India’s budget: it’s not a sprint, it’s a marathon

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India’s budget for the fiscal year to March 2016 (FY16) has successfully managed to balance maintaining fiscal discipline and promoting growth by focusing on infrastructure investment and improving the ease of doing business. It confirms our view that policy actions will be incremental and tactical rather than tectonic, aiming to gradually put India’s economy back on track towards a sustainably higher growth rate.

 

Maintaining fiscal discipline, with some leeway to promote growth

First of all, the government maintained its fiscal deficit target of 4.1% of GDP for FY15, showing its commitment to enforcing fiscal targets. For FY16, the target was cut to 3.9% with an objective of 3% of GDP by FY18, one year later than previously planned.

By doing so, the government aims to balance the need to continue fiscal consolidation and to create leeway to promote growth. It is worth noting that these budget assumptions look better grounded than past assumptions, which makes us more confident that the government can avoid slippage on the targets.

Achieving a higher growth rate is critical for India to ensure its ‘demographic dividend’ – a young population and a low and falling dependency ratio – does not turn into a burden because of insufficient job creation.

A focus on infrastructure investment

To promote growth, the government is focusing on infrastructure investment, financed by the less stringent fiscal deficit target as well as the fall in crude oil prices which should help trim the subsidy burden by 50% to INR 300 billion (USD 4.9 billion).

In total, the government aims to allocate an additional INR 700 billion (USD 11.3 billion) to infrastructure investment in FY16 compared to FY15. It plans to set up a National Investment and Infrastructure Fund (NIIF) with an annual investment of INR 200 billion (USD 3.2 billion). Lastly, it wants to create tax-free infrastructure bonds to fund road, railways and irrigation projects.

Improving ease of doing business, empowering state governments

Also critical to reviving capital expenditure, the government is introducing a ‘plug-and-play’ model, which sets out clear rules for large projects, listing all applicable norms and laws ahead of the bidding process. Companies will not need to continuously ask for permits or clearance as long as they follow the guidance, which should speed up execution and increase the number of projects that get off the ground (and contribute to improving India’s infrastructure). In addition, companies should benefit from a cut in the corporate tax rate from 30% to 25% over the next four years.

Another important step was the decision to transfer more responsibilities to states by increasing their share in tax collections by 9%, in line with the recommendations of the Finance Commission. This marks a paradigm shift in the relationship between the central government and the states, which should promote efficient policy execution at the local level.

Towards a gradual growth recovery

This balanced budget confirms our view that policy actions will be incremental and tactical rather than tectonic. Most importantly, it provides a clear roadmap to build the foundations for a sustainable 7-8% growth in the coming years, which we believe is a positive for long-term investors.

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Paul Milon

Investment Specialist, Indian equities

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