Budget 2015: Does Modi government mean business? - Livemint

Prime Minister Narendra Modi. Photo: Indranil Bhoumik/Mint

The next three days will shape the short-term future of the stock market, have a bearing on investor and consumer confidence, and provide another opportunity for just about anyone to make up their mind on the Narendra Modi -led National Democratic Alliance (NDA) government.

The business end of the ongoing budget session of Parliament starts on Thursday with railway minister Suresh Prabhu presenting the rail budget. On Friday, the government will release the Economic Survey, reflecting its thinking on the state of the economy. And on Saturday, finance minister Arun Jaitley will present his government’s first full-year budget.

The stock markets have begun the week nervously. After running up smartly between 9 and 19 February, the BSE’s benchmark Sensex index, which rose 2.59% in this period to 29,462.27 points, dipped to 29,231.41 points on Friday, closed Monday even lower at just under 29,000 points, and remained pretty much flat on Tuesday and Wednesday.

Expectations are running high. And the wish list is long.

Analysts (and credit rating agencies) would like to see Jaitley focus on fiscal consolidation. Investors, domestic and foreign, would like to see him spell out a stable tax regime as well as reassure them that the tax department will not exhibit the same trigger-happiness it has done in raising demands in recent years. Industry would like the government to prime the pump to kick-start the investment cycle. And the man on the street would, no doubt, prefer to pay a little less tax than he is doing now.

This is pretty much “India’s chance to fly”, The Economist said on its cover last week. “A budget next week must be bold enough to turn a cyclical recovery into a sustained boom.”

“Expectations are high that the forthcoming FY15/16 budget would be ambitious and reform-oriented, and be a development roadmap for the coming years,” Deutsche Bank economists Taimur Baig and Kaushik Das wrote in a note.

Indeed, investors are already beginning to see India as the great hope, the brightest star in the BRICS (Brazil, Russia, India, China, South Africa) grouping. “I personally have a problem in seeing any risks at all (to the India story),” investment guru Jim Walker of Asianomics said in an interview on 24 February.

Yet, the earnings of most firms in the December quarter missed Street estimates—as much a reflection of the over-optimistic expectations of analysts as poor demand.

A Mint analysis of 315 of BSE-500 companies that have announced their fiscal third-quarter earnings, and for which comparable data is available for at least 25 quarters, showed that aggregate net sales rose at a mere 0.25% from a year ago, the slowest pace since the quarter ended March 2010.

Aggregate net profit for this sample dropped 4.65%—the worst showing since the quarter ended March 2013.

And last week, Deepak Parekh , the chairman of Housing Development Finance Corp. Ltd who is widely seen as an elder statesman of the business community, said that despite all the optimism, there isn’t much to show for it.

“I think there is still a lot of optimism among the people of the country and among the industrialists and entrepreneurs that the Modi government will be good for business, for progress, for reducing corruption. They think this government means business on all these fronts,” Parekh said, and then added: “However, after nine months, there is a little bit of impatience creeping in as to why no changes are happening and why this is taking so long having effect on the ground. The optimism is there, but it is not translating into revenues. Any industry you see, when there is a lot of optimism, the growth should be faster.”

In the nine months since it has come to power, the NDA has said all the right things, sent out the right signals to investors by not pursuing appeals in some tax cases, launched an ambitious “Make in India” campaign to boost manufacturing, sought to make it easier to do business in India by moving some part of the approval process online, and tweaked some of the country’s suffocating labour laws.

It has also used its executive powers to address issues related to land acquisition and foreign direct investment in insurance.

However, it still has to figure out a way of getting its legislative agenda through the Upper House of Parliament where it is in a significant minority, and reviving growth—perhaps by increasing investments by the government and state-owned companies because many private companies are still laden with debt from their previous round of investments that are yet to pay off.

“..the CLSA India equity universe, now trading at 15.9x 12-month forward earnings, is not at ludicrous valuations if it is assumed that a private sector-led investment cycle will resume in the next two years,” Christopher Wood , managing director of CLSA Ltd , said in his newsletter titled Greed & Fear on 22 January

“Meanwhile, the fact that such an investment cycle is not necessarily imminent may induce the Modi government to allow more fiscal stimulus in the forthcoming budget than previously anticipated, in terms of the currently proposed FY16 (fiscal year 2016) fiscal deficit of 3.6% of GDP (down from an estimated 4.1% in FY15),” said Wood.

“Still if there is more stimulus it will be investment-driven, not subsidy driven; though hopefully the Modi government will remain relatively conservative on the fiscal front given the excesses of the previous government, which ran an average deficit of 5.3% of GDP in its last five years in government,” Wood added.

The tabling of the report of the 14th Finance Commission on Tuesday, which gave states a higher share of tax revenue, showed that the NDA was willing to walk the talk when it came to what it calls “cooperative federalism”.

Thursday’s rail budget and, more importantly, Saturday’s budget, will show whether it is willing to do the same with its articulated pro-growth, pro-investment economic policies.

Ami Shah in Mumbai contributed to this story.