The FM, Arun Jaitley presented a budget for fiscal 2014-15, that has shown a growth in total expenditure of 12.9% and growth in total revenues of 17.9% over fiscal 2013-14 numbers. Fiscal deficit in absolute terms is higher by 4.5% while in relative terms to GDP is down to 4.1% from 4.5%. Net market borrowing is lower by 1.5% while gross borrowing including buybacks of Rs 500 billion is higher by 6.6%.
The FM has not taken any bold decisions on reduction of subsidies that is higher by 2.4%. Tax revenues are projected to grow by 19.8% while non tax tax revenues are projected to grow by 10%. There are no major tax reforms with tax to GDP ratio is kept at around 10% and is expected to grow marginally to 11.6% over the next two years. GST (Goods and Services Tax) and DTC (Direct Tax Code) are likely to be pushed through in the next one year.
The Sensex and Nifty gave up all gains post budget to close negative while the ten year benchmark bond, the 8.83% 2023 bond rose 10bps from lows seen during the budget speech. The INR closed down post budget at Rs 60.17 against the USD, a fall of 0.6%.
Given that the budget 2014 has not delivered any great policy moves apart from increasing FDI limit from 26% to 49% in insurance and defense, markets have reacted negatively to the budget. Is the honeymoon over for markets that have trended to record highs for Sensex, Nifty and taken down bond yields by 30bps and strengthened the INR by over 3% against the USD post the election of Modi as the PM?
The economy cannot be set right in one budget and with GDP growth down from over 8% levels to below 5% levels since 2010-11 and inflation trending at 9.5% levels, corrective action is required in the form of RBI keeping a lid on rates and liquidity and government being cautious on spending. Sensex and Nifty may have overrun itself in the short term but outlook is positive over the longer term when the economy is expected to stabilize and grow.
Bond markets are grappling with everyday issues of bond supply of Rs 150 billion weekly and tight system liquidity. The market has to gain confidence to position for the longer term and that will take time. A falling trend in inflation and improved liquidity conditions would lift bond market sentiments higher.
The INR would look at issues such as the Fed stopping bond purchases and raising interest rates given strong job numbers that saw unemployment rate at six year lows of 6.1% for June 2014. Fed rate hikes are USD positive but the INR has rate differentials and global search for yields going for it. The iNR will stabilize at current levels before looking to strengthen on capital flows.