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India's budget shows positive signs

Following the announcment of the first budget under India's new Prime Minister, Narendra Modi, Craig Botham, Emerging Market Economist for Schroders, comments on its implications for India's economy and markets…

On balance, India’s Finance Minister, Arun Jaitley, delivered a positive budget speech yesterday. Expectations were extremely elevated however, and markets were somewhat disappointed. Nonetheless, we think there is much to be constructive about in what was laid out.

The government’s commitment to the Goods and Services Tax was reiterated, with the aim of providing a solution this year.  As we have said before, this is a crucial part of the fiscal picture for India. Furthermore, the finance minister said the government would target a fiscal deficit of 4.1% this year. This is also welcome, but we are more cautious on the underlying assumptions.  Despite no change in GDP growth predictions, revenue growth of 15.5% is now projected, versus the 13.4% that was forecast at the interim budget six months ago.  Meanwhile, spending on subsidies is budgeted to fall by 0.3% of GDP, but there is no detail on how this will be achieved. Our concern here would be that if projections are not met, the deficit will be achieved through cuts to capital expenditure, as has often been the case in India.

However, the budget included a number of commitments to increase infrastructure spending and address bottlenecks in roads and ports, coal and mining. Again, details are sketchy but given Prime Minister Modi’s record of dealing with red tape in Gujarat, we feel cautiously optimistic that promises to expeditiously resolve bureaucratic impasses can be met.  Furthermore, foreign direct investment caps were raised to 49% in both the insurance and defence sectors, another encouraging step for an economy in dire need of investment. On a more granular level, we also take heart from measures to develop a bankruptcy framework for small and medium enterprises (SMEs) – the World Bank currently ranks India 121st out of 189 countries for bankruptcy resolution – as well as plans to incentivise lending for long-term infrastructure projects and streamline industrial corridor projects.

One measure which seems set to disappoint is the stance on retrospective taxation. Though Finance Minister Jaitley said the government would try to limit retrospective tax arrangements, he did not rule them out. This provides limited comfort to foreign corporates looking to invest.

India’s economy was never going to be reformed and revived by one budget alone, and we are encouraged that policy is going in the right direction. We hope now that Prime Minister Modi proves as adept at implementation on a national level as he did in Gujarat.

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