Budget 2018: Key factors that influenced Arun Jaitley's announcements

Budget 2018: Key factors that influenced Arun Jaitley's announcements

The Finance Minister had three key challenges to address before presenting the Union Budget 2018.

The Finance Minister had three key challenges to address before presenting the Union Budget 2018.

Win Rural Hearts - The Gujarat Election results made the government introspect the angst of the rural economy stemming from the feeling of neglect. The Budget Balm for the rural calm.  

Fiscal Consolidation - The fear of fiscal slippage leave very limited head-room to the government on doling out freebies.

Accelerate Growth - The "Acche Din" has taken perhaps much more time than anticipated. The current run-rate hasn't been very impressive.

Current situation - "It is like a cricket team, who in the first 35 overs has scored at below average pace. It has the challenge to score at a much faster pace in the last 15 overs (i.e. - faster GDP Growth, pleasing the rural vote banks) and yet not lose wickets (i.e. - no room for fiscal slippage)". 

The current government advocating "Digital India" used Data Analytics intelligently - full credit for balancing budgetary allocation without much freebies.

The Rural & Farm Sector allocation -
tries to address infrastructure issues, price realisation concerns and improve the living standard. Many a times the price realisation falls short of the cost of production; hence fair price realisation was their biggest issue. MSP of 1.5 times cost of production a welcome move.

The ambiguity of ascertaining the cost of production may be a road-block to effective policy implementation. Higher MSP might fuel food inflation; the government will have to keep a hawk-eye.
Fiscal Deficit - The government breached last year's fiscal deficit target of 3.25% marginally and estimate to close at 3.5%. The forecasted FY 18-19 fiscal deficit looks aggressive at 3.3%.

The government juggled the Personal Income Tax by adding standard deduction and doing away with transport and medical reimbursement allowance, addition of 4% cess makes it "Nil Battey Sannata".

The US and the UK cut their corporate rate. India Inc. was shouting to cut corporate tax rate to 18% (at least 25% as earlier promised) to remain globally competitive. The Corporate Tax Rate was cut for corporate having turnover less than 250 crore. This covered 95% of Indian Companies but left the big corporates high and dry. Bulk of the corporate tax collections comes from the bigger ones. The Finance Minister fulfilled the promise without causing much dent to the fiscal deficit number - a smart move indeed.  

Tax on Long Term Capital Gains will add to tax revenue.

Few things that could derail the fiscal train are MSP ambiguity - the actual revenue impact, the health insurance of Rupees 5 Lakh for 10 Crore families covering 50 Crore people and an optimistic tax collection numbers.

The GDP Growth factors growth in 4 areas -

  1. Consumption - The Indian population was hoping for some tax sops to battle the rising cost of living. The subdued corporate earnings will see limited wage increment. Higher MSP is the only hope for increased rural consumption. Long Tax Gains tax will affect income marginally negatively impacting consumption.
  2. Private Sector Investments - Companies sitting on higher capacities will have limited investment to increase capacities. Increasing interest rates will be a dampener, hence keeping a hawk-eye on inflation & fiscal deficit will be very important.
  3. Government Investments - allocated 10% of the Budget Estimates towards Capital Expenditure is a big positive.
  4. Net Export (Export minus Import) - Increasing Oil Prices will affect fiscal deficit, shoot inflation, and negatively impact interest rates. This will not only impact Net Export earnings but will also impact domestic businesses as well.
We need to watch how the government bats in the coming years accelerating the run-rate and yet not losing the wickets. Further adding that the favourable pitch (lower crude oil prices, lower inflation, and benign interest rates) will turn a little hostile (higher crude oil prices, little room for any interest rate cut and expected increase in Inflation).

What should you do with your investments?

Equity Investments - Long Term Capital Gains is only an excuse for the equity market correction. The equity market is trading at a high valuation level with market anticipating the corporate earnings to catch up. The rate of earnings growth hasn't been very encouraging, yet the bulls are riding on hope and excess liquidity (money) chasing the market. The head-winds of increased crude oil prices, already increased interest rates and if earnings don't grow as anticipated could make the journey turbulent, so fasten your seat-belt and be cautious.

Continue SIP in all market conditions, keep some money to invest on corrections.

Fixed Income -
Last year the sudden and gradual increase in bond yields took many by surprise. There could be a marginal relief rally of 25 basis points thereabout but don't expect this to ease further. Will prefer short term bonds funds and credit funds at this time Retired person can now allocate approximately 7 lakhs and take home the returns tax-free.

The writer has spent over twenty years in the financial service industry - roles encompassing Investment Banking, Investment Advisory & Mutual Funds. (Views are his own)