Budget 2017: Government Incentivising Savings Through Financial Assets, Says Leo Puri 

It was more or less in line with what we expected or what we have come to expect since this was the third budget that we have seen of the Modi administration and they have all been fairly ‘workman-like' and they have always been about Bharat as well as India and that's reflected here. Typically, the most spectacular announcements tend to happen before the budget and the budget is used to amplify them. That is how I would describe this budget as well.

I think some of the fiscal hawks might be a little disappointed and would have been hoping for something around 3 percent. But in the context of what we have seen in terms of both global events and demonetisation, maintaining some balance towards growth was the right thing to do and the path that the government has emphasised, remains steady. Looking back at the trend line over 3 years, we are in the fiscal consolidation path and we have not deviated from it. This is not a blow-out. This is on the same glide path. You have chosen a point that may not appeal to the hawks but personally I think it's a good point. I remain convinced of their conviction that we are ultimately a country that is still committed to fiscal probity.

I think the immediate reaction has been positive. Broadly, there are two triggers for this. One is that for the foreign investors, there was a tactical trigger around the clarification on the indirect tax transfer resulting from the confusion around the CBDT circular in December. That has provided some encouragement to FPIs who otherwise were pretty uncertain. The commitment towards FDI and the removal of the FIPB are all positives. For most other participants, the stimulus in effect provided through affordable housing and the multiplier that people are anticipating there, into the entire supply chain, was definitely the big positive of the day. So will that last? I think corporate earnings have been better than feared but worst than what was initially hoped for at the beginning of the year. Now that we have seen a reasonable quarter, the expectation is going to be of a sharp earnings uptick in the next two quarters. So the sustainability of the rally will depend on that. The budget if anything is going to be helpful in that process. Apart from the somewhat encouraging boost to affordable housing, there are elements of stimulus elsewhere. There is some stimulus in the form of the direct tax, however small it may be; there is some stimulus in the way of trying to introduce market-linked mechanisms in agriculture; allowing perishables to be taken out of the APMC; new contract farming laws which will enable contract farming which has been stuck for years which can be a major boost to rural incomes if this were to happen. Buried in this there are small pockets of potential stimulus. Most importantly, there was no bad news, that can often overshadow the good intentions.

The reduction in tax will primarily be a boost to consumption. I don't think it will impact household's views on their savings. But if you look at what preceeded the budget, demonetisation has brought savings out from the shadow economy and into the banking system. Now with further encouragement for things like digitisation, we expect that to stay and continuing restrictions on the use of cash like the Rs 3 lakh limit, the encouragement to BHIM, will encourage flows into financial assets, more driven by demonetisation or a follow through effect of the budget. Budget on its own cannot be a big driver of that. There is another small push in the budget towards financialisation, which is in the capital gains holding period for real estate from three years to two years which is positive in many ways. Along with that is the permission to invest those proceeds, in a broader range of financial instruments. I have to look into details to see how broad is the range of financial instruments. But what we are saying is that if you own a property now, you can liquidate it more quickly, so it's like a nudge to quickly start liquidating real estate inventory. You don't have to wait for three years, you can do it in two years. You also get the encouragement that you can invest it not only in that narrow set of bonds, you might have a different and interesting set of instruments with higher yield opportunities. So that is where the financialisation is, which is another way to encourage a move from the real assets to financial assets. Some of that is going to clearly flow into markets, both debt markets and equity markets. It is not as if all of this will flow into equity, since a lot of people are still seeking the safety of secured yields. But net-net it is helping fuel India's capital appetite and growth.

There is no direct impact as I could see that I could headline and say, here's the neon headline, Let's start spending. If anything, the larger corporates are disappointed that they didn't get the 25 percent corporate tax rate. But mind you, given that the government was going to introduce this only on a revenue neutral basis which is removal of exemptions and substitute that with a 25 percent rate, I am not sure that would have been as big as an impact as they hoped for, psychologically it has disappointed them. As you know, capacity utilisation is also not very high, it's somewhere between 65-70 percent at the moment, so the impetus to start capex is not very high anyway until consumption picks up. So what you have in the budget are some signs that the government will start to lead public investment, which is sort of consistent with what we expect. Revival of capex, let alone animal spirits in the private sector is a little way down the line. My sense is that earnings will be driven through capacity utilisation and the investment led part of the cycle is still some distance away. We have to believe that we are going to get there because you cannot drive economic growth on consumption cycle alone. Investment rates have dropped alarmingly from 38 percent to somewhere between 25-27 percent. So we are on a trend that will be worrying if it didn't start to stabilise and reverse. But I think the confidence will build if you see the quality of public expenditure actually start to shape opportunities for the people around infrastructure which is obviously the hope. Some of this is also in the digital area. The definition of infrastructure is being expanded to include digital infrastructure as well. This is an opportunity which may be able to aviod some of the pitfalls of trying to build roads and bridges and that may attract a new set of entrepreneurs in the infrastructure sector as these definitions start getting expanded and that will certainly see some investments as well. But this is not the big driver in this budget in my view. The revival of private sector capex will have to wait for a little while longer.

You have to hold on to the fact that this government is committed towards broad liberalisation and reform, and a key step in this reform is stepping back from the state. In a fundamental sense there has to be a commitment to roll back. The announcement of the listing of CPSEs is very positive. The point is that now you are going to list and monetise your holdings in public sector enterprises. Obviously they are not saying that they will privatise them but they are monetising. You start to see the effects of good governance even at one level. Listing is a form of divestment too. I think there could be more definition around how this would happen. I continue to think there has to be a commitment towards strategic sales which gets talked about from time to time. This gives me the idea that we are not too far away from conducting a program for strategic disinvestment. But at the moment, there are clear signs that yes, we are on a path where the government is going to start stepping back. The decision to create a single energy company is also very intriguing because this is going to take upstream, downstream and given how vulnerable we are in the energy sector in terms of being a large net importer, this might be the beginning of a more positive approach to managing our energy needs, the efficiency with which we manage the sector and so on. I maybe am being optimistic there but I am looking for more details around that. If this is an attempt to better-manage public assets, that is a good sign because first you have to manage the assets better and then sell them. But if you cannot manage them better, sell them anyway. Let someone else manage them. Maybe a little bit of both is going to happen at this point of time. I do anticipate a step-up in disinvestment through these routes.

Perhaps there could have been a bit more about the banking system and what we intend to do to continue the reforms happening in the banking sector. Maybe that will happen elsewhere since budget isn't the only place where this would happen. But other than the Rs 10,000 crore which was a reference, which is very negligible frankly, the desire to carry forward what was initiated a year and a half ago with the Bank Board Bureau and the thrust towards eventually creating a bank holding company, the performance-based recapitalisation, the consolidation, the enforced clean-up through joint action between the RBI and the government and therefore accelerated resolution of net NPAs. The economic survey raised hopes through talking about creating of PARA entities, that was missing in the FM's speech. He didn't seem to find room for it. That is a gap I would have like to see being filled.