No Big Bang Reforms, But Jaitley's Budget Gets a Thumbs Up from Markets

The Nifty scaled above the 9,000 mark to a record high on Tuesday. Signs that the blue chip index would make a new high were visible on Saturday, when the Nifty posted its first Budget day gain in four years. Finance Minister Arun Jaitley's Budget was low on big bang reforms, but his focus on reviving growth and the lack of populist measures were taken positively by markets, analysts say.

Here's why Mr Jaitley's Budget has got a thumbs up from investors:

1) Pro-growth: Recognizing the need for capital spending, Mr Jaitley increased government spending on infrastructure by Rs 70,000 crore or 0.5 per cent of GDP. According to Nomura, total public sector capital expenditure (ex-defence) is expected to rise from 2.7 per cent to 3.4 per cent of GDP. Additional funds will provide stimulus to the economy at a time when India's private sector is struggling with falling profitability.

2) Higher deficit, but lower borrowing: FY16 fiscal deficit target at 3.9 per cent of GDP is higher than Street expectations of 3.6 per cent. The delay in achieving medium-term fiscal deficit target of 3 per cent of GDP by one year to FY18 has not been viewed negatively by rating agencies because the government will spend money for planned expenditure and also reduce subsidies by nearly 10 per cent. Its market borrowing for FY16 is likely to be below expectations, easing fears of higher inflation and higher interest rates.

3) Credible numbers: Mr Jaitley has assumed gross tax revenue growth of 15.8 per cent in FY16 to Rs 14.5 lakh crore. According to SBICap Securities, the government is likely to achieve its tax collection target because of the increase in service tax and rationalization of excise taxes. In the previous fiscal year, the government had assumed 19.8 per cent growth in tax revenues, but could achieve just 9.9 per cent growth.

4) Corporate tax cut: Mr Jaitley said corporate tax rate will be brought down from 30 per cent to 25 per cent over the next four years starting FY17. However, many of the current exemptions will be phased out. According to Bank of America Merrill Lynch, lower corporate tax rates will move India closer to its competing countries in Asia and reduce tax disputes and simply tax structures. The cut in corporate tax rates could raise Sensex earnings per share by 5-7 per cent over the next four years, Nomura says.

5) Incentives for foreign investors: Mr Jaitley wooed foreign investors by postponing the dreaded GAAR by two years. He also extended a concessionary rate of 5 per cent for withholding taxes on debt investments by foreign investors by two years. Foreign investors have been the backbone of the rally that has taken Indian stock markets to record highs. India has received a net $51.6 billion in investments into shares and debt since the start of 2014.

What lies ahead?

The Budget was being dubbed as a "make or break" event by some analysts, but despite the absence of big bang reforms, Mr Jaitley's Budget did not disappoint markets. BofAML says its year end Sensex target of 33,000 remains intact. However, it expects markets to be choppy this year and returns to be more back-ended. Nomura maintained its positive view on the market with a December 2015 Sensex target of 33,500.

On Tuesday, the Sensex ended 135 points higher at 29,594; the Nifty closed at 8,996, up 39.50 points. It had earlier made an all-time high of 9,008.40.