Budget 2014/15 reveals priorities, sets the stage

July 14, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The new Narendra Modi government rides on a long wishlist of policies and reforms, with limited resources. Budget 2014/15, as expected, reveals the government’s priorities in the near and medium term.

Arun Jaitley poses as he leaves his office to present the union budget for the 2014/15 fiscal year in New DelhiThe inflation moderation imperative overshadows near-term headline growth desires, manifested in aggressive (albeit challenging) fiscal deficit targets. The projected fiscal deficit of 4.1 percent (3.6 percent of GDP in FY16) versus the 4.6 percent recorded in FY14, is in line with expectations. The reduction in the budget deficit is driven by hoped-for revenue growth rather than depressed spending growth.

The spending mix is forecast to improve towards more plan and capital spending, which should bode well for the growth outlook. Curtailed non-plan spending growth and subsidies are also a positive.

This budget sets the stage for a future pick-up in growth, rather than drive acceleration in real GDP this year. It does outline both policy initiatives as well as specific schemes (albeit with yet limited fund allocation) to support medium-term growth recovery.

These also indicate the government’s priorities over the medium term. Higher FDI limits in defence and insurance, a commitment to the GST rollout and revival of manufacturing zones (SEZs) are examples. Also, funding allocation for new schemes indicate focus areas such as tourism, housing and education. It also attempts to revive financial savings, again key for medium-term growth recovery.

The finance minister also attempted a bigger push for public spending in infrastructure to revive the investment cycle, especially given the still weak private sector spending trends. These numbers though are insignificant in the context of the overall investment spend.

A labourer carries saplings at a paddy field on the outskirts of AhmedabadFiscal consolidation will dampen near-term consumption trends though, despite some respite from lower income tax. This implies a muted outlook for consumption (including discretionary) recovery in the near term, more so for rural consumption given a muted target for rural credit growth versus history and risk from weak monsoons on rural incomes (but not on inflation). This stance is supportive of rate sensitives and cyclicals though.

The thrust on infra spending is positive for cement, infrastructure and capital goods. The intent to introduce Real Estate Investment Trusts (REITs) is positive for real estate. Long-term loans to the infra sector with minimum regulatory burden is positive for banks with a large infra book. Lower fuel subsidy is a positive for ONGC, Oil India and state-owned oil marketing enterprises. A higher excise duty on cigarettes implies a cut in ITC’s volume estimates for FY15, but the more equitable approach to tobacco taxation is fundamentally positive.

With the big catalyst event of the Budget behind us, markets may consolidate for a while. We do expect continued announcements on policies and roadmaps for various ministries over the next few months. The markets though will look for tangible indicators such as earnings or macro parameters, beyond just headlines of hope from future reforms, as the initial honeymoon period wears off.

We remain bullish on Indian equities nevertheless as current valuations are not expensive in our view and growth recovery hopes will likely ensure premium valuations. Our Nifty target for end-2014 is 8000. There could be an upside to this target based on how policymaking evolves.

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