Does Sabka Vikas imply Budget Jhakaas?
Businesses, markets, people, in general, are all eagerly awaiting Budget 2.0.
July 5th will reveal how the government plans to take India’s economic reforms journey forward.
The medium-term mission statement already contains a clear road map on which some aspirational milestones which include doubling of farm incomes by 2022 and making India a $ 5 trn economy by 2025.
Then there’s the apparent intent to pragmatically redeploy national resources. This could be a way of RBI reserves, an optimization of PSU divestment on a likely golden share formula, etc.
Thirdly, a new approach to ‘Make in India’ aligned to an FDI-friendly, coastal SEZ approach is already the whisper on the street.
Be that as it may, the immediate backdrop is a tad murky with global trade face-offs, GDP momentum at multi-year low and funding for the recent election promises that could unsettle the fiscal balance.
Can the new FM subsume these undercurrents and leverage the parliamentary majority to score a century on debut?
In this context, we have attempted a re-based analysis of the past budgets under the NDA regime from 2014 to 2019.
Here are some interesting trends we observed–
- Tax receipts: Direct tax to GDP ratio has improved from 5.6-5.8% pre-Demon to 6.05%; however, Indirect tax ratio peaked at 5.61% in FY16-17 and could be the dark horse going forward.
- Subsidies: A decline in subsidies from 2.1% of GDP to 1.6% underscores the gains of Aadhar-DBT; Food subsidy has dipped to 0.59% in FY17-18 but have since rebounded. With overflowing wheat-rice silos there may be scope for pruning.
- Flagship social schemes: The annual outlay has expanded at an 18.3% CAGR between FY16 and FY19; the allocation in the interim budget surged 28% yoy to accommodate Ayushman Bharat and the direct income scheme for small farmers.
- Bank recapitalisation: Over the years, the amount expanded to Rs 1.06 lakh crore in FY18-19 (3.4% of total expenditure); interim budget FY2019-20 has not explicitly specified a number. With the NPA cycle easing, there is scope for moderation.
- PSU Disinvestment: The proceeds peaked in FY17-18 at Rs 1 lakh crore (4.7% of total receipts) and then dipped to Rs 84,971 crore in the following year; for FY19-20 BE, it is targeted at Rs 90,000 crore.
- Interest payments: After hovering at around 24% of total receipts, interest payments could offer an unexpected relief on account of a rate-cutting cycle manifesting globally
- Fiscal deficit: This crucial barometer overshot by 30bps in FY17-18 and by 10 bps in FY18-19; the debate on the rising trend of IEBR has added a further element of concern though nothing alarming yet.
- Equity Fund flows: FII flows have been volatile, though arguably un-correlated to how economists rated the budget each year. In contrast, DII flows continue to have a muted impact, despite the rise in quantum.
The farm income target implies a double-digit CAGR in Agri-GDP till FY2022-23 while the overall GDP target builds in a8.5%+ GDP growth to FY2024-25. Surely, these appear to be a stretch vis-à-vis the past 3-year CAGR achieved at 4.26% for Agri and 6.87% for overall GDP. And, the upcoming budget must lay a strong runway for such a take-off.
The Agri target depends on rapid yet superior execution of more crop per drop, yield enhancement and switch from foodgrains to pulses/ horticulture and a transparent e-NAM, etc. Being a state subject, it has hitherto suffered from a yo-yo approach. Implicit is the share of Agri-GDP must rise by 300bps. So, can we expect a mega shift from subsidies to suppliers to DBT to empower farmers and a step up in the institutional credit target for the farm sector (almost stagnant for the past 3 years)?
The recent deceleration in IIP is substantially underpinned by liquidity constraints arising from a relapse of the Bank NPA saga exacerbated by the NBFC crisis. Maybe a Mudra fillip (Rs 3 trn disbursal in FY2018-19) and a radical Railway reform could be the antidote further augmented with tax incentives for corporate Capex linked to job creation? A moot point is whether rail passenger fares can be hiked materially (say 20%+) with refunds to economically weaker sections akin to the LPG scheme?
The interim budget FY2019-20 factored an11.8% growth in indirect tax revenue versus 14.3% attained in the previous year. GST collections in April-June are up 7.2%yoy. On the other hand, forecasts for crude prices (despite the recent rally) point to the average for the current fiscal being below the previous year. Besides, the global rate cycle is turning benign and G-sec yields are down 47bps over the first three months. These could be latent positives going through FY2019-20.
Give and Take
The ‘electoral promises’ equation is the 800-pound Gorilla in the budget calculations. By how much would the Rs 61,000cr healthcare allocation in the interim budget be stepped up as also the allocation for direct income support to small farmers (Rs 75,000crper annum)? Assuming a stiff 20% increase would expand the fiscal deficit by Rs 27,200cr (appx 0.13% of GDP); then add to it a further Rs 85,200 cr (5% below interim budget) shortfall in net tax revenues and the aggregate gap widens to Rs 1,12,400cr(equivalent to 3.9% of GDP). A mere coincidence, this uncannily matches the Rs 1,00,000cr speculation of RBI reserves transfer for the current fiscal! ‘From each according to ability and to each as per need,’ said Karl Marx. Extending the argument, the Budget might leave little leeway for the new FM to play Lady Santa Claus to the corporate, middle and stock market classes. They need to wait expectantly (Buy & Hold), for a potential bonanza ahead.
Time for Earnings to Catch-up?
Through Modi 1.0, markets witnessed the strongest P/E expansion in an electoral cycle despite a sub-par earnings growth trajectory of just 4.5%, that too with two years of degrowth. Obviously, the fresh breath of change and focus on rollout enhanced investor confidence to invest with a ‘buy on expectation, ignoring valuations, to sell on conception thereof’ mindset.
The onus, then, is on the FM to convince investors that the transition in Modi 2.0 from strategy & plan to actual implementation (Read: Big SocialSpend!) is being executed in a prudent, calibrated manner. She will also have to deliver a degree of assurance that desirable outcomes, which could trigger multiple J-curves over the medium term, will be achieved.
In summary, the upcoming Budget will likely be similar to a mega project (with a high RoCE business plan) taken up for implementation by an entity that is a tad stretched in its finances but has sound management acumen. By the same token, it may cap any further material re-rating of the market till the much-vaunted 22-25% Nifty EPS growth for FY19-20 begins to manifest (unlikely before 2QFY20) while keeping a hawk-eye on how the Government finances playout on an uneven pitch.
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