Budget 2016: A strong case for interest rates to head southward and boost investment

Nirmal Jain, IIFL | Mumbai | March 02, 2016 10:20 IST

As government’s market borrowings have been capped at Rs 4.2 lakh crore, there is a strong case for interest rates to head southward.

Follow our Chairman Mr Nirmal Jain on Twitter @JainNirmal for his real-time updates and views on policy, economy, markets and more.

The finance minister has stuck to the fiscal discipline and the roadmap of fiscal deficit, pegged at 3.9% of GDP for this year, going down to 3.5% next year. What is more heartening is that underlying assumptions for tax and revenue are realistic too.
 
As government's market borrowings have been capped at Rs 4.2 lakh crore, there is a strong case for interest rates to head southward. This itself will be a boost to private sector sentiment for investment.
 
While it was expected that Budget will have a huge boost for the rural poor and farmers, one can see prudence is focussing on capex such as rural roads, electrification, food processing, irrigation etc.
 
The plan to bring in 28.5 lakh hectares incrementally with an investment of Rs 17,000 crore and investing a total, including states contribution, of Rs 27,000 crore on rural road under PMGSY will be a huge boost to demand with cascading benefits to industrial and services sectors as well.
 
There is a much-needed allocation for healthcare of 'below poverty line' people and provision for 3,000 medical centres dispensing low-cost medicine. The government has demonstrated pragmatism by proposing statutory backing to previous government's initiative AADHAR platform to ensure that benefit reaches the deserving and leakages are avoided.
 
There is a massive increase in resource availability for highways at Rs 70,000 crore (including planned bonds issue of Rs 15,000 crore) as against Rs 40,000 crore last year. The road sector has gathered momentum and this impetus will make it more visible. Besides, removing certain procedural bottlenecks in infra and real estate trusts structure, Public Private Partnership and dispute resolutions will go a long way in encouraging new investment.
 
The total capital expenditure for roads and railways planned in the coming year is over Rs 2 lakh crore. Transport sector investment has a huge multiplier impact on capital formation and growth. There are several provisions to boost investment in affordable housing too.
 
PSU Banks need Rs 3 lakh crore to recapitalise their balance sheets by 2018-19, and allocation of Rs 25,000 crore look paltry and inadequate. There are hints of consolidation, allowing phased privatisation of a few banks besides use of unconventional means such as use of RBI balance sheet etc. One can derive satisfaction from the fact that policy makers understand the gravity of the situation and they will work on a solution.
 
For financial sector, the government plans several reforms including Bankruptcy law, computerisation, boost corporate bonds, list general insurance companies etc. On the flip side, Dividend Distribution Tax increase is not equitable as it is a tax on profit distributed after paying full tax.
 
However, it will hurt only large wealthy shareholders receiving dividend above Rs 10 lakh, one can take it in stride, given imperatives to mobilise resources for the poor.
 
Market heaved a sigh of relief as there has been no change in Long Term Capital Gains Tax for listed equity. In the short term, market will again look for cues from global and emerging market sentiment.
 
The above article was published in The Economic Times on March 02, 2016

Follow our Chairman Mr Nirmal Jain on Twitter @JainNirmal for his real-time updates and views on policy, economy, markets and more.

 

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