India Strategy:Rural pitch not backed by spending

Budget geared towards political constituency: Rural was writ large on thebudget document, with the government trying to address issues of ruraldistress and lower job creation. However, at the same time the governmenthas refrained from being profligate, as indicated by a 2% growth in overallrural development spend. The government announced procurement priceswould be at 1.5x of production cost, but this is already in place for wintercrops and would not add meaningfully to agri incomes and hence inflation.

National healthcare cover, which aims to provide Rs0.5mn cover to 100mnfamilies, is another key initiative, but budgetary support of Rs20bn is too little.

Based on current insurance rates, the government needs Rs2.5trn annually(obviously, it would negotiate much better pricing).

Fiscal deficit for FY19 set at 3.3% of GDP, slightly higher but notalarming: The government has set the fiscal deficit target at 3.3% of GDP,higher than our expectation of 3.2% of GDP. The government has indicated anew fiscal deficit reduction roadmap, with the target to reduce fiscal deficit to3% of GDP now pushed to FY21. However, we believe the market can livewith this. The government’s commitment to slow but steady consolidationdoes not push monetary policy into a tight spot. As such, we expect the RBI toremain on a long pause. This should allay some of fears in the bond markets.

However, we expect yields to remain under pressure due to elevated oilprices and inflation trajectory peaking in 1H18.

Fiscal math looks largely credible: The budget math looks credible, with thegovernment targeting to increase spending by 10.1%YoY. Assumptions onthe tax revenue front (direct and indirect taxes) look largely achievable – morefor direct tax collection growth than GST collections, given the uncertaintyaround GST collections until now. The divestment target of Rs800bn, whileachievable, could be slightly ambitious in context of a busy election year.

Infra emerges as only beneficiary– but no big bang splurge: The budgethas focused on certain pockets of spending, such as infrastructure allocationgrowing by 21%YoY (however, actual spending is usually lower than budgetestimates), food subsidies growing by 21%YoY (indicating possibly higherMSPs). However, overall rural development spending has grown by only 3%,and within this spending on NREGA remains flat. Growth in defence spendingis also meagre at 8%.

Worst fears on equities taxation did not materialise: While the market’snervousness around introduction of long-term capital gains (LTCG) tax didcome true, it should have limited adverse impact on account of grandfatheringon profits till 31 January 2018, in our view. Going forward, the LTCG tax isapplicable at 10% on profits over one year, while the short-term gain taxcontinues at 15%.