The Budget came in the backdrop of weak global environment, pressure of non-performing assets (NPAs) in the Indian banking system and lower nominal gross domestic product (GDP) growth. Finance minister Arun Jaitley honoured his commitment to fiscal discipline and debt market gave a 20-basis point salute and equity markets gave a 1,500-point salute to the Budget. (One basis point is one-hundredth of a percentage point.)
The commitment to fiscal discipline brings multiple benefits. The Reserve Bank of India (RBI) can now cut interest rates further. Inflationary expectations will remain muted, which will allow lower rates to persist for a longer period of time. Global rating agencies can also upgrade India’s rating if we negotiate well with them.
One aspect of fiscal discipline is that the government’s net borrowing programme is lower than last year’s by Rs.15,000 crore, giving more funds for private sector investment. Foreign institutional investors (FIIs) in both debt and equity markets, having been assured, have turned from being sellers to buyers, and are likely to be this way in calendar year 2016. Between 2003 and 2008, the Sensex multiplied seven times as valuations got re-rated on the back of reduction in fiscal deficit. This cycle can be replayed, albeit on a smaller scale, which would provide support while corporate earnings recover.
