Our equity markets engaged in intense yo-yoing on the budget day but managed to close marginally in the green in the end. Now that the event risk associated with the budget is over, our markets can go back to business as usual. Let us, at the outset, analyse the impact of the Union Budget 2015 on the market sentiment.
NDA Government's first full fledged budget has been hailed as a path breaking budget by a majority of market pundits for it's forward looking statements. The budget appears to be an excellent policy document for long term growth, but at the same time it has failed to clearly spell out the means to achieve the end result. The budget has tried to reverse the composition of spending that had become adverse in recent years as Capex spending as a percentage of GDP fell from 3% to 1% on the one hand and the subsidies more than doubled. This budget has stepped up the allocation by 0.5% of GDP and substantial reduction in subsidies, aided to a large extent by falling crude oil prices. The spending has been largely focused on roads and railways where the multiplier effect may be easily visible. Introduction of new fiscal federalism will shift the focus of greater spending responsibilities to the states.
Some other important policy decisions incorporated in this budget are:
- Creation of a comprehensive bankruptcy code
- Lowering corporate tax rates to 25% over next 4 years and doing away with various exemptions
- Putting off implementation of GAAR for 2 years
- Creating liquidity out of individual gold holdings through 'Gold Bonds'
- Fixing 1st April 2016 for implementation of GST. Rationalisation of Excise duty and service tax are steps in this direction
- Doing away with obnoxious 'Wealth tax' where the cost of administration was very high as compared to its benefits to the govt.
- Work towards creating a universal social security system for the common man
- FMC to be merged with SEBI, for orderly development of various markets
However, the budget has disappointed on the fiscal consolidation front, despite huge saving on oil sector subsidies. Fiscal deficit for the year has been pegged at 3.9% of GDP. To achieve a 8% GDP growth in FY 16 we need a substantial growth in demand side components. There has been no tangible measures to augment household disposable incomes. The demand side push has to come from the Central Govt. supported by various State Govt's.
Our stock markets have been steadily going up in the hope of some 'Big Bang' announcements in the budget (Nifty has rallied about 8% since 1st January 2015). Although the budget does not contain any nasty surprises, it has failed to meet the market expectations in respect of reasonable reduction in Fiscal deficit, Cuts in individual taxation, Steps to boost housing sector, Capitalisation of PSU banks etc. The markets would also view the progress of the Govt. in the Budget session, in its ability to get various important bills passed amidst stiff opposition. The 3rd quarter results have been below expectations, and the chances of a rate cut have diminished further due to the inflationary ramifications of higher excise duty and service tax. Under these circumstances the markets would take cognisance of the ground realities sooner than later, after the initial euphoria subsides. Although the long term trend continues to be up, markets are in for a short term correction which could take the markets down by at least 8-10%, before the next round of rate cuts are announced by RBI.
