Schroders Quickview: No big bang budget in India
India’s Union Budget, announced on 28th February, broadly delivered what markets were looking for, but will have disappointed some expectations.
3 March 2015
The expected pivot towards greater infrastructure spending was there, but more modest in scope than widely expected. The budget also fell short in reform delivery; foreign lenders had hoped for greater relaxation of priority sector lending regulations than was delivered, and we saw relatively little detail on the introduction of the much vaunted Goods and Services Tax (GST). The overall fiscal consolidation was also smaller than in the roadmap, but this comes as less of a surprise.
A welcome focus on infrastructure spending
Still, focusing on the positives, the shift to infrastructure spending was welcome. Subsidies were reduced by 0.5% of GDP (thanks largely to oil price falls), with this gain split between deficit reduction and infrastructure spending; targeted to rise from 1.5% to 1.7% of GDP. The increase is chiefly split between road and rail spending, following on from a well received railway ministry budget on the 26th. In addition, a National Infrastructure and Investment Fund is planned; financed with £2 billion a year, it will be able to raise debt to finance infrastructure projects. In a similar vein, tax-free infrastructure bonds will be used to directly finance road, rail and irrigation projects.
Helpful tax changes
Another positive move is a phased reduction in corporate income tax, alongside the elimination of exemptions, starting from the next fiscal year. This should reduce the tax burden for most companies as well as simplifying the tax code generally. It is also good to see the formal creation of a Monetary Policy Committee, which will pursue a mandated 4% +/- 2 inflation target, though this is subject to legislative approval. This is more of a long-term positive; the current governor of the central bank is undoubtedly independent and committed to lowering inflation, but a legal mandate will provide a framework for future governors to do the same even when they cannot win a clash of personalities.
Sentiment on India should remain positive, though there may be implications for monetary policy.
Improved fiscal target, but some risky assumptions
On fiscal consolidation, the initial roadmap had suggested a deficit target of 3.6% of GDP, but Saturday’s announcement revealed a more realistic 3.9% target, down from the 4.1% deficit this year. We are not surprised by this and do not view it as a negative as such. What does provide some concern is that assumptions around growth (11.5% nominal GDP forecast) and revenue to be raised from disinvestments (0.5% of GDP) look to be slightly optimistic. Consequently, there is a risk of fiscal slippage and cutbacks to budget outlays, potentially on the infrastructure side.
Implications for monetary policy
Overall, we view the budget as a positive development, if slightly more gradualist than we had initially expected. Sentiment on India should remain positive, though there may be implications for monetary policy. Central Bank Governor Rajan had said rate cuts would depend on the fiscal path taken by the government, and this budget may not be decisive enough to persuade him to maintain an aggressive easing cycle. Expectations for an off-cycle rate cut in March must now be subdued, though April easing still seems
Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.