Policy rate, public spend by govt hold key for markets

There has been so much of discussion on the FY2016 budget proposals, but many investors missed to notice a few disturbing facts as revealed by the comparison of the budget estimate of FY2015 (presented last year) with the revised estimates of FY2015 (presented in the latest Budget).

The government has managed to retain the revenue deficit and the fiscal deficit (as targeted by the government in the last year budget) in the revised estimates of FY2015 at 2.9% and 4.1% respectively. Apparently it looks like a great achievement on the part of the government as the revenue receipts (the revenues for which there are no liabilities to the government) are estimated to fall short of the original budget estimate by 5.3% and, within the revenue receipts, the tax revenues are estimated to fall short by 7.04% in FY2015. While the FY2015 budget had estimated tax revenues at Rs 9.77 lakh crore, the revised estimate is Rs 69,000 crore less at Rs 9.08 lakh crore.

However, the disturbing fact is that the government was able to manage the projected deficit figures in the revised estimates of FY2015 despite such revenue shortfalls mainly due to a drastic cut in the plan expenditures. By definition, the plan expenditures are incurred largely for either creating or maintenance of productive assets. The plan expenditures are revised downward by 19% to Rs 4.68 lakh crore in the revised budget estimates as against Rs 5.75 lakh crore as projected originally last year in the budget estimates for FY2015 – a cut of Rs 1.07 lakh crore in the total plan outlay! The growth objective has been completely sacrificed for the fiscal prudence! This compromise on investments got reflected in the index of industrial production for the manufacturing segment which has grown at a mere 1.1% yoy during the period April-November 2014.

However, the government has proposed to increase the total capital expenditures to Rs 2.41 lakh crore in the latest budget – about 25% increase over the revised estimate of FY2015. It promises a big hope on growth in FY2016 through acceleration of investments especially in infrastructure space with the help of public sector enterprises (PSEs). The PSEs are expected to increase their capital expenditures by a whopping 34% in FY2016.

Now the onus is on both the central bank and the government. While the RBI is expected to cut the benchmark interest rates substantially to spur the private investments, the government needs to deliver what it has promised on public investments. These two moves would be the next big triggers for the stock markets to create record fresh highs in 2015! Any failure on both fronts would have serious consequences for the industrial economy and the equity markets.