India’s finance minister Arun Jaitley announced plans for the country’s budget on February 29, which aim to reduce the central government deficit and increase spending on rural infrastructure.
The government will keep the fiscal deficit at 3.5% and Jaitley pledged around $32 billion on rail, road and other infrastructure. He allocated $3.6 billion to recapitalising the state banks which dominate the financial system but have been crippled by bad loans.
Two leading equity managers specialising in the region have given their views on the announcement and what the longer-term effects on the Indian economy may be.
The Citywire A-rated Mike Sell, who is head of Asian Investments at Alquity Investments Management and runs the Alquity SICAV-Alquity India Subcontinent fund, thinks the budget was positive as there were no tax giveaways.
There was so much fear running up to the budget that they were going to increase capital gains tax, that that has had a very negative impact on the market and particularly the mid cap area which is where we tend to be. In India these budgets are built up to be a game changing thing every year.
All you want is a sensible competent administration to continue to deliver on their strategy, that is what we got. We didn't get any big bang announcements, either positive or negative. We've taken the budget incredibly positively as it removes the worry.
There is a complete dichotomy between the urban and the rural areas. The rural areas for many years have been given subsidy after subsidy. That stopped with the BJP. Combine that with two slightly below par monsoons and then you have rural growth slowing. But urban growth continues to accelerate and be strong. There have been a number of schemes announced for the rural areas in the budget, but no giveaways as has been the case in the past.
When the markets bounced back in February, India didn't, it has actually been the worst performing in Asia because the local investors were very fearful that the budget would raise capital gains tax which would really hurt them. Now that hasn't happened, people will regain their confidence because global sentiment is better and the oil price remains low.
We have been re-adding to our positions where we have conviction in the mid-cap space in our country specific fund. We have also been adding to India in our Asian fund on a belief that India is the strongest story in emerging markets without a shadow of a doubt.
Fixing the economy, not the market
Citywire + rated Avinash Vazirani, who manages the Jupiter JGF India Select fund thinks the budget will have a positive effect on the economy, especially consumer staples and oil marketing companies. He thinks interest rates could now be cut.
Coming after months of rumours about new initiatives that could penalise taxpayers, the many progressive steps contained in Jaitley’s third union budget will provide a lot of reassurance about the direction of travel for government policy. The fact that the finance minister has focused on ensuring that the fiscal deficit remains the same, despite pressure from higher salaries and pensions across the board, is a good sign and my expectation is that a cut in interest rates is now even more likely.
The main takeaway is that this is an attempt to fix the economy and not the market. The government has signalled that it will continue to work through its key areas of focus, and will let markets take care of themselves. The budget also marks a decisive shift towards progressive taxation, with a focus on rural India and the poor. Biometric IDs will now extend to the food distribution system, cutting red tape and corruption while delivering money and services to those who need it.
There were also key developments in the tax sphere, where India has introduced an ‘equalisation levy of 6% of amount of consideration for specified online transactions received by a non-resident not having a permanent establishment in India’. This is a simple way of framing a tax designed to prevent global internet giants from operating tax-free in India.
Overall I think this is a good budget for our portfolio and is likely to be positive for a number of sectors in which we have core holdings, including consumer staples and oil marketing companies. Rumours circulating in recent weeks about extra taxation for the oil marketing sector have been quashed – if anything the new policies will benefit the sector. Furthermore, given savings from low oil prices, there is no question of any further need to fund energy subsidies until oil reaches $55-$60 per barrel, in my view – a positive for the sector.