additional benches for tax dispute resolution and a HLC to regularly interact with trade and industry to ascertain areas where tax laws require clarity. Changes to transfer pricing regulations to simplify the system were also introduced in the budget and the finance minister vowed to further rationalise India’s arcane direct and indirect taxation regime.
Fiscal consolidation targets maintained: Despite a tough macro environment, the government has set a steep fiscal consolidation path, targeting a fiscal deficit of 3% by FY17. While the revenue targets could be optimistic, the government’s intent is in the right direction. Our economists believe that fiscal policy is now in sync with monetary policy and expect a sharp decline in CPI in H2 2014.
The reform path is long and valuations are full: We believe the reform process will be long and windy and the outcomes will have delayed discernible impact on output. Our economists expect GDP growth rate of 5.6%/6.4% in FY15/16, and in that context, we now find the markets expensive—our market-implied growth rate model suggests the markets are currently trading one standard deviation above mean. Hence, our view is that the markets are likely to consolidate near term. Our stock preferences are Coal India, TCS and Axis Bank. Over a longer term (three years), we would take any weakness in the market as an opportunity to increase our exposure to domestic cyclicals.