Cristian Maggio, Head of Emerging Markets Strategy at TDS, notes that the Indian government has confirmed the 3.5% of GDP deficit target for FY2016/17, after 3.9% in 2015/16.
Key Quotes
• “This is a very good starting point as markets speculated that the government would resort to pausing fiscal consolidation.
• To incorporate the forthcoming revision of public salaries and pensions based on the Seventh Pay Commission recommendations and OROP, the government will raise ‘plan’ expenditure by 15.3% Y/Y to 3.7% of GDP.
• It has also decided to increase ‘non-plan’ pensions by 28.9% in 2016/17, which leaves less resources for investment. Consequently, capital spending will expand at a slower 3.9% Y/Y pace, falling to 1.6% of GDP from 1.8%.
• The composition of the budget is satisfactory where the crucial reduction of subsidies is projected in the coming years. However, we are unimpressed with the decision to sacrifice capital spending for higher wages/pensions, alt-hough these increases are lower than what we feared.
• The ruling coalition is trying to regain the lost political clout ahead of important state elections this year and next. A stronger BJP would be positive for big ticket reforms.
• The single biggest concern we have is related to NPAs of banks and liquidity needed for capital adequacy. We think the funds earmarked to recapitalize public banks remain largely insufficient and several institutions may require deeper privatization or significantly more capital injections.
• Against these risks, the government debt trajectory doesn’t seem to pose any particular risk. In a low or declining rate environment, the cost to service debt should continue to diminish both for the government and the private sector.
• India remains well insulated to external shocks given its small external debt, large forex reserve buffers and small foreign ownership of the domestic fixed income market.
• Our overall assessment of the budget is positive, although several macro assumptions may be somewhat hard to materialize from FY2016/17 onwards. Slower growth than expected would see a wider deficit than 3.5% of GDP. All in all, we give a thumbs up to the FY2016/17 budget.”
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