OBJECTIVE
The first budget of the re-elected government is long term and sets the direction for a holistic development of the country. The objective is to make India a 5 trillion USD economy by 2024. I believe that it is achievable with a real growth of 8% and an inflation rate of 4%. From various parts of the speech, I could gather that the intent is to make this growth broad based as compared to a small select group marching forward while most of the population just lingering with no progress. For example, lot of attention is being given to stimulate rural economy.
LONG TERM VISION
The government has a long term policy. Catching the next wave and grasping the major new trends will enable India to leapfrog rather than continuing to be on the same path, same journey which others have travelled a long time back and which has already served its purpose.
EXAMPLE -LEAPFROGGING IN ENERGY
There is a long term energy policy with lots of thought given to environment and sustainability with an objective of leap frogging as in mobile connectivity. Many Indians who never had telephone landlines have mobile telephones. Similarly, lots of villages who had little access to electricity might in the future have plentiful solar energy. In addition to the beneficial effect on the environment, it also has the potential to reduce India’s foreign energy dependence, decrease imports and save lots of foreign exchange.
In this budget, the government has made a major push towards electric vehicles. There are incentives announced for buying an electric car- interest paid on car loan will decrease the taxable income by as much as Rs 1.5 lakhs. There are naysayers that there is no infrastructure supporting such a push. But the government has rightly taken an active approach breaking the usual chicken and egg conundrum. A big domestic market will also enable India to be a global manufacturing hub for electric vehicles which will support Make in India considerably- China and Brazil are already ahead.
STIMULATING ANIMAL SPIRITS-OLD OR NEW?
One favourite quote of TV pundits in all pre-budget conversations is whether the budget will revive the animal spirits of industrialists. Multiple industry groups used to look for incentives and concessions.
This budget with its objective of creating new India has clearly favoured stimulating such spirits of new entrepreneurs with innovative and fresh ideas rather than old crony capitalists. One important measure is to remove Angel Tax – previous practice was to calculate the difference between purchase price and fair market value of shares of a startup as taxable income.
This budget lays down the vision for the next 10 years and expects industrialists to align themselves with those objectives. For example, if there is lots of importance being given to digital connectivity of the whole country and Reliance, for example, aligns itself to that vision by enhancing Jio, it will benefit.
FISCAL STABILITY
The budget maintains fiscal discipline and pegs fiscal deficit for 2019-20 at 3.3%, down from the revised estimate of 3.4% for the year 2018-19 and 3.5% of actual level in 2017-18. Adhering to this level will be supported by disinvestment and RBI dividends.
INFRASTRUCTURE
There is generous allocation to building the country’s infrastructure, most notably roads and railways. Impressive track record of good execution in the first term augurs well. There are also significant incentives for investment in housing. In terms of social infrastructure, provision for piped water is being given top priority with an objective of reaching every home by 2024.
FINANCIAL SECTOR & CONSUMPTION
Credit squeeze has hampered consumption. Important urgently required steps have been announced to restore the health of the financial sector. Rs 70000 crores have been committed towards recapitalization of Public Sector Banks. There are steps to unblock liquidity of NBFCs, there is one time partial six-month government guarantee to PSBs for buying NBFC assets. Also RBI’s regulation over NBFCs is being strengthened and housing finance companies will also be regulated by RBI.
Additionally, there is a proposal for minimum public holding of listed companies to be increased from 25% to 35%. A very important step announced is to tap global savings for Indian government- that will help in keeping Indian interest rates on the lower side.
PRIVATE INVESTMENT
This is an unconventional budget that covers a wide canvass to attract private investment. It is operationalizing a new model of private public partnership in various infrastructure areas, for example railways. For ‘Make in India’, a scheme is being launched to invite global companies to set up mega manufacturing plants in sunrise and advanced technology area. There is also a proposal to launch a social stock exchange for listing social enterprises, where they can raise capital.
RURAL ECONOMY
The government has raised the budget allocation for agriculture by 78%. There is emphasis on revival of traditional rural industries including bamboo, honey and Khadi clusters. Rural housing is a thrust area with 19.5 million houses to be built in 3 years.
FINANCIAL MARKET REACTION
The bond market reacted favourably , 10 year bond prices moved up with yields going down by 12 bps from 6.72 to 6.6% . Sensex which was at 39908 before the budget speech ended almost 400 points down at 39513
OUR VIEW & PORTFOLIO MANAGEMENT
Overall, the budget is very good from a long term perspective and should be able to bring up growth to close to intended 8%. As I have written many times, stock market is totally correlated to economic growth though sometimes it becomes exuberant and sometimes it falls behind , but in the long term there is a reversion to mean. Therefore our long term bullish view remains intact but there could again be range trading for some time. For example, raising public participation in listed companies, if implemented, is beneficial in the long term but in the short term it raises the equity float which can impact the prices.
We have always advocated equity being allocated only for long term horizon and we should stay invested and use any dips for adding long term money to the portfolio. Resilience and holding power are keys to generating good returns in the equity market. A confluence of good and positive factors happens inevitably in an economy which is growing and has sound fundamentals. Scheme selection becomes even more important, given the unconventional budget .
Debt markets have shown a very positive reaction. But there I will still advocate only liquid high credit quality funds for short term goals like contingency and w any other goal with a time horizon of 0-2 years. For 2-4 years, we can consider hybrid balanced funds.
