"Budget kept its focus on rural, SMEs and middle-class households"

Navneet Munot, Executive Director & Chief Investment Officer, SBI Mutual Fund.

Budget 2019-20 is staged against the backdrop of compulsions of pre-election spending but a challenging revenue situation, primarily emanating from the required GST buoyancy. Deflation in food prices and mounting agriculture debt has highlighted the accentuating farm distress. Further, the thrust on infrastructure spending over the last few years (particularly on road, railways, housing, urban development) had just started to bear some result. Against this backdrop, the government had eventually sided with a marginal glide path on fiscal consolidation. Fiscal slippage in 2018-19 was limited to 10bps and revised deficit estimate is pegged at 3.4% of GDP. FY20 fiscal deficit is also pegged at 3.4% of GDP.

As expected, the budget kept its focus on rural, small and medium enterprises and middle-class households. While this is an interim budget and the actual realization of the visions (such as the changes in direct taxes in favour of the middle-class) will have to wait till the roll-out of the full budget post the general election, it does set a narrative. Some of the rural oriented schemes such as PM Kissan Samman Nidhi and Mega pension scheme are expected to be rolled out in FY19 itself and have seen the provision in FY19 revised estimates figure.

The earlier years of the current national government were focussed on addressing the bottle-necks of growth. Consequently, we saw the taxation reforms, banking sector reform, real-estate reforms, e-auction of natural resources, reduced time-lines in obtaining the business clearances, bringing the parallel economy into the mainstream, a drive towards implementation of Aadhar and financial inclusion.

These reforms yielded visible gains in terms of formalization, digitization, financial inclusion and lower inflation. Yet, for a variety of reasons, the reforms are yet to translate into a higher income gains. The rising inequality and the unique nature of a large un-organized sector in the Indian economy make it imperative for a government to not only worry about the overall growth and reforms but the distributional aspects of growth i.e. a more equitable growth.

India is flirting with its own version of Universal basic income and social sector benefits. Some of the measures such as health insurance scheme, guaranteed income for small and marginal farmers, and mega pension schemes work towards providing a social security net and enhance the demographic potential of the economy.

Coming to the markets, the thrust towards income enhancement is positive for the consumption oriented sectors. The bond market will have to grapple with the resultant higher market borrowing. The bond market is faced with a mix of push and pulls factors.

While the extremely muted headline inflation, stable external account dynamics and dovish bias in key global central banks augur well for the Indian debt market, the high gross market borrowing and the large emphasis on off budget borrowing requirement would prevent a material rally in the yield.

From equity market perspective, budget would be seen as a positive event given the continued focus on income enhancing measures. Market’s focus will shift back to global cues, political developments and earnings trajectory.


(This article was originally published in The Economic Times)

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