India Budget 2016: Pillars of Success
In his 2016-17 budget, Finance Minister, Arun Jaitley, outlined a detailed roadmap to building a stronger, more prosperous India, highlighting “9 pillars of success” which included: agricultural welfare, rural sector development, advances in national healthcare, education and job creation, improvements in infrastructure, new financial regulations, pro-business reforms to encourage foreign investment, fiscal consolidation and landmark tax initiatives. Indian markets reacted positively to the news, with the BSE Sensex Index posting a total gain of 1,241 points in the two days following the address.Macroeconomic takeaways:
- Fiscal discipline, targeting a lower deficit of 3.5 percent of GDP for the current year, versus 3.9 percent in fiscal year 2016 1
- Government pledge to double the income of farmers by 2020, allocating ₹360 billion ($5.3 billion) to the agricultural sector 2
- State-run banks to receive ₹250 billion ($3.6 billion) to help with recapitalization, part of a larger plan to revamp public sector banks 3
- Allocation of ₹2.21 trillion ($32 billion) in total public spending on roads, railways and ports, an estimated 24 percent year over year increase 1
- Corporate income tax for small to medium sized businesses in fiscal year 2017 unchanged at 29 percent, although new manufacturing companies will be taxed at 25 percent 4
- 3-year tax holiday proposed for start-ups incorporated between 2016-19 5
- 100 percent of households to have cooking gas within three years and 100 percent of villages to have electricity by May 1, 2018 2
Staying the course of fiscal consolidation is a major positive for India’s macro stability and has been a key reason for India’s outperformance since 2013. Indian government bonds rallied on the news that a lower deficit would be targeted. A lower deficit means a lower net supply of debt, which increases the possibility of further rate cuts from the Reserve Bank of India (RBI). Indian 10-year government bonds currently yield around 7.6 percent and returned 8.1 percent in 2015 and 16.5 percent in 2014, the highest in Asia for both periods.6
Notably, RBI Governor, Ragharum Rajan, stated in February that he would keep a watchful eye on the outcome of the budget, using it to decide if further easing was needed. Our market view is that, the RBI will cut India’s benchmark rate by as much as 50 basis points, from a current rate of 6.75 percent, over the course of the year. Lowering interest rates will have a stimulative impact on the economy.
The rupee also edged higher as details of the budget filtered through to the market. Indian equities are currently undervalued and now that a clear blueprint for the upcoming fiscal year has been laid out, we expect a strong rally over the upcoming quarters. The 2016-17 budget is expected to benefit a wide range of industries from infrastructure and farm equipment manufacturers to developers of affordable housing and state-owned banks.
Overall, this budget signals that the government continues to maintain its two main policy objectives of increasing capital investment while maintaining fiscal restraint. With the 2016-17 budget clarity, investors should focus on growth opportunities in Indian equities and the attractive yields offered by Indian fixed-income.
- Morgan Stanley, India Economics and Strategy, F2017 Budget: Par for the Course, March 1, 2016.
- Bloomberg Business, India Budget: Winners and Losers, February 29, 2016.
- The Indian Express, Budget 2016: Arun Jaitley tables pro-rural budget, tax sops for small income Indians, February 29, 2016.
- Birla Sun Life AMC Limited, data accessed on February 29, 2016.
- Deloitte, Budget 2016, Understanding the Business Impact, February, 2016.
- Bloomberg Business, Modi Finds Missing Piece in Bond, Rupee Jigsaw: Fiscal Prudence, February 29, 2016.