The finance minister has presented a very workmanlike Budget which does not really break any new ground or deliver anything radical. However, neither does it cause any real damage. Markets will very quickly shrug off the event and once again look towards more fundamental issues of earnings, liquidity and interest rates. The next stage of our markets will be driven by the delivery on earnings. First of all, unlike many I feel the budget arithmetic is actually reasonable and the fiscal deficit numbers honest. Many complain about the revenue assumptions. 20 per cent growth for income tax is not outlandish in my view. We have seen a surge in new tax filings, and most of the benefits of the notices filed by income tax authorities using the demonetisation data is still to be seen in revenues. The FM has talked of income tax buoyancy of 1.9 to 2.1, and using a nominal GDP assumption of 11.5 per cent for FY 19, yields the desired numbers. For corporate tax, the growth assumption of 10 per cent is actually conservative. Most market observers are building in 20 per cent corporate earnings growth for listed equities in FY 19. These are the companies which pay the bulk of our corporate taxes. If the market players are right on earnings we should definitely overdeliver on the corporate tax targets. Disinvestment receipts have been taken at Rs 800 billion, realistic given that we will see Air India sold as well as the listing of the general insurance companies. The government has resisted the temptation to use the Rs 1,000 billion achieved in FY18 as the new base and build in growth over that. GST receipts seem to have been pegged at slightly more than Rs 600 billion per month, again achievable. With the introduction of the e-way bill and eventually invoice matching, full 12 months of revenues and the economy accelerating to 7.5 per cent growth, this number looks realistic. The FM does not seem to have built in anything significant for spectrum auctions in FY19, and neither has he built in a rebound in dividends from the RBI. In fact the Budget builds in only a 4 per cent increase in non-tax revenues. He should be able to overshoot this number. On expenditure, the FM has budgeted 10 per cent growth, with similar growth for both capital and revenue expenditure. The disappointing aspect is that capital expenditure from the Budget in FY19, at Rs 3,000 billion, while rising 10 per cent, is still less than the original estimates for FY18 (having been revised down through the year). A more liberal definition of capital expenditure of the government, including of budget IEBR, also shows only 4 per cent growth for FY19 at Rs 7,780 billion. After delivering Rs 600 billion more than originally budgeted in FY18, the days of the government delivering double-digit capital expenditure growth seem over. Thankfully this does not seem to be a populist budget. Despite all the sound bites, there is no surge in expenditure. The two items of expenditure growing the most are food subsidies (20 per cent, Rs 300 billion) and interest payments by Rs 450 billion. We have not seen any handouts. Despite spending more than an hour talking about rural India, he has not broken the bank. There has been a cut in the net market borrowings to Rs 4,070 billion from Rs 4,800 billion.
However despite this reduction, bond yields edged higher by 10 basis points to 7.5 per cent. This may be due to disappointment around the headline fiscal deficit numbers of 3.5 per cent (FY18) and 3.3 per cent (FY19), as well as disbelief on the budget arithmetic. I do not share this disbelief. Neither do I believe that a fiscal slippage of this magnitude in an election year budget is alarming. I agree that the 3.5 per cent number was higher than anticipated, but remember we had the RBI dividend and spectrum shortfall as well as only 11 months of GST revenues. 3.3 per cent for FY19 was also higher than anticipated, but at least looks realistic. The FM also seems determined to legislate the 3 per cent fiscal deficit target into law. As for structural measures, there are some. The move to provide health insurance cover of Rs 0.5 million to 100 million families is to be commended. This government has been successful in rolling out crop insurance in scale and hopefully can repeat that success in health insurance as well. The realisation that farmers need additional price support schemes (like in MP) to even receive the notified MSP is long overdue. The desire to ensure that as many agricultural markets as possible are modernised and linked to the E-NAM and give farmers the opportunity to sell directly to buyers is welcome. There was a lot of discussion on employment, and the government paying 12 per cent of wages for all new employees is welcome as is the extension of fixed term employment to all sectors and the reduction in pre-emptive contributions for women employees. Giving provident funds and insurance companies the ability to buy single A rated paper is a significant step to deepen bond markets. There seems to be some steps on the part of the RBI and Sebi to encourage all companies to raise 25 per cent of incremental borrowings from the bond markets. Will help the bond markets for sure, but is this Sebi’s job? Can you force companies to go to debt markets? The FM has talked of alignment of stamp duties across states and bringing these duties under the GST. A very significant step to ease the hassles of real estate and other transactions. There have been some changes made to the minimum alternate tax (MAT), and other tax sections to make it easier to acquire companies under the Insolvency and Bankruptcy Code (IBC) process. Much needed to enable the IBC process to function smoothly. They have unfortunately continued to duck a lowering of taxes for corporate India. Even though 99 per cent of companies may be now paying a 25 per cent tax rate, these companies account for less than 5 per cent of corporate taxes paid. For larger companies, through the cess hike, taxes have actually gone up again. On the introduction of the long-term capital gains tax, I am not surprised. It is political posturing, and will not yield the Rs 200-billion number the FM mentioned. It is also unfair to have both capital gains tax and STT, but this is an election year! However, he has made it more palatable by resetting your cost base to 31st January, 2018. Beyond a few days the market will shrug this off and forget. Frankly, given the wealth created in equity markets over the past 18 months, we should not complain. On the whole, for an election budget, this is not too bad. I have seen far worse. Markets will go back to looking at the underlying fundamentals in a couple of days. We need to worry about rates, earnings and oil prices, the Budget hoopla is thankfully over.
The writer is at Amansa Capital. Views are personal