This Budget was like dancing in a minefield. And the government did well at coming unscathed, while delivering the objective. The market expected the government to provide growth impetus, to strengthen the PSU bank balance sheets, to encourage the private sector investment, to not impose detrimental tax regime and to aid the much battered rural sector.
On all these counts, the government came out kings and queens (if not aces), given the limitations. The Budget was possibly themed on (1) giving infrastructure sector a big push; (2) keeping taxation levels largely unchanged; and (3) improving the ease of doing business.
The biggest takeaway has been the government’s disciplined approach in maintaining the quality and quantity of fiscal deficit. The government stuck to its fiscal deficit projection of 3.5% (of the GDP) for FY17. In fact, it has been pretty conservative in estimating some of the likely revenue-generation possibilities for the year (from items such as voluntary disclosure, incentivised settlement of long-pending IT litigations etc). The fiscal deficit diligence has raised India’s prestige and its global standing. This will translate into more respectful assessment by FIIs and credit rating agencies in the time to come.
Market borrowings for FY17 are projected at around Rs 4.25 lakh crore, which is almost the same as previous year.
The projected supply is lesser than projected demand, and will lead to a rally in the bond market. Importantly, the finance ministry seems to have kept its end of the bargain. It has provided the incentive for RBI to act more firmly on the repo rate. We expect a follow-up rate cut soon by RBI in the coming days.
The consequent rally in the bond market may accrue nearly Rs 30-50,000 crore for PSU banks from MTM gains.
This, along with the Rs 25,000 crore capitalisation of PSU banks will improve bank balance sheets and create a pivot for consolidation, privatisation and professionalisation in this sector. This fiscal leadership reduces capital cost in the economy, provides ground to boost credit growth and stimulate private sector borrowing.
The government has made a major push for investment in roads and railways, and around Rs 2.18 lakh crore of capital expenditure has been earmarked. The aim is to provide connectivity to rural areas, provide electricity access to all villages and integrate the agricultural market through digital initiatives. This will create a self-sustaining momentum for income growth in the rural economy (expected to double in five years), create an insulated domestic demand in a slowing world and stimulate capex cycle.
In closing, we believe that a path is being created towards a sustainable double-digit growth with 2 to 3 years’ timeframe. The expectation of a good monsoon this year (due to La Nina effect), reducing borrowing costs, likely parliamentary approval to key reforms bill such as bankruptcy code (& also GST) and a strong infrastructure push give strength to this belief.
While we believe that debt will be the favoured asset class this year, this will be an opportune time to accrue equities.
When the pent-up earnings growth will catch up, most of the retail investors will be surprised with the size and level of the leap equities are likely to take.
Investors are consequently advised to position themselves in bond and credit segments. So, while many may have missed out on the rally in gilt (which we were forecasting), the yield levels in the private debt and the AA segment may still be lucrative.
From equities stand point, we believe that the market is increasingly offering attractive opportunities for bottom-fishing investors. The sentiments remain lack lustre and may therefore remain in bear embrace for some time.
Therefore, this is an accumulation opportunity for the investors; whom we advise to take an SIP route. Further, a portion of the cash is advised should be put on standby, which can be invested during significant market dips.
By Nilesh Shah, MD, Kotak Mahindra Asset Management Co Ltd