The first budget of the Modi government for fiscal 2014-15 was presented by the FM, Arun Jaitley on the 10th of July 2014 was strong on intent to control inflation, fiscal deficit and bring about long term stable economic growth. The government expects the economy at grow at 5.4% to 5.9% in this fiscal and at levels of 7% to 8% in the coming years. Inflation target of 8% and 6% for CPI (Consumer Price Index) as adopted by the RBI will be maintained while fiscal deficit is expected to come down from 4.1% of GDP for this fiscal year to 3.6% and 3% of GDP over the next two fiscal years.
The budget for fiscal 2014-15 did not deviate from the intermin budget presented by the then FM, P.Chidambaram in February 2014. Fiscal deficit is maintained at 4.1% of GDP. The fiscal deficit of Rs 5311 billion is funded by market borrowings of Rs 4610 biliion or 86.7% of fiscal deficit. Gross borrowings including buyback of Rs 5000 crores is projected at Rs 6000 billion. Gross and net borrowings are higher by just around 0.5% from interim budget levels.
There were expectations that the subsidy bill would be brought down as there was a strong note on wasteful expenditure in the economic survey for 2013-14 that was released on the 9th of July. However the subsidy bill was actually higher by Rs 50 billion from Rs 2555 billion budgeted in the interim budget to Rs 2605 billion. Markets will view this as negative but will not react too much as it would expect rationalization on subsidies going forward.
The bond market has reacted positively to the FM’s commitment to keep borrowings in check and ten year bond yield is down 5bps from pre budget levels of 8.73%. Outlook for bonds is positive over the longer term given the FM’s commitment to keep down deficit and inflation. However in the short term, bond yields will react to levels of liquidity in the system and movements in global commodity prices. RBI will maintain policy rates at 8% for this year unless there is a sharp fall in CPI inflation, which is around 8.3% levels as of May 2014.
The Rupee will benefit from an improved BOP (Balance of Payment) position with CAD (Current Account Deficit) down from USD 88.7 billion to USD 32.4 billion in fiscal 2013-14. The budget 2014 addresses the need for FII and FDI flows and has clamed FIIs on tax issues and has increased FDI in defense and insurance sectors from 26% to 49%. Higher portfolio flows is positive for the Rupee.
The Sensex and Nifty are up by over a percent post budget after falling by around three quarter of a percent during the budget as the budget looks to attract portfolio flows, increase infrastructure investments and take up economic growth. On a longer term time frame, outlook for equities is positive as inflation and lower fiscal deficit bring down interest rates in the economy.
The FM had just over a month to prepare the budget for 2014-15 and given the time constraints, there has not been any major announcements except for intent on a strong macro economic framework. Markets will have to be patient for the economy to stabilize and grow and not expect quick returns.