This article was published on moneycontrol.com on March 1, 2016.
The Union Budget 2016-17, presented today by Arun Jaitley has reiterated the ongoing discussion on the street that the Budget should not be considered sacrosanct. There were no big bang reforms and the FM made it very clear that the measures laid down in the Budget would supplement the on-going reform agenda of the Government. If the Economic Survey was very vocal when it laid out its views on the economy, Jaitley decided to come out with a Budget that had a very sombre tone. However, it is very clear that this Government means business and will not use the Budget to announce earth shattering reforms, even if this means that markets go into a zig zag mode on account of this decision. The Finance Minister has maintained a status quo on the existing policies in the major sectors and has not made the investor community nervous with any drastic measures in their favorite savings instruments.
A quick glance at the document makes it clear that it is a very pro-agriculture Budget with due emphasis on some of the other sectors of the economy like infrastructure, banks, social sector, education while maintaining fiscal discipline. However, the Finance Minister seemed to be silent on the Mutual Fund Industry when he touched upon Financial Sector Reforms in the Budget. We continue to believe that more investors can participate in the growth story that the team at North Block has envisioned for the country only via the mutual funds route and not through direct equities. In this scenario, conducive policies targeted at diverting the savings of the public into the mutual fund industry should be taken up earnestly by the Finance Minister.
In this column, I would like to highlight a few points which are positive from the over-all macro-economic perspective.
The Government has decided to allocate INR 35,984 crore for Agriculture and Farmers’ welfare. The emphasis given to irrigation, sustainable management of ground water resources, promotion of organic farming, provisioning of INR 15,000 crore towards interest subvention, implementation of Krishi Kalyan Cess @ 0.5% with effect from June 1, 2016 for financing agriculture and welfare of farmers, etc. shows the seriousness of the Government towards this sector. These measures seem to be in the positive direction considering the fact that agriculture actually grew by -1% in the third quarter of 2015-16.
In this sector, the Government continues to give importance to the road and highways segment and also takes steps to re-vitalize Public Private Partnership (PPP) mode. The total outlay for the infrastructure sector is estimated to be INR 2,21,246 crore in 2016-17. The decision to raise bonds of NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority so as to mobilize additional finances for the infrastructure sector is also a step in the right direction.
We have been positive on the infrastructure funds since 2011 inspite of all its challenges. A Government emphasizing on infrastructure development as is visible not only from the measures taken in the Budget but even from the progress made in sectors like roads, highways, etc. means that our moderately aggressive and aggressive investors can continue to take an exposure into this sectoral funds.
The Government seems to be as eager as the RBI in improving the performance of our Public Sector Banks (PSBs). The different measures announced today like allocation of INR 25,000 crore towards the recapitalization of PSBs and the willingness to provide additional capital if required also means that the aim of the Government is to make PSBs strong and competitive. The other measures like operationalization of the Bank Board Bureau, willingness to reduce the stake to < 50% in IDBI Bank and the strengthening of Debt Recovery Tribunals are steps in the right direction. The Central Bank is already very active in reducing the NPAs of PSBs and if the Government’s action supplements these efforts then it will not only make the PSBs healthy but will also lead to credit growth in the economy.
Corporate bond market
We are living in an environment wherein, investors in the mutual fund industry have been on a panic mode on account of the downgrading of a few instruments included in the portfolios of a few funds. The Finance Minister announced measures in the Budget to deepen the corporate bond market, like setting up a dedicated fund by LIC to provide credit enhancement to infrastructure projects, allowing Foreign Portfolio Investors to invest into unlisted debt securities and pass through securities, developing an ecosystem for the private placement market in corporate bonds, developing electronic platform for repo market in corporate bond by RBI, etc. We believe that such measures aimed at deepening the corporate bond market means that appropriate liquidity will be created in this market which should in turn have a positive impact on credit funds.
Fiscal Prudence is a top priority of the Government
The Finance Minister has decided to adhere to maintaining a fiscal deficit of 3.9% and 3.5% in RE 2015-16 and BE 2016-17. Dr.Rajan has been on a wait and watch mode to see how the Government will go about the fiscal consolidation agenda that would be laid out in the Budget. We are of the view that the fiscal prudence that the Government has decided to maintain, despite the increase in the plan expenditure and the provisions made for the Seventh Pay Commission, should give confidence to the RBI to continue with its monetary easing stance. As for our fixed income investors, those with a moderately aggressive and aggressive risk profile can continue taking the exposure into dynamic bond funds.
However, our expectations from the Finance Ministry continue to be on these lines: (1)Section 80 C should be made more favorable for mutual fund investments,(II)Reverse the taxation of Debt Funds and (III)Revamp RGESS. To conclude, our advice to investors is that they need not have a knee jerk reaction after reading the fine print of the Budget and hearing the views of various experts on the same. Life moves on as usual for mutual fund investors post the third Budget of Team NAMO.