Re-Budgeted 2016
Published: Wed, 03/02/16
Re-Budgeted 2016
I am not usually negative about the Union Budgets in India because if you listen closely there are lot of things that will benefit someone or the other. If there is enough spending GDP will grow. So those are never the issues. Last year we read about setting up of cold storages, solar power, and a move towards lower corporate tax rates.
This year I tried hard to stitch the pieces. Yes more on roads and railways. But were there any serious structural changes that would have long term positive effects when the business cycle turns up? I am still searching. Look I was not looking for immediate market effects from this budget. At the current debt levels it was not expected. It was expected by many that the fiscal deficit maybe moved up a bit to boost the economy mildly but they did not. The immediate impact is that expectations of lower interest rates are set. If they had decided to spend more it would have immediately pushed the bond and currency markets into a tizzy. But not having done so leaves us with a situation where there is no stimulus to the economy. Status quo continues so that we can at least maintain the current growth trajectory. The current growth trajectory is however not enough for the private sector to be able to service its debts. It does not pose any immediate problem to the government as they are only expecting a mild pick up in taxes at this growth rate. So the entire onus of helping the private sector survive is now on the RBI and its ability to lower interest rates. And that is where the market is finding its optimism
What I would have liked however is more structural reform. Like a clear cut move towards lower corporate taxes as proposed last year, a road map. A further move in the direction of the participation of the private sector in Agri production and distribution of goods and services that would directly take care of inflationary bottlenecks. I am sure there are more items that could be added. But it is not about these measures but any set of measures that ensure that when the business cycle turns up the positive effects of that up turn has a multiplier effect on the economy through participation of people at large and transmission of economic activity without inflation. There was room for a lot more on this front.
My take away is very simple as always. This budget will keep people working and consuming. But if earnings growth is the key metric that drives stock market valuations. There is nothing in it for that. At the high debt levels in the private sector, the current growth trajectory is not sufficient to create earnings revival. Additional spending would have helped spur inflation to a point that some additional revenue growth could be projected. Without inflation, rising labor costs and existing interest costs will continue to weigh. This quarter interest costs were one of the primary reasons for negative growth. So I cannot see an earning revival directly except by lower of interest rates. And would they be transmitted given the high cost of borrowing for the banks already in force? Unlikely! It may in fact continue to push corporate to borrow at lower rates from abroad piling on external debt and building a case for a ‘’Future Shock’’
In fact, that the budget does not acknowledge the size of the banking crisis and the amount of recapitalization eventually needed, is a hidden burden on the budget numbers. My sense is that by the end of this year it is impossible to meet the fiscal target. Yes in the past the FMs have shown a magical ability to achieve their target numbers but this year might be different. By keeping tax expectations low and outlays low there is room for a lot of contingent expenses to show up as we go along. Spending might overshoot and taxes/disinvestment might not and for once we will be looking at a different situation all together.
Yesterday morning everyone was a pessimist on the budget and now everyone is waiting for Dr. Rajan to start playing the music. But once the game show is over we will be back to looking at the ground realities. Interest rate transmission cannot be solved by the fiscal deficit target but by recapitalization of baking. That is a process still underway.
The good news is that with fiscal prudence the government is continuing to build the ammunition that it will need when the dark day actually comes. When the weak global growth and our own business cycle combined slow the economy further and when our debt binge pushes our bond markets on the edge, the FM will be able to step in with a massive program for revival without caring a hoot about rating agencies, and yes at that point of time it will work in stimulating a turn around. But till that moment arrives the worst is not over for the market. In the short term however we may continue to Cheer the RBI for a rate cut. Bring it on! Can it cut rates based on fiscal when the problem is one of banking? Time will tell. The ball is in the court of the RBI.
The Final Winter [19 Jan 2016]
The following Video [just published] discusses the market scenario in the context of India's Economic cycle and its position in the Winter cycle.