Government Must Boost Private Sector Investment Cycle

The 2018 Union budget would be a keenly watched one - both domestically and globally, given that it is just ahead of general elections slated for 2019. It will be a trade-off between political requirements and prudent economics.  The last few years have seen a slew of major reforms and policy initiatives. Fiscal discipline has been tightened up, credit culture is being mended and the ease of doing business is improving.

The year 2018 is to decide how the government wants to take these elements forward. Fiscal play would be central in this part of the act. We believe that government has ample mediums and avenues through which it can raise capital, monetise its services and unlock value. For this purpose taxation or deficit need not necessarily be the only option. Other than that, there is a need to stimulate the private sector investment cycle.

For bond market participants, fiscal deficit would be the key to determining the direction of rates going forward. The additional borrowing announced by the government for FY 2018 has already led to tightening across the yield curve. Hence, it is pertinent that we do not see much deviation from the set fiscal disciple path. Tolerance for a higher borrowing number (led by a high fiscal deficit) would be very low for bond markets.

From mutual funds stand point, the industry too has a wish list for the budget. Among other things, the wish is to see LTCG period for debt funds to be reduced to 12 months from 36 months. This would ensure parity with listed debentures with respect to long term capital gains tax.

Finally, Budget 2018 would be a confluence of prudent fiscal policies, coupled with stable inflation that would allow for stable interest rates and extended policy rates pause in 2018.

(Lakshmi Iyer is CIO - Debt & Head - Products, Kotak Asset Management.)

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