Markets Weekahead – Focus on sectors which will build India

March 1, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

Volatility marked the extended budget week which culminated with the presentation of the union budget on Feb. 28 and the Nifty closing at 8,901. The railway budget two days earlier disappointed markets as it seemed more of a vision statement, but the Economic Survey boosted spirits. Expectations of a path-breaking budget from Finance Minister Arun Jaitley were belied, but it looks like a pragmatic one.

sensextwitter.jpgThe underlying statement in the budget seemed like one which intended to remove inefficiencies in the system, provide clarity and enable the economy to move forward on its own. The clarity on GAAR should remove any doubts foreign investors have about the government’s intent on retrospective taxation. Though the fiscal deficit target of 3 percent was deferred by a year to 2018, it was compensated to a certain extent by higher government spending on asset building.

The finance minister hopes to kick-start the infrastructure sector with a series of measures which includes higher budgetary allocation, setting up a National Investment and Infrastructure Fund (NIIF), floating of tax-free bonds, and a plug-and-play model for projects including in the power sector with all regulatory clearances in place. He could have rounded off the focus on ‘building India’ by offering tax sops for a limited period to attract private capital. Higher allocation to the states should hopefully have a multiplier effect unless the same is frittered away through inefficiencies and leakages.

The confirmation on GST roll-out by April 2016 was on expected lines but excise duty and service tax rates seem to be diverging instead of converging in the run-up to the simplified tax regime. The proposed reduction of corporate tax to 25 percent will only be a sentiment booster as it would be gradual over the next four years, coupled with rationalisation of exemptions. This would surely reduce complications and disputes. The removal of wealth tax and increase of income tax surcharge of 2 percent on the super-rich is also based on the principle of simplification of tax rules.

Indian PM Modi listens to FM Jaitley during the Global Business Summit in New DelhiThe level of commitment to the social sector is similar to the earlier UPA government, but the focus on the JAM trinity – Jan Dhan Yojana, Aadhaar and mobile convergence – will ensure higher efficiency and lower leakages. The Micro Units Development Refinance Agency (MUDRA) Bank with a corpus of 200 billion rupees may enable entrepreneurs in rural areas to be a part of the “Make in India” story. Agriculture, which has slowed down considerably, got a booster shot with higher allocation and credit facilities. One needs to see whether this would indirectly strain the PSU banking system.

Non-banking financial companies (NBFC), which play an important role among small and medium enterprises, would be covered under the SARFAESI Act, aimed at assisting in faster recoveries. The proposed comprehensive bankruptcy code could also reduce the incidences of defaults and improve the ease of doing business in India.

Although the markets would be worried about stagnating revenue receipts, the bill on “black money” and consequent collections could be a windfall in the ensuing years. The Benami Transaction Bill and focus on a cashless economy will dramatically improve overall tax compliance in the country, thus improving collections. On the other hand, it could affect consumption to a certain extent.

A cashier counts Indian rupee currency notes inside a bank in MumbaiThe disappointment for individual tax payers was perceptible as the budget did not directly increase cash in-hand, but instead offered a few tax sops for further investments. Among the corporate, ITC was the biggest loser with an unexpected 25 percent increase in excise duty of cigarettes.

This may not be a big bang budget but is a step forward in removing impediments and facilitating a stable fiscal environment for the economy to move forward. With the big event out of the way, markets would now look for execution of intent, especially in the infrastructure space. Corporate performance is not expected to show any drastic improvement over the next two quarters, thus markets will continue to look for domestic cues from the government as well as overseas news flows while hoping oil remains below $60 for the year ahead.

The budget also reiterates the fact that change will be slow and one should not expect a magic wand for the economy. We should see the next few months as a period of consolidation as corporate performance will keep the pressure on the stock markets, while government actions could provide a positive trigger. The focus would be on ‘building India’ and I would reiterate fresh investments in power, infrastructure and capital goods.

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