FY18 and the healthcare programme outlay is only Rs 20 billion.
The government's tax revenue assumptions, especially on Goods and Service Tax collections, are aggressive, and could undershoot if tax compliance fails to catch up.
While the budget is a slight disappointment relative to our expectations, it is not a game-changer in either direction. From a macro perspective, the budget is largely neutral for growth, although we believe the economy is already on the cusp of a cyclical recovery. The inflationary impact will depend on the extent of MSP hikes as every 1 per cent rise in MSP adds 10-15 basis points to headline CPI inflation.
