Budget Review Report FY16-17 - Fiscal prudence to pay off in long term :: Centrum

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Fiscal prudence to pay off in long term



Union Budget 2016-17, unusual to market expectations, seemed far more
prudent and credible given the achievement on the fiscal front and the
arithmetic on revenue assumptions, which appear far more realistic.
Enhanced focus on Agriculture, Rural and Infrastructure spends, in
addition to improved governance, will translate into further economic
growth. We believe a good balance between growth and fiscal adherence
is the right ingredient for monetary policy easing. Valuations have
corrected over the past 12 months and the focus now shifts back to
earnings.

$ Fiscal prudence: Unlike market expectation of the need to balance
growth or manage fiscal deficit, the government chose a far more
credible and a prudent fiscal consolidation path (fiscal deficit at
3.5% of GDP for FY17E) while adhering to growth and at the same time
making necessary allocations (though preliminary) to one-off
expenditure like OROP and seventh pay commission. Revenue growth
assumption at 11.7% looks realistic (with excise duty growth of 12.2%
YoY and service tax growth of 10% YoY) given an additional tax of
50bps as Krishi Kalyan cess and keeping corporate tax rates broadly
unchanged.

$ Nine pillars at centre stage: The government has chosen to focus
more evidently on Agriculture & Rural spends and Infrastructure
creation which will in turn bolster the economy. Allocations under
PMGSY have been raised to Rs190bn, the highest ever spend under
MGNREGA at Rs38.5bn and Rs2.2tn towards Road & Rail Infrastructure.
The above is in addition to thrust on improving governance and ease of
doing business, tax simplification, education and skill development.
Policy decisions like bankruptcy code, monetary policy committee and
constitution of Bank Board Bureau will further strengthen the
financial sector.

$ Sectoral impact: Clean energy/Infrastructure cess and tax on
cigarettes (a way to shore up indirect taxes) will be sentimentally
negative for Metal & Mining, Auto and FMCG sectors in the near term.
In the oil & gas sector, the change to an ad valorem basis will have a
near-term positive impact. On the banking front, while the budget
disappointed on PSU recapitaliastion of only Rs250bn (though having
assured higher allocation if need be at a later stage), strengthening
of DRT and amendment to SARFAESI Act 2002 with respect to asset
reconstruction company will enable faster resolution of asset
quality-related problems in the longer run.

$ Focus back on earnings and valuations: Unlike last year’s much hyped
budget, the expectation this time around was more subdued, with no big
bang reforms expected. Instead, there was an element of fear of
negative surprises on fiscal consolidation and tinkering with the
long-term capital gains tax. In fact, the budget positively surprised
on the fiscal path and walked a tightrope on tax fronts. With focus on
fiscal prudence, central bank will consider this and take an
accommodative monetary policy stance as the markets will move on again
and the focus will shift back to earnings and valuations which are far
more reasonable.