The excitement around India’s Union Budgets usually dies down once the fine print is read and analyzed.
However, the buildup to the FY19 Budget seems worthy of some hype.
Arun Jaitley will be presenting the last full year budget of the government before the general elections most likely to be held in May 2019. This is also the first full year budget after the implementation of GST in July 2017 and special attention will be paid to estimates pertaining to indirect taxes.
Given the rising oil prices, the future of how monetary policy is likely to be shaped this year will depend to a great degree on the fiscal deficit target. The market has factored in the possibility that the interest rate cycle has bottomed out in India. The real risk lies in the scenario of the RBI raising rates prematurely if fiscal targets are not met going forward.
The big question the industry is asking is whether this budget will be a populist one. Given the recent neck to neck political battle in Gujarat, a political pundit sitting in New Delhi would most likely be putting his or her money on the above.
But the math does not add up to make a compelling case for a populist budget.
Firstly, the sharp slowdown in the economy in 2017 can be attributed to transitionary short term factors such as demonetization and the implementation of the GST. As growth picks up and the spillover effects of the above smooth out, real GDP growth should recover to 7.5% in FY19, as per Deutsche Bank. They do not include any fiscal stimulus in their base case scenario as general government budget deficit and debt/GDP are already at 6.5% of GDP and 70% respectively. This leaves very little headroom to maneuver a meaningful fiscal stimulus package.
As per the Fiscal Responsibility and Budget Management Act, 2003 directed glide path, the centre needs to bring down the fiscal deficit to 3% of GDP by FY19 and sustain it at those levels in FY20. The government has very little incentive for unleashing populist spending, as much effort has been put behind fiscal consolidation which led to a ratings upgrade from Moody’s. The government will most likely want to preserve its fiscal credentials.
The focus should be some key expenditure pillars: agriculture, jobs, housing and infrastructure. Rural demand conditions appear to be stabilizing in the backdrop of consistent monsoon, farm loan waivers and with fading impact of demonetization according to Citibank. Activity indicator such as tractor sales, two-wheeler sales, rural wages remain positive to stable and policies must be put in place to accelerate momentum, if at all the PM’s stated objective of doubling farm income by 2022 is to be achieved as per a note by Citibank.
A boost to infrastructure is a must as private sector investment is nowhere to be seen. In FY18, the budgetary allocation for railways and roads was up by over 19-24%. Citi economists expect that with Bharatmala projects this year and the multiplier impact of railways investments, the government could continue with higher allocation for infrastructure sector. They expect overall investment to increase by another 10% YoY in FY19, an impact of around INR400bn.
Affordable housing can be seen getting more traction as the government stepped up its focus under the PMAY (Prime Minister Awas Yojana) in the fiscal year 2017-18. The budgetary allocation for rural housing in PMAY increased from INR160bn in FY17 to INR230bn in FY18, up 43%YoY and the allocation for urban housing sector is INR 60bn in FY18, up 22%YoY according to data compiled by Citibank. The aggressive push to affordable housing is evidenced by the three-fold increase in the stock of houses completed under PMAY-U since April-2017. The RBI data also shows that affordable housing is driving loan growth in India responding to the policy efforts. Thus, it will be interesting to see what the Finance Minister has up his sleeve with respect to boosting this space. From a stock market stand point, many housing finance names which have not participated in the recent rally can witness sharp moves up.
The government rightly has been focusing on rural flagship schemes where productivity and the end goal of creating sustainable tangible assets can be seen. However, only few schemes such as MGNREGS and schemes relating to rural roads and interest subsidies have the optimal mix of size and productivity. Thus, allocations to the above should see a significant uptick from last year if the government is serious about ramping up rural expenditure and demand.
The Finance Minister must present a budget where pragmatism trumps populism. Otherwise, within a landscape of global economic tailwinds he will be selling India short.