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IDFC Mutual Fund

In India after years of high fiscal deficit it has become inevitable to go through a phase of Fiscal consolidation. Though fiscal consolidation will result in lower inflation possibly lower CAD and greater room for monetary easing in the short run it also lead to lower GDP growth. How fast and how sustainably the GDP will grow in the medium term will depend on the quality of fiscal consolidation.

 

The fiscal deficit to GDP ratio came in at 4.8% in FY 14 as widely expected and communicated by the Finance minister. The intent for fiscal consolidation was there with overall restraint in the growth of non plan expenditure however the credibility will be tested with the GDP numbers clocking 4.5% in Q3 FY13 and pending elections. Also fiscal consolidation has not come at the cost of throttling plan expenditure which is imperative for growth of productive assets in the economy. 16% increase in total expenditure contributed by 28% increase in plan expenditure and 10% increase in non plan expenditure is balanced and conducive for a stable growth regime.

 

The flavor of the budget remains socially oriented. Direct cash transfers, increased allocation for food security remained in focus. The stress on vocational training and skill development will improve employability and disposable income in the long term. Some incentives to facilitate infrastructure sector viability and growth also found their due in the budget. We were expecting some reforms on the taxation side but all that is work in progress and no announcements were made which could changes the quality of resource mobilization (higher contribution of taxes to total receipts)

 


Annexure – 1 – Fiscal Aggregates


 

Explanation to Annexure – I


On the fiscal aggregates, the fiscal deficit target for FY14 stands at 4.8% vs. 5.2% In FY13


This is to be achieved through a combination of increased tax receipt (19%) and non tax receipts (increase of 33%). The revenue/ resource mobilization in the long term needs to shift towards higher contribution from tax revenue. Currently nearly 47% of total Receipts is coming from non tax and capital receipts.  The key risk in meeting the revenue receipts emanate from telecom auction (20000 cr) and disinvestment (PSU and Non PSU of 54000 cr)


On the expenditure side, the planned expenditure estimates an increase of 28% and the total expenditure increases by 16% – Key themes were restraint on the subsidy side, and some incremental spending to facilitate infrastructure sector viability and growth.

 

View Going Forward


The net takeaways have been nothing different from the last couple of budgets by the current Government. A lot of direct spending on the social sector – some indirect intervention to channelize money into the investment economy and a little focus on incentivizing financial savings. Profitability is unlikely to be affected significantly. The day does not change materially the events of the rest of the year. The budget is not an event that would trigger out a return to either the investment economy or a revival of growth rates. But it has been an admission that all is not well at a macro level. Under such environments asset market recoveries would at best remain muted.

 

 

Takeaways for Investors:

 

Equity investing is all about a long term disciplined approach to investments. Event like budget just helps formalise and formulate views on trends for polarization of capital and growth in the economy. Overall we continue to invest in companies in line with our philosophy i.e. leaders in their respective space, efficient allocators of capital and having minimum leverage

 
Disclaimer:
 
The Disclosures of opinions/in house views incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. Neither the IDFC Mutual Fund / Board of Trustee/ IDFC Asset Management Co. Pvt. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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Suyash Choudhary

Summary:

 

1. Fiscal deficit for FY 14 pegged at 4.8% in line with the revised roadmap. For FY13, the finance minister has bettered his revised target by keeping deficit to 5.2%

 

2. Net market borrowing pegged at INR 484,000 crores. This is towards the higher side of market expectations. Gross borrowing at INR 629,000 crores. However, this includes INR 50,000 crores which will be borrowed only to buy back bonds maturing later in order to smoothen maturity profile of government debt. Adjusted for that, gross borrowing is at INR 579,000 crores as against INR 558,000 crores in the current financial year


3. Total expenditure growth is pegged at INR 16,65,297 crores representing a rise of 16% from the revised numbers for current financial year. With recent expenditure control focus, the total expenditure growth for the current year is at 10% only.

 

4. Total receipts pegged at INR 11,22,798 crores entailing a 23% growth from revised numbers for this year. To put this in perspective, in the current year total receipts growth will be 15%


 

Assessment:


The Union Budget today delivered on the headline but has somewhat disappointed on the detail. The recent focus on austerity had raised hopes that the budget will focus on controlling total expenditure and thereby create more room for RBI to continue with a monetary stimulus. Indeed, the finance minister had recently been on a massive expenditure control drive which has been showing in month on month expenditure numbers since September. The hope was that the same austerity will get carried forward to the next financial year as well. However, instead the finance minister has pegged a 16% expenditure growth for the next financial year. While the contours of this are better (29% growth in plan expenditure and only 11% in non plan expenditure), fact of the matter still remains that the size of the government’s total expenditure is still staggeringly large.

 

In order to finance this large total expenditure and still maintain the 4.8% fiscal deficit target, the finance minister will have to work hard to achieve his substantial 23% total receipts growth target. Under receipts the finance minister has pegged reasonably aggressive (though perhaps achievable) targets under disinvestments, spectrum sale, and dividend receipts. Tax revenue is pegged to grow at 19% which currently looks reasonable when compared with 18% growth this year. However, this may become difficult as well if economic momentum continues to slow.

 

Overall, it remains to be seen whether RBI will stand impressed about the details behind the 4.8% fiscal deficit target. There is also a good likelihood that market starts to fear  slippages to these targets sometime later during the year.

 

View Going Forward and Portfolio Strategies:


As is known, we have been overweight on government bonds starting August 2012. The rationale was the favorable demand supply mix for government bonds supported by anticipation of rate cuts. Alongside, however, we repeatedly said that the favorable supply equation for government bonds may change once the new borrowing calendar starts from April 2013. In line with this view and communication, we have been reducing government bond exposures in our bond funds from 90% levels earlier  to 35% before the budget. Given the disappointing details of the budget, we have further cut positions on our income and dynamic bond funds to less than 10%.

 

Alongside, we have started going overweight on front end corporate bonds (1 – 5 years). We believe that shorter end rates will rally from April for the following reasons:


1. Incremental credit to deposit ratios will fall with start of lean season on credit between April and September. This will lead to CD rates and front end corporate bond rates falling.

 

2. While system liquidity will still be in deficit mode, the extent of deficit may reduce compared to recent months.

 

3. We would still expect another 25 – 50 bps rate cuts from RBI over the next 6 months

 

Whereas, the government bond curve may stagnate over the next few months on pricing for new supply. However, once the supply premium begins to get priced in, we may look to tactically re-enter government bonds.


Takeaways for Investors:


1. We remain bullish on rates on expectation of slowing growth and further expected rate cuts. However, owing to changing supply-demand dynamics we are shifting portfolio strategy from being overweight government bonds to being overweight front-end corporate bonds. For reasons mentioned above, we believe this strategy is the best placed to gain from market movements over the next few months. There is a reduction in portfolio maturity that will happen as a natural outcome of this shift. However, this reduction does not signal in any way that we have turned bearish on rates.

 

2. Investors should continue allocation to our bond products like Income and Dynamic funds with a 1 year plus investment horizon. These funds, in line with our stated active managed investment philosophy, are already aligning towards front end rates as per our view. Medium term and short term funds are naturally positioned to do well when front end rates fall. Products around 1 year bank CDs (like our Money Manager Fund-Investment plan and the new banking debt fund) are also expected to benefit from the seasonal fall in CD rates starting April

 
 

Disclaimer:
 
The Disclosures of opinions/in house views incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. Neither the IDFC Mutual Fund / Board of Trustee/ IDFC Asset Management Co. Pvt. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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