This is the time of the year in which all focus shifts to union budget. Budget is purely an economic event which provides insights on government’s spending plans. This year’s budget is going to be crucial since general elections are planned in 2019. In this article, we explore sectors that are more likely to get impacted by the budget.
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Now-a-days all governments are using budget to woo their vote bank and mix economic policies with vote bank politics. This happens globally & India is no exception. Since 2019 general elections are around the corner, this year’s budget will be their last shot for current government to improve their electoral prospects. We are sure Niti Ayog must be burning midnight lamps to finalize budget. Based on our analysis, we expect this year’s budget to increase spending on previous flagship schemes, introducing few public appeasing measures and controlling fiscal deficit along with adherence to international commitments. Let us take a look at possible budget announcements & their impact on business sectors.
Income tax slabs and rates have not been changed for the last couple of years and it may be a planned move from government to wait until 2018 before decreasing tax slabs for individuals. This will reduce tax collections and increase fiscal deficit which is already widening because of increase in crude oil prices. To offset, there may be surcharges on super rich or introducing taxation on equity returns or expanding the duration of equity taxation from one year to three years. Last year PM Modi strongly indicated that profit from equities should be taxed to benefit the poor. Also, lower bank interest rates coupled with higher returns from equities is making it very tough for banks to attract deposits. Not to mention deposits are the lifeline of banks as they enjoy differential rate between borrowing & lending to run operations. If equity is taxed, market may see a correction post such announcement but that will be temporary and a perfect buying opportunity for smart investors. Lower taxation on salaried class will result in more disposable income and sectors like FMCG, Entertainment & Retail will benefit from it while taxation on equity may see sharp correction in brokerage and banking stocks.
Roughly 70% of Indian population lives in rural areas. For economy to grow at higher rates, it makes sense to harness the productivity of larger section of the population. This is one area which makes political as well economic sense. We expect bigger fund allocations to previous flagship schemes like Swatch Bharat Mission, Pradhan Mantri Gram Sadak Yojana & MGNREGA alongwith possible introduction of new schemes to galvanize rural productivity. This may benefit two wheeler & entry level car manufacturers as rural consumers prefer to buy a vehicle because of poor connectivity with business centers.
Along the lines of rural push, it makes economic & political sense to promote agriculture sector as well. Around two third of Indian population is engaged in agriculture but contributes only 17% of GDP. Primary reasons are old farming methods and smaller landbank per farmer. Government should push for adoption of modern farming methods using machines. This will need funds and a sustained ecosystem which helps farmers to repay successfully. We expect budget to carry more emphasis on irrigation, cheaper loans to farmers, etc. Waiver of farmer loan is not the best option for long term sustainability but it may be used due to political climate. This will create more demand for Agri-finance, Fertilizers, Farming equipment like tiller & tractors, Seeds & Irrigation solutions.
Budgets are also made keeping international commitments in mind. India has committed to United Nations that it will reduce carbon emission by a factor of 30% by 2030. We can expect big push towards subsidizing import duties on solar panels, battery components, etc. We may see some kind of guidelines or policy formulation for electric vehicle eco-system. This will be a big positive for the companies engaged in production or installation of Windmills, Solar panels, electric vehicles, etc.
We need better infrastructure to speed up wheels of economies. Bharatmala project was announced mid year, so road development commentary should revolve around Bharatmala scheme with no new major announcements. There will be measures to run Railways profitably by increasing new investments in various schemes. Our view is that we do not need bullet trains when our normal trains are routinely running late. We need to fix existing condition and improve at later stages. Housing sector may see some new announcements or positive commentary on existing schemes like Housing for All. We do not expect big push on previous schemes which failed to take off like smart city project instead government may want to downsize scope and hence spend. There may be some update on Namame Gange program and emphasis on clean drinking water for all.
Demonetization was one of the major initiatives of present government during its tenure so far. We can expect more push on doing digital transactions, completely Aadhar based authentication for government subsidy schemes and more application of Aadhar in economy. These will be more reformatory in nature and less capital intensive because major capex in building Aadhar infrastructure is already spent. Digitization will positively impact whole economy and its impact is not limited to few sectors only. Increased transaction speed will bring more business to existing establishments along with transparency which will broaden tax base at the same time.
Overall, we think it will be a populist budget keeping general elections in mind. As investor, we should never invest purely on basis of budget announcements as they fade over a period of time and it is actual execution which matters the most. Use budget announcements to understand government plans and calibrate your investment thesis basis on actual implementation at a later stage.
A word of caution, please do not decide your investment based on this article as budget may pan out entirely different. No one could have anticipated demonetization! Instead use this article to refine your process and broaden your knowledge.
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