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'Ticks all the right boxes': Experts give their verdict on India's new budget

Key Points
  • The budget, presented by India's newly-appointed Finance Minister Nirmala Sitharaman, eases foreign investment restrictions and states that the country is set to become a $3 trillion economy in the current financial year — becoming a $5 trillion economy in the next few years.
  • This budget is due to run until March 31, 2020.
  • The new budget looks to add 700 billion Indian rupees ($10 billion) of fresh capital into public sector banks, in order to accelerate the pace of lending, and deal with the liquidity crunch following the default of lending firm IL&FS last year.
Nirmala Sitharaman, India's finance minister, center, Anurag Thakur, India's finance and corporate affairs minister, second left, other members of the finance ministry exit the North Block of the Central Secretariat building in New Delhi, India, on Friday, July 5, 2019. India's government plans to narrow its budget deficit target and proposed a number of measures to spur foreign investment, including selling its first global bond, to revive economic growth. Photographer: T. Narayan/Bloomberg via Getty Images
Bloomberg | Bloomberg | Getty Images

India's latest budget proposals have received a mixed response from market watchers, with one noting that the government could find achieving its fiscal plans "challenging."

The budget, presented by India's newly-appointed Finance Minister Nirmala Sitharaman, eases foreign investment restrictions and states that the country is set to become a $3 trillion economy in the current financial year — becoming a $5 trillion economy in the next few years. With a heavy focus on infrastructure, it aims to upgrade nearly 78,000 miles of roads over the next five years at a cost of $11.6 billion.

The "budget makes all the right noises in terms of reforms and infra spending, but it's about how this is delivered and how quickly," Marc Ostwald, a strategist at ADM Investor Services, told CNBC via email Friday.

Ostwald explained that the banking sector reforms needed to be implemented quickly, adding that India's "monetary transmission mechanism is still misfiring, and needs to work much better if government spending is to filter down into more private sector investment."

This budget is due to run until March 31, 2020. Earlier in February, before India headed to the polls, Prime Minister Narendra Modi's government presented an interim budget that channeled money to farmers in order to bolster rural job creation.

Infusing fresh capital

The new budget looks to add 700 billion Indian rupees ($10 billion) of fresh capital into public sector banks, in order to accelerate the pace of lending, and deal with the liquidity crunch following the default of lending firm IL&FS last year. Shares of state-owned banks jumped on the news Friday, with the Nifty PSU index, the index for state-owned banks, initially trading 1% higher but pared gains to close 0.3% higher.

The overall Indian stock market finished lower after the budget announcement Friday. The benchmark had earlier opened higher with the Sensex reclaiming its 40,000-point level. But sovereign bonds also rallied after the announcement that India will strengthen its corporate bond market and look to explore offshore borrowing. "India's sovereign debt-to-GDP ratio is one of the lowest, and there is lot of cheap liquidity available in international markets," Sitharaman said in her speech.

"The sovereign bond issuance also seems well timed with global interest rates at record lows. Not only will this help the government's books, but also ease pressure on the domestic bond market and help to keep local bond yields soft," Priyanka Kishor, head of India and South East Asia economics at Oxford Economics, told CNBC via email on Friday.

The yield on the benchmark 10-year bond dropped 13 basis points to trade at 6.62%. Meanwhile. the was up nearly 0.9 percent higher to hit its highest level since May 24.

"We believe the budget ticks all the right boxes on improving the investment climate and reforms. As this is the first budget of the new government, this was a platform to signal the medium-term priority," Nomura's Sonal Varma and Aurodeep Nandi said in a post-budget research note on Friday.

Prime Minister of India Narendra Modi waves his hand after casting his vote during the presidential election, at the Parliament House on July 17, 2017 in New Delhi, India.
Sonu Mehta | Hindustan Times | Getty Images

A lower fiscal deficit target?

The government also lowered its fiscal deficit target to 3.3% from its earlier target of 3.4% — a move that is tied to weak economic growth and slower-than-expected tax revenue collections.

"The lowering of the fiscal deficit target despite fiscal headwinds from a lower revenue base in (full-year 2019) and slacking growth are also important signals that the government is focused on improving macro fundamentals and a medium-term positive," the Nomura economists said.

However, ratings agency Moody's cautioned that this could be very "challenging" for India.

"India's government announced a lower fiscal deficit target for fiscal 2020, while maintaining its support for growth and incomes. Achieving these competing goals will be very challenging. We expect the economy to grow relatively slowly, despite the government's income support measures," Moody's said in a note.

Meanwhile, another expert has said that the budget was a surprise for many.

Leong Lin-Jing, Asian fixed income investment manager at Aberdeen Standard Investments, said in a note Friday that "India's budget threw up plenty of surprises, most of which will be positive for the country and its bond and FX markets in the long term. This is a government very much taking advantage of the majority it secured at this year's general election to push through essential structural reforms."

In May this year, Modi won a landslide re-election victory in India, with his Hindu nationalist Bharatiya Janata Party securing a commanding parliamentary majority in the largest democratic exercise in history.

—CNBC's Saheli Roy Chaudhary and Tanvir Gill contributed to this report.