Expect Significant Political Elements in Budget 2018’
Krishna Memani, CIO, Oppenheimer Funds
Jan 25, 2018 | Source: CNBC TV18
Our expectation is that the Indian Budget would have a more significant political element in0 it than would have been the case one or two years ago. This is because you have an election coming up in a not-too-distant future and things are softening from a political standpoint for the Modi administration.
The government clearly would do more infrastructure spend, support rural initiatives and perhaps try other things. You will see some of that in the Budget. One of the other things that we would be watching very keenly on the budget front is the net outcome from a fiscal standpoint. GST collections have been very modest. Oil prices are higher and hopefully they would not go too far up. That is something that FIIs are very worried about. If the deficit increases meaningfully because of political initiatives and tax collections go down or oil subsidy increases, that will have a reasonable impact on the Indian growth picture from a longer-term perspective.
As far as the Indian markets are concerned related to these Budget considerations, I will make two observations; one, Indian markets are benefiting not because of growth acceleration in India. The Indian economy has actually slowed down. What they are benefiting from is continued flows from foreign investors into emerging markets in general and India happens to be a large emerging market.
Second is the equitisation of Indian savings. Effectively, Indian savers who were focused on putting their money in banks are putting it in equities and that is a longer-term multidecade situation, but the FII flows can turnaround pretty quickly. If the budget is significantly worse, then that will have some implications on foreign flows. It may not undo the rally in the market, but it may take the bloom off the roads a little bit.
What India needs more than anything else to take advantage of its demographic advantage is capital. Anything the government can do to bring in more capital, facilitate capital formation in the Indian economy will be beneficial from a longer-term perspective. Any taxation on that front is a negative from a long-term perspective. Implementing policies that make capital formation easier, capital flows into India easier will pay very rich dividend from a longer-term perspective.
From a capital inflow & capital allocation standpoint, dealing with NPA issues in India is extraordinarily important. The initiative that the government has is a good step forward. The trick in all of this is in execution.
What you do in terms of recapitalization, in terms of writing down bad loans and implementing policies must ensure that this does not end up being a recurring phenomenon for the banking sector. The government has some really good and interesting ideas. They have taken some really bold initiatives and are in the process of implementing a lot of them. So, things are moving forward. The challenge is India has not been coming up with new ideas just very often and has come up with self-inflicted wounds that take away from the momentum that the economy has on its own and things like demonetization. Hopefully, they avoid those mistakes in the future and continue to implement all the new good policies that they have come up with and execute them expeditiously. It would be really a game changer for India’s growth rate in the long term.
Again, the action of the RBI is really going to be reactive as oppose to proactive. Core inflation on a worldwide basis is at a good place. On the other hand, if the Indian government implements policies where deficit is going up, oil prices spike up and as a result inflation picks up in a meaningful way, the RBI would have no choice but to react to that. So, if inflation picks up in India in a meaningful way, it would not be a good outcome for the economy in the long run. Tackling that issue in the near-term will end up being quite important. It really depends on what the government does. If they are more disciplined on the budget front, there is enough slack in the economy and inflation does come down, probably the path for rates remains reasonably stable and India will continue to grow and hopefully grow faster.
If the policy that the government starts going down the path of sheltering consumers from that rise in oil prices and subsidies come back, it will have a very negative impact on the deficit and as a result that will definitely have some negative impact on how international investors perceive India. It will depend on the magnitude of that subsidy and whether the policymakers articulate that there is only a certain amount of subsidy that they are going to provide. But at the end of the day, if oil prices go up, that is not a good situation for India.