Monday, February 29, 2016

Jai Jawan, Jai Kisan

Prime Minister Lal Bahadur Shastri coined the phrase 'Jai Jawan, Jai Kisan' in 1965, and it became a rallying call for a poor and struggling nation, reeling under a shortage of food grains, and one that had just repelled an attack by Pakistan. Fifty years later, the BJP government has adopted the sentiment, if not the words.
By adopting OROP (One Rank, One Pension), and lionizing one of the soldiers who was killed by elements on Siachen, the Modi government has been in "Jai Jawan" mode for several weeks now. Today, Mr. Jaitley's 3rd budget has added "Jai Kisan" to this stance. The NDA government is now fully transformed to UPA3!
A plethora of new schemes for agriculture and farm welfare were announced. I am clearly sceptical of their value, for 3 reasons. The first is structural — the most crying need for rural areas is to get people off the land, and into jobs in service and manufacturing sectors; this will only happen if urban growth is promoted, not rural schemes. The other two are the bane of government schemes — poor design and implementation; and massive financial leakages. Prime Minister Modi repeatedly claims that he has eliminated large scale corruption in the central government, and I will take him at his word. Corruption at the district, tehsil and panchayat level is quite another matter.
The additional resources for these schemes will come from — a trebling of tax on short-term trading on equity markets (STT on F&O segments); a hike in the Income Tax surcharge on those with incomes over 1 crore, from 12% to 15%; and a 10% tax on dividends for those receiving more than Rs 10 lakh in dividends. "Soak the rich" is standard for those seeking to deepen the honey pot, and the billionaires on TV this morning seemed relieved that the sponge was not applied too vigorously.
A sense of relief was the dominant reaction to this Budget. Two big concerns had built up over the last couple of weeks:
  • The first was that Finance Minister Arun Jaitley would abandon, or stray from, the path to fiscal consolidation. This path required him to reduce the fiscal deficit for the coming financial year (FY17) to 3.5%. With the difficult circumstances in the world economy, and the professed need to stimulate growth, it was felt that this budget might postpone that attempt. Today, the FM underlined that this budget will stick to the target of 3.5%.
  • The second was that long-term capital gains tax (LTCG) on shares would be reintroduced. This concern was so widely aired a couple of weeks ago that it had the air of a trial balloon. The market tanked sharply. When the Budget had no word of it, the sense of relief was palpable. In retrospect, the LTCG rumor could have been a trial balloon that didn't fly; or, it may have been spin-doctoring, designed for this very sense of relief.
Our bond markets had the most reason to celebrate, as Jaitley clearly signalled that he planned to borrow less in the coming year. Bond yields celebrated by dropping 10-12 bps (0.10 - 0.12%) during the day. In itself, this is not a major move, but it could signal a shift, especially if the RBI governor follows through with a cut in interest rates.
Raghuram Rajan has repeatedly asserted that fiscal consolidation is a necessary pre-condition to further lowering of bank rates. His back-room boys must be looking at the budget numbers to ascertain how credible Jaitley's numbers are — they are a lot better equipped to do so than I! At first glance, though, I do find the projections of a 19.5% increase in indirect taxes, and a 25% in service tax, somewhat optimistic. If Mr. Rajan seems convinced, though, and announces a rate cut, it will have a dual impact on our markets. It would give a stamp of credibility to the budget estimates. And it would make it easier to repair balance sheets, of both borrowers and lenders.
The health of our lending institutions, public sector banks particularly, has been of mounting concern. Mr. Jaitley has earmarked 25,000 crore for the purpose. It's probably not enough, but he also indicated that he would raise funds as required.
From the perspective of markets, the Budget day has passed without too much damage, the most one could wish for. The global scenario is not very encouraging though, and trouble in China looks like it will continue. For many money managers, India and China get clubbed in the same Emerging Markets (EM) basket, so foreign withdrawals could keep our markets weak. That's of unknown strength and duration, so I don't think about it too much. Back to the hard work of finding under-priced stocks with low risk!

This quick review of the budget for FY 2017 was written for Outlook, and published here:

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