A Budget for Bharat, funded by India and the world

By R Venkataraman

The budget presented by finance minister Nirmala Sitharaman is a statement of purpose of Modi government 2.0. How well it drives India's journey towards a $5-trillion economy lies in execution.

The intent statement is pragmatic and takes into account both domestic and foreign factors. Infrastructure spend is needed to kick-start the economy, and for that the government needs capital.



Domestic savings are not enough to fuel the stalled engine and hence the urgent need to attract foreign capital. The world is awash with liquidity; interest rates in many developed economies are as close to zero as possible. A confident resurgent India wants to tap into this pool of capital to fund its growth plans.

Given our forex reserves and the size of the economy, we expect the government to raise sovereign bonds soon. In the past, the government had resisted such issuances. The government is interacting with various stakeholders and will announce the programme in due course. This will release pressure on domestic bond markets and yields will decline.

Asking Sebi to look at public ownership increase from 25 per cent to 35 per cent is a bid to attract foreign equity capital. The increase in float has been done with an intention to increase India's weight in global market indices, which in turn will drive inflows. The government is willing to bear short-term pain for long-term gains.

We can expect about $60 billion of equity issuances, and some MNCs might chose to delist as well. Sebi will announce guidelines after studying all aspects, and is expected to give a three-year window for compliance. FII limits have been revised up, from 24% to relevant sector limits.

The finance minister has relaxed the government ownership definition, to include ownership by other public sector entities like LIC. We can expect a host of PSU issuances, either through the CPSE ETF route or direct. Strategic divestment of Air India has been announced. Based on how this takes off, we can see some more strategic divestments.

The overwhelming mandate for Modi 2.0 will ensure that employees union pulls and pressures will be withstood. This also ties up with my earlier point of steps taken to attract foreign capital.

The other big picture change is the acknowledgement of the role played by NBFCs and HFCs in serving the credit needs of Bharat. The NBFCs and HFCs have been in the forefront in delivering credit to the poor in rural or urban India through micro finance, or affordable housing loans or MSME loans. Getting the RBI to regulate HFCs boosts credibility. Giving the RBI powers to change directors, force mergers of NBFCs among others increases the regulatory oversight of NBFCs and in the long-term increases credibility of the sector. This also implies that regulatory arbitrage between banks and NBFCs reduce considerably. Given that large NBFCs are bigger than banks, there is a need to articulate the evolutionary path for NBFCs. With this, one can expect a road map for NBFCs to become a bank after reaching a critical size. The recent incidents have exposed that liability profile for NBFCs is a big and inherent risk and must be addressed.

Housing for all remains a policy objective. Increase in income tax exemption for housing loan interest on self-occupied properties, from Rs 2 lakh to Rs 3.5 lakh per year, for a house valued up to Rs 45 lakh, is a positive. Demand growth in affordable houses has many downstream benefits.

The fiscal math of the government remains quite optimistic. It expects net tax revenues to go up by ~25% YoY, on the back of robust growth in excise, customs duties and personal income tax. Non-tax revenue assumptions on telecom and dividend from the RBI/FIs could be tough to meet. Despite this, the government may continue its track record of optically adhering to the revised fiscal deficit target of 3.3 per cent of GDP, given it needs foreign capital to fund its spending.

(The author is MD and co-Promoter, IIFL )