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  • V K Vijayakumar

    Chief Investment Strategist, Geojit Financial Services
    He is known for his articles on capital markets, wealth management, and Indian and global economy. He has presented many papers and delivered many lectures on the capital market in national and international seminars. He has authored four books on economics, presented eight papers in international seminars and 65 papers in national seminars.

Opportunity's here for a popular not populist, Budget

What has the final Budget of the Modi government in store for people and the economy?

Jan 30, 2018, 09.02 PM IST
What has the final Budget of the Modi government in store for people and the economy?
By V K Vijayakumar

As the German statesman Bismarck once famously said, "Politics is the art of the possible."

In a democracy, therefore, it is normal for the ruling party to use the Budget for some political mileage before the elections. Most election-eve Budgets have been characterised by good politics rather than good economics. Unfortunately, good politics is bad economics and good economics can be bad politics, at least in the short term.

What has the final Budget of the Modi government in store for people and the economy?

The FM would be presenting this year’s budget under some hard constraints. India’s GDP growth will drop to a 4-year low of 6.5 per cent in 2017-18, according to CSO’s advanced estimates. Growth has been impacted by the twin shocks of demonetisation and GST.

Of course, we can derive consolation from the fact that the economy is on the recovery path: Growth rate has picked up from 5.7 per cent in Q1 of 2017-18 to 6.3 per cent in Q2 and is expected to gather momentum and rise above 7 per cent average for Q3 and Q4, mainly assisted by the base effect. The recovery notwithstanding, the slump in growth rate to a 4-year low, when the global economy is powering ahead, is indeed, a constraint.

It would be difficult for the FM to restrict the fiscal deficit to 3.2 per cent of GDP as projected in last year’s Budget. Poor GST collections and lower-than-expected GDP would certainly lead to slippage in fiscal deficit. By November 2016, fiscal deficit had crossed 110 percent of GDP. We are likely to end the year with a fiscal deficit of around 3.4 per cent.

Yet another area of concern is the rising crude, which is impacting the fiscal deficit, current account deficit (CAD) and inflation. The CPI inflation inched up to 5.21 per cent in December 2017, precluding the possibility of another rate cut, any time soon.

The bond market has correctly reflected the slippage in the fiscal deficit target with a near-90 bps rise in the benchmark yield, from 6.48 per cent in July 2017 to 7.4 per cent by December-end 2017. Rising crude import bill will aggravate CAD too even though CAD can be contained within safe limits.

Steepening of the yield curve is undesirable. Rise in bond yields, when the corporate sector is increasingly depending on the bond market for raising funds, will impact capital formation and GDP growth. Therefore, the government should desist from embarking on populist spending programmes that will impact the fisc and raise yields further.

Growth coming back strongly
On the positive side, the best news is the economy is showing signs of sharp recovery. Industrial activity as measured by the IIP touched a 22-month high of 8.2 per cent in November 2017. Commercial vehicles sales - an important indicator of economic activity - in December have been excellent. Exports also have shown improvement since July 2017.

These good numbers will lead to better growth in the last two quarters of 2017-18. The impact of demonetisation and GST implementation are also behind us. Even though private capex might take a couple of quarters more, the economy is all poised to get back to the high growth path in 2018. The global economic scenario is
also highly favourable with the best growth rate in the last 10 years. The World Bank’s growth projections for 2018 show India again becoming the fastest growing large economy in the world with a growth rate of 7.3 per cent.

With growth coming back, fiscal slippage this year will not be an issue. This government has a good track record of fiscal consolidation, having brought down fiscal deficit from 4.8 per cent to 3.5 per cent of GDP. Fiscal deficit targets may be revised to 3.2 per cent and 3 per cent for 2019 and 2020; these are achievable.

The government should not embark on any populist spending programmes that will derail the fisc and aggravate inflation. That will add to inflation, which is primarily driven up by rising crude prices.

On taxation, since the GST Council is the decision making body for indirect taxes, there won’t be any major announcements except some marginal changes in Customs duties, which do not come under GST. Some relief to the salaried class will certainly come this year. Some minor changes in the computation of long-term capital gains tax are likely.

Even though the government has committed to reducing the corporate tax, it remains to be seen whether it would be done in this last Budget before the general elections.

Cut the excise duty on crude
When crude crashed in 2014, the government raised the excise duty on petroleum products and took the bulk of the benefit without passing over the benefit to consumers.

Justice, therefore, demands that now when the prices are going up, the government should reduce excise on petroleum products rather than pass on the increased burden on to the consumers. Excise duty cut in the Budget would be a popular move and doable since petroleum is outside GST.

Agriculture-rural sector will be the focus
The focus of the 2018 Budget would be agri-rural sector. Increased focus on the rural and agricultural sector is necessary to address the rural distress. But it should be done within the limits of macroeconomic stability. Loan write-offs like those done in UP and Maharashtra are totally undesirable. Focus should be on programmes that ensure
remunerative prices to farmers and projects to increase agricultural productivity.

2018 should be year of consolidation
2017 was the year of disruption and falling growth. Growth suffered due to the doublewhammy of demonetisation and GST implementation. 2018 should be the year of consolidation, creating the right environment for the nascent green shoots of the recovery to grow fast. The Budget should convey this message clearly.

The budget and market
Some structural changes under way in Indian macro scene are influencing markets substantially. Financialisation of savings, increasing preference for equity as an asset class, the growing tribe of new young investors entering the market and poor returns from alternative popular investments like bank deposits, are acting cumulatively, producing profound consequences for the stock market. These structural shifts have the potential to keep valuations at elevated levels. But investors should be aware of the risks in the market.

There had been rumours, during the last few years, regarding the abolition of LTCG tax exemption for equity investment. This year too, the rumours are doing the rounds. Some tweaking of the LTCG tax is likely. The market has discounted this. But the abolition of the exemption is not yet discounted. Therefore, if it comes, there is bound to be a big correction in the market.

With the Sensex and the Nifty around 36,000 and 11,000 respectively, valuations are indeed a serious concern. Valuations of pockets of mid and small caps are in bubble territory. It is important to appreciate the fact that we are part of the ongoing global bull market. This global rally is driven by the best-synchronised global economic growth in 10 years assisted by the humongous liquidity created by quantitative easing. This global rally is
likely to be impacted negatively by a global trigger rather than a domestic event.

Since valuations are lofty, investors should play a defensive game in 2018. Aggressive bulk buying should be avoided.

In brief, the emerging economic and political scenario offers an opportunity to the government to be popular without turning populist. Can Arun Jaitley rise to the occasion by combining good economics with good politics?

(V K Vijayakumar is Chief Investment Strategist of Geojit Financial Services. Views are personal)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

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