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Takeaway: The FY15 budget and out-year fiscal policy guidance are in line with the structural GIP improvement we’ve been calling for; buy the dip(s).

Newsflash to all Keynesians, monetarists, neo-monetarists and any other Ivory Tower economics gangs that I’m not yet familiar with: you don’t have to burn your currency at the stake for “exports” in order to generate economic and financial market prosperity (you actually can’t – at least not on a sustainable basis).

If you haven’t yet learned anything from the 2013-14 UK experience, you’re getting another opportunity to witness what sound monetary and fiscal policy can do for a country in present-day India. Specifically in the UK, real GDP growth accelerated +280bps or +1400% to +3% YoY from EOY ’12 through 1Q14; the FTSE All-Shares Index appreciated +15.2% in conjunction with a +5.3% appreciation in the GBP/USD exchange rate on David Cameron’s austerity and Mark Carney’s regime change at the BOE.

Looking to India, today new finance minister Arun Jaitley introduced the FY15 budget and out-year fiscal policy guidance and both were in line with recent, irrational fears of fiscal consolidation. Specifically, Modi’s new finance chief is maintaining the existing target of 4.1% for the FY15 deficit/GDP ratio – a seven year low – while pledging to reduce that ratio to 3.6% in FY16 and 3% in FY17.

Underneath the hood, both the guidance and commentary were quite hawkish as well:

  • “We can’t spend beyond our needs. We can’t leave debt and liability behind for our future generation.” – Arun Jaitley
  • “We are committed to providing a stable and predictable tax regime which will be investor friendly and spur growth,” said Jaitley. He also stated that he’d decide on a much-needed goods and services tax (GST) by year’s end. That, coupled with his pledge to limit retroactive tax demands on businesses, should actually help increase the nation’s tax take, at the margins, by promoting marginal capital formation and FDI. With respect to promoting the latter, we’re pleased to see that he lifted the FDI limits for the defense and insurance sectors to 49% from 26% currently.
  • Much to the chagrin of gold bulls, Jaitley also left import taxes on gold unchanged after hiking them from 2% to 10% over the past two years, while also mandating that 20% of imports be re-exported. The associated restrictions on gold imports help slash India’s current account deficit by more than half to $32B last fiscal year. The government is expecting a further decline in gold purchases in FY15 to 650 metric tons from 847 metric tons in FY14.
  • Perhaps most importantly, Jaitley also stated that the India’s new fiscal policy roadmap is “only the beginning of a journey” towards reviving India’s downtrodden economy (e.g. India’s latest real GDP growth rate of +4.6% YoY is in the bottom decile of all readings over the trailing ten years). He cautioned investors that it would be “several years” before growth would get back up to the 7-8% figures India had been putting up consistently.

The latter catalyst is a clear signal that the Modi regime is “in it to win it” for the long haul, opting to put the economy on a sustainable growth path rather than trying to jump-start the ailing economy in an inflationary manner – something we’d expect any long-term investor worth his/her shirt to adore. This is in stark contrast to the tactics of the previous administration led by the Monmohan Singh of the Congress Party.

While it will be somewhat difficult for India to meet the FY15 budget guidance given that 46% of the deficit target has been achieved through only the first two months of the fiscal year, we like that Jaitley is not relying on overly-optimistic growth forecasts to get the job done. In fact, he openly criticized the previous finance minister, Panaliappan Chidambaram for assuming pollyannaish revenue growth amid aggressive GDP growth forecasts, while consistently understating and deferring subsidy expenditures, which have grown fivefold over the past 10Y and now account for 16% of total expenditures.

All told, this the kind of structural improvement in India’s GIP fundamentals we’ve been calling for since last OCT and is in line with what Dr. Rajan has been promoting as governor of the RBI. On that front, “Dr. Raj” was out this morning reiterating his EOY ’14 CPI target and his previous guidance that controlling inflation is paramount for Indian growth and that the RBI and new administration are working in conjunction on that task.

Click on the following hyperlinks to review the aforementioned thesis, which was out in front of a +31.4% gain in the WisdomTree India Earnings Fund ETF (EPI) since then. That performance compares to a sample mean of only +3.4% across the 24 country level ETFs we track in the EM space. #Alpha:

As such, we’d expect continued improvement in India’s budget balance and current account balance over the intermediate-to-long term.



Both would be positive for the Indian rupee (and Indian growth via current account financing) – which our FX valuation models see as roughly 6-16% undervalued at current prices.



In five years of writing research notes on India’s budget, this is the first one that has a takeaway that isn’t extremely negative; in fact, it’s overwhelmingly positive. India’s new “management team” is flat-out killing it. We’ve said this before and we’ll say it again: if we could LBO entire countries, India would be our primary acquisition target!

Feel free to ping us with any questions, comments or concerns.



Darius Dale

Associate: Macro Team