India On A Course To Healthy Recovery
With a credible budget & rate cut from the Reserve Bank of India (RBI), there is a reassurance that we have started out firmly on the road to India’s recovery. The Reserve Bank of India has come up with a pleasant surprise of a 25-basis-point Repo Rate cut. (Source: RBI) Inflation is well within the RBI’s target and the fiscal consolidation by the Government has spurred the RBI to act decisively in cutting
interest rates. The sum total is a 50-basis-point interest-rate cut since the start of the year. It signals the end of a slowdown and possibly the beginning of a sturdy revival.
The benefits of a rate cut will take time to trickle down into the grassroots of the economy as industry and consumers are still holding back. But the new rate can bring back corporate bodies and industry to the expansion drawing board.
Plans to kick-start projects that have been stuck because of higher financing costs will be re-considered with renewed enthusiasm. Industry could begin to look at fresh expansion plans once the foundation of recovery has been laid. And before long, in
next 3-5 years, we could see real expansion and profit growth taking place.
As for the budget, given all the limitations of the tight fiscal constraints, the Finance Minister managed to present a credible budget that seeks to nudge industry towards more activity and revive capital expenditure through greater spending on infrastructure.
The budget is credible because the revenue targets set appear achievable. A fiscal deficit of 3.9 percent of GDP for FY16 looks achievable – and is realistic. In the past, pressures on the fiscal deficit had given rise to substantial delays in government
payments; this tended to crimp the Indian economy. Once the payment cycle is streamlined, it can create a virtuous circle for the economy.
On the whole, the government is adhering to a fiscally-prudent road-map, over the medium term too, although it has postponed the deficit target by a year. Now, the revised fiscal deficit is 3 percent of Gross Domestic Product (GDP) by FY18. This is
favourable, and may help the government do that little more that is needed toward reviving the capital expenditure and investment cycles.
It is nice to see that the government did not unleash any big-bang reforms that many were expecting, since it was the first full-year budget of the new government. Given the low tax-to-GDP ratio and high revenue deficit, there is hardly any room to lower taxes.
Nevertheless, the government has charted out a road toward fiscal prudence. It said that the corporate tax rate would be bought down to 25 percent in the course of time. This could render Indian companies more competitive in the domestic market. Individuals have got tax breaks in crucial and must-have segments such as health care and pensions. The desired tax breaks could help individuals focus on these segments and invest for their good health as well as their retirement. A mechanism of
monetizing India’s huge gold assets has potential to turn the asset into a productive one. All this could drive the majority of factors that go into India recovery.
However, we are awaiting a revival in the investment cycle. The government has earmarked Rs. 70,000 crore for capital expenditure, which is not really substantial though clearly a good start given the current economic situation. The bulk of that
expenditure is toward roads and other infrastructure. The capital expenditure is targeted at reviving economic activity and job growth.
This is one of the better ways to kick-start and sustain a long-term Indian economic recovery. Once the investment cycle picks up (though not in the near term), the private sector may step in and invest in fresh capacities and expansion. This could further boost the India recovery.
Segments such as national highways and rural roads have been supported through greater budgetary allocation. And they could drive growth for a host of raw materials such as cement, steel, other building materials, paints, etc. The banking sector could see cascading benefits due to an increase in credit for new projects and expansions.
Among the notable things in the budget, the Alternative Investment Fund category has received the benefit of pass through of taxes. This could be a good model for raising
resources.
Real Estate Investment Trusts (REITs) have received a fillip through tax breaks. Again, this could be a valuable source of capital for the commercial real-estate sector. The Goods and Services Tax (GST) will be introduced in April 2016, allowing the
free movement of goods and services, and aiding in the India recovery.
The budget was billed as a make-or-break one, but it was a neither. It was a credible one, which laid emphasis on gradual improvements in the investment cycle. If all goes well, this budget is more than likely to pave the Indian way to a healthy recovery.
Investors still sitting on the fence, waiting for the major events to pass, could start making fresh investments in financial assets and switch from physical assets. Fixed income still looks good to invest, though interest rates have already come off a little.
Equity assets seem to be placed for the long haul of three to five years as the investment cycle picks up.
Happy Investing
With a credible budget & rate cut from the Reserve Bank of India (RBI), there is a reassurance that we have started out firmly on the road to India’s recovery. The Reserve Bank of India has come up with a pleasant surprise of a 25-basis-point Repo Rate cut. (Source: RBI) Inflation is well within the RBI’s target and the fiscal consolidation by the Government has spurred the RBI to act decisively in cutting
interest rates. The sum total is a 50-basis-point interest-rate cut since the start of the year. It signals the end of a slowdown and possibly the beginning of a sturdy revival.
The benefits of a rate cut will take time to trickle down into the grassroots of the economy as industry and consumers are still holding back. But the new rate can bring back corporate bodies and industry to the expansion drawing board.
Plans to kick-start projects that have been stuck because of higher financing costs will be re-considered with renewed enthusiasm. Industry could begin to look at fresh expansion plans once the foundation of recovery has been laid. And before long, in
next 3-5 years, we could see real expansion and profit growth taking place.
As for the budget, given all the limitations of the tight fiscal constraints, the Finance Minister managed to present a credible budget that seeks to nudge industry towards more activity and revive capital expenditure through greater spending on infrastructure.
The budget is credible because the revenue targets set appear achievable. A fiscal deficit of 3.9 percent of GDP for FY16 looks achievable – and is realistic. In the past, pressures on the fiscal deficit had given rise to substantial delays in government
payments; this tended to crimp the Indian economy. Once the payment cycle is streamlined, it can create a virtuous circle for the economy.
On the whole, the government is adhering to a fiscally-prudent road-map, over the medium term too, although it has postponed the deficit target by a year. Now, the revised fiscal deficit is 3 percent of Gross Domestic Product (GDP) by FY18. This is
favourable, and may help the government do that little more that is needed toward reviving the capital expenditure and investment cycles.
It is nice to see that the government did not unleash any big-bang reforms that many were expecting, since it was the first full-year budget of the new government. Given the low tax-to-GDP ratio and high revenue deficit, there is hardly any room to lower taxes.
Nevertheless, the government has charted out a road toward fiscal prudence. It said that the corporate tax rate would be bought down to 25 percent in the course of time. This could render Indian companies more competitive in the domestic market. Individuals have got tax breaks in crucial and must-have segments such as health care and pensions. The desired tax breaks could help individuals focus on these segments and invest for their good health as well as their retirement. A mechanism of
monetizing India’s huge gold assets has potential to turn the asset into a productive one. All this could drive the majority of factors that go into India recovery.
However, we are awaiting a revival in the investment cycle. The government has earmarked Rs. 70,000 crore for capital expenditure, which is not really substantial though clearly a good start given the current economic situation. The bulk of that
expenditure is toward roads and other infrastructure. The capital expenditure is targeted at reviving economic activity and job growth.
This is one of the better ways to kick-start and sustain a long-term Indian economic recovery. Once the investment cycle picks up (though not in the near term), the private sector may step in and invest in fresh capacities and expansion. This could further boost the India recovery.
Segments such as national highways and rural roads have been supported through greater budgetary allocation. And they could drive growth for a host of raw materials such as cement, steel, other building materials, paints, etc. The banking sector could see cascading benefits due to an increase in credit for new projects and expansions.
Among the notable things in the budget, the Alternative Investment Fund category has received the benefit of pass through of taxes. This could be a good model for raising
resources.
Real Estate Investment Trusts (REITs) have received a fillip through tax breaks. Again, this could be a valuable source of capital for the commercial real-estate sector. The Goods and Services Tax (GST) will be introduced in April 2016, allowing the
free movement of goods and services, and aiding in the India recovery.
The budget was billed as a make-or-break one, but it was a neither. It was a credible one, which laid emphasis on gradual improvements in the investment cycle. If all goes well, this budget is more than likely to pave the Indian way to a healthy recovery.
Investors still sitting on the fence, waiting for the major events to pass, could start making fresh investments in financial assets and switch from physical assets. Fixed income still looks good to invest, though interest rates have already come off a little.
Equity assets seem to be placed for the long haul of three to five years as the investment cycle picks up.
Happy Investing
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