If the global situation supports India, the multi-year bull run in equity markets will surprise on the upside
Nilesh Shah, MD, KOTAK AMC
The Budget has changed India’s structure from a planned economy to decentralisation through higher allocation and more discretion to states.
It is envisaging one country, one market through the rollout of GST and National Market for Agriculture products where leakages of fragmentation will be replaced by productivity of unification. The Budget is presenting more realistic revenue and subsidy projections, which enhances credibility.
The debt market will view the Budget positively as fiscal deficit at 3.9% and revenue deficit at 2.8% are supportive of lower inflation. The fiscal roadmap for 3% by FY18 will give enough confidence to the market that low inflation and, consequently, lower interest rates are likely to sustain. The net borrowing programme at R4.56 lakh crore is in line with market expectations. Setting up of a Public Debt Office and mandating the RBI to target inflation are gamechangers for the debt market.
The economy will move on a higher growth path on account of increased spending of more than R70,000 crore on infrastructure. Transferring increased excise collection of R40,000 crore on oil products to the road sector will have a multiplier effect on the economy.
Investment will get revived by the plug-and-play approach on UMPP and other infrastructure projects. The Budget is also smartly leveraging the National Infrastructure Fund to make more money available for infrastructure development. Reversal in inverted duty structure on some commodities will help the manufacturing sector. Setting up of a re-financing facility for the micro sector and development of an e-platform for bill discounting for the SME sector can reduce the interest burden of the most deserving sector of the economy. Monetisation of domestic gold through gold bonds and gold lending can free up substantial savings for the economy. Financial savings will be encouraged by the incentive for contributions to the New Pension Scheme.
The equity markets are trading at fair value despite below-expectation earnings in Q3FY15. Higher capacity utilisation, lower commodity prices, improved working capital cycle, lower interest rates and lower tax rates will accelerate growth in corporate earnings over the next eight quarters. The earnings growth will be back-ended in nature, but will be ahead of market expectations at today’s valuation. If the global situation supports India, the multi-year bull run in the equity markets will surprise on the upside.
Withdrawal of stimulus in Europe and Japan, spike in commodity prices and back-ended earnings growth can create a short term correction in Indian markets. All such correction will provide an attractive opportunity to invest.