Less than 24 hours remaining for
the most awaited day of the year- this time not longed for its weekend-but for
the first full year budget, to be presented by NDA led BJP Prime Minister’s
Narendra Modi’s government; after their historic win in May’14 elections. This
year’s pre-budget rally is like silent reaction as against its extreme- as it
was last year 2014 before the budget as well as elections.
Everyone marks their day for the
last Saturday of the month- 28 February 2015; as many questions wait
to be answered; many doubts wait to be cleared. Market stay cleared off the
volatility this time, as investors wait to react to new happenings, as it seems
to have absorbed the speeches and promises by our new government. Now, it is
like they are asking for what more and better is there to digest around.
Investors have already reflected
the optimism and confidence for the new government. Now, what they are aspiring
is the delivery of their promises; now empty words won’t make any impact- but
actions will. We are well aware of what you look forward to do but our main
concern stays how shall you achieve what you have already said.
Today market is trading at
29,000+ points with valuations looking stretched at 18.09x 1-year forward. The
market focuses on the action plan of the government as they remain the
confident that government’s intent and purpose is clear, pure and
goal-oriented.
Investors state their
expectations for this year’s budget and request that actions say louder than
words:
1.
Fiscal consolidation
Markets expects government to
bring in quality in public finances and to keep the fiscal path intact with
4.1%, 3.6% and 3.0% target of the GDP in FY15,FY16 and FY17 respectively. Also,
anticipates the reduction in subsidy spending by 0.4% and alternatively, increase
the capital expenditure. (ING Vysya Bank, 2015). Given that the government is
close to 90% fiscal target; the challenge remains how government shall focus on
value-creating assets, decrease its interest outgo and improve its current
tax-to-GDP ratio of 10.6%.
Its remains in critical factor
for future monetary policy, equity markets and debt bond yields- as fiscal
consolidation shall ‘make or break’ the future growth story of India. It is a
key to macroeconomic stability and RBI has kept its eyes and ears glued to it.
2.
Revival of investment cycle
Corporate continue to struggle
with high interest rate, weak demand and low capital expenditure cycle. Hence,
to ensure the economic revival it is critical for the government to increase
savings and investment ratio from 30% to late-30% and rationalize the
allocation of resources to important sectors including railways, defense,
power, capital goods and manufacturing. The government should rightly focus on
making India as investment-growth economy rather than being consumption-driven.
Ease of doing business, stable
tax regime, managing inflation and routing financial savings to long-term
infrastructure and economic developments plays a critical part in reviving both
investment and consumption cycle.
3.
Simplified taxation regime
To boost the ease of doing
business as well as stabilize the taxation system, it is critical for the
government to focus on streamlining the tax structure and introduce a well-defined
process for taxation. The workings and development of Goods & Services Tax
(GST), Direct Tax Code (DTC) should be focused on. Clarity in Minimum Alternate
Tax (MAT) framework, dispute settlement mechanism, Real Estate Investment
Trusts (REITs) and Alternate Investment Funds (AIFs) should be presented.
Government also needs to focus on
increasing its tax revenues and optimize on its tax administration; as
government’s income-expenditure sheet should define India’s future growth
story.
4.
Infrastructure development
Advancement of an economy is
defined through its infrastructure, which not only includes roads, power,
transport, and real estate but also quality of education and health services
granted its citizens. As it not helps in improving the economic development but
also ensures competiveness and healthy business climate. Hence, ‘Make in India’
is expected to not only focus on manufacturing but also transform India’s
economic future as it shall lead to expansion in job market as well as skill
development.
5.
Reform-focused
NDA led BJP government won May
2014 elections through its speeches as ‘pro-growth, pro-business and
pro-reform’ government. It is time from them, to stick by their words and
demonstrate an action plan. Government should focus on reforms including
taxation, investments, infrastructure, policies and resources. It is critical
for the government to ease its land acquisition, labor laws, acquisition and
pricing of machinery and capital-raising for it to boost its agriculture,
manufacturing and services industry.
Economic inclusion, fiscal
consolation and ‘Make in India’ remain defining parameters for Budget 2015 to
be presented by Finance Minster Mr. Arun Jaitley.
But on the darker side, analysts
and India Inc expects market to react negatively, if budget fails to deliver
its promises. A fall of 6-8% (Mint, 2014) is expected in equity markets if the
government Additionally, rise by 25-30 bps in expected in the bond yields if
fiscal consolidation roadmap is left un-adhered to. This sell-off may also lead
currency plunging to 64-65/$. Thus, market looks around in observant manner,
waiting to react to announcements to be led by our Honorable Finance Minister.
