There are stronger underlying bullish currents for medium to long term

By Nirmal Jain
The Finance Minister has tried to balance imperatives of elections and economics and in the process has failed to meet expectations of many constituencies.

For the year 2017-18, revised estimate for fiscal deficit target has exceeded the Budget estimate of 3.2 per cent to 3.5 per cent. In absolute terms, fiscal deficit is higher by Rs 48,318 crore. This should be viewed in light of revenue expenditure increasing by Rs 1,07,371 crore primarily due to higher compensation to states for GST and implementation of 7th Pay Commission. Given growth imperatives, reduction in deficit by further 20 bps by itself is not disastrous. But market gyrations are not driven by any news alone as much they are by expectations vs actual news. Most analysts and the debt market expect formula-based Minimum Support Price (MSP) to result in food subsidy far exceeding the budgeted target.


Gujarat elections brought home the point that farmers are not happy with their income. The hike in MSP is much needed. Interestingly, higher income in the hands of farmers would boost consumption as well as demand for rural housing.

They now expect government borrowings to be much higher than estimates. This along with RBI’s hawkish stance, has spiked G Sec yield.

Strong focus on rural and agriculture sector augurs well for economy as well as markets in the long run.

To balance the economics of Budget, FM needs revenue. It’s good to be seen as taxing rich, wealthy and people not working in farms or factories. The long-term capital gains tax has come back at 10 per cent; it’s modest so as to not upset the apple cart, which will carry the PSU disinvestment. However, the incorrigible problem with the Indian tax structure is multiplicity and complexity. Security Transaction Tax (STT) was introduced in lieu of lower capital gains taxes. There is no reason for STT to continue.

Entrepreneurs, large or small, invest not for real profits, but in expectations of good profits with least hassles. The real profits, you discover much after actual investment is made.

There are several other rural initiatives such as rural haat and for animal husbandry sector besides Operation Green. The Budget provision of Rs 14.34 lakh crore for rural infrastructure, if spent well, will make some positive difference to our rural folks.

One must commend the government for thinking big and proposing to cover 50 crore people by introducing the world’s largest health protection scheme, including hospitalisation. The sad reality is there are no hospitals or doctors accessible to most villages. Before we boast of ModiCare Vs ObamaCare, we need to realise massive investment is needed in building capacity of doctors and hospitals for health insurance to make any sense for the poor people. Yes. The cost of this mega health plan, will be shared by the Centre and states and is more than covered by 1 per cent increase in health and education cess. The cess further increases the effective tax rate for large corporates. Still, increase in threshold of turnover from Rs 50 to Rs 250 crore for lower corporate tax of 25 per cent is a big booster for a much larger number of enterprises. But a high interest rate environment, when demand pickup is not very strong, is a deterrent for new investment. Effective corporate tax rates have been increasing for large corporates, which can take up large investment projects, driving growth of SME ancillaries as well. The multi-layered taxes, surcharges and cess do not help much in energising entrepreneurs to take risk of new investments.

There is impressive increase in outlay for roads, infrastructure, railways and education. This would provide a further fillip to the economic growth. Last year, the government was not only able to meet ambitious disinvestment target but exceeded it too. The Budget has kept next year’s disinvestment target a bit lower, as it does provide the necessary cushion should there be shortfall in some revenue heads or excess in expenditure ones.

For markets, there are many more factors. Rise in interest rate in the US is also a concern besides tight local liquidity Corporate earnings have been sluggish to recover and potential rise in interest cost is another worry.

Still there are stronger underlying bullish currents for medium to long term. India is the fastest growing economy, and government is committed to reforms and mitigating corruption as much as feasible. Domestic investors, although not happy with the long term capital gains tax, have hardly any alternatives but to continue investing in mutual funds or Systematic Investment Plans.

(The author is Chairman, IIFL Group. Views expressed are personal)