By Adrian Lim, Senior Investment Manager – Equities and Leong Lin-Jing, Investment Manager – Fixed Income at Aberdeen Asset Management
Under the flamboyant Narendra Modi, Indian government initiatives tend to be well-hyped. Earlier this week it was the turn of his finance minister, Arun Jaitley, to deliver the annual budget.
In the end there was a sense of anti-climax.
Mr Jaitley was sensible. He has to balance the needs of spending to support growth and reform while reassuring investors that the government remains committed to deficit goals. So spending is up, but still in check.
This is positive for fixed income markets as it keeps hopes of interest rate cuts on course. We expect another 25 basis point cut when the central bank next meets in April, although a move could come even sooner.
For equities, the news was more muted. There was no trimming of corporate tax and silence on the goods and services tax (GST) – a pillar of Modi’s reform agenda and critical if the government is to diversify and boost revenues.
With the opposition having stalled such reforms and state elections coming soon, this was a disappointment but not a huge surprise.
With half an eye on politics, the budget’s focus was on the rural sector. A fat part of the $289bn in projected spending will go on rural infrastructure, agriculture and social programmes. More will be doled out via direct benefit transfers that will, for example, help farmers buy fertilizer.
In view of India’s dire transport bottlenecks, spending on roads and railways also remains a priority. Some artful shifting of planned capital expenditure to so-called ‘public sector undertakings’ – which are off the government’s balance sheet – will keep down headline costs.