Budget 2018 leaves little for markets to focus on

One of the signs of a maturing economy is that the Nation’s budget becomes just a year-end accounting and budgeting job. While India may not be there yet, that there are fewer big-bang reforms and fewer shocks (barring the tax on long-term gain on equity) means that we are not far from getting there. With the increasing incidents of rural stress and the larger concern of lack of jobs, the Budget could not but allow some fiscal slippage to spend on agri-rural development, social sectors of education, healthcare and affordable housing. To this extent, ‘productive spending’ rather than populist spending can be termed positive from an economic growth point of view.

Other than the spending mentioned above, the government appears to be pinning on the reforms that it did outside of budget – bringing money into the system and reducing evasion, a new indirect tax regime and measures to tackle NPAs and strengthening bank capital – to make their impact felt on economic growth. That means the focus is on implementation (as suggested by the Chief Economic Advisor) rather than on adding more ambitious reforms.

The debit and credit does not tally easily

The data above will tell you how the numbers stack up. Here are some of our observations on it.

• There is fiscal slippage; something that is not surprising. But given that the thrust is on rural and social security measures, the spending is acceptable.
• The spending on capex, although nothing to boast about is at least higher, if marginally. This compares favourably with a decline in FY-18. This is necessary, if not sufficient, to boost investment activity in the country. The 9.9% budgeted growth in capex spending for FY-19 is not lower than long-term average spending and to this extent, we are getting better.
• The revenue target from taxes seem ambitious. While the target is less imposing on the direct tax front, the GST target will require high compliance and smoothening out of all operational issues for it to fetch the numbers indicated in this budget.

To summarise, it will take a lot of effort for the government to make this plan work. The revenue collections by the first half of FY-19 will give us some indication on where we are headed on the fiscal front. We believe this will be a key indicator on whether foreign investors decide to pump money into India – both into the equity and debt market.

Sector and stock market impact

If that be on the macro front, there is not too much emphasis on any one sector for markets to go crazy. However, some of these announcements will provide enough meat for the market.

Some of the key rural and agri-spending initiatives can have a significant impact on corporate earnings. Key highlights are as follows:

• Minimum support price for all kharif crops to be kept at 1.5 times over produce cost for the upcoming year. This is a policy revision, i.e., up until now there was no definite principle in place with regard to MSPs and the 1.5 times number was restricted to a few crops only.
• Infrastructural spending in rural areas is pegged at Rs 14.34 lakh crore. This includes roads, toilets, housing and electrical connections.
• Higher institutional credit to farmers
• Gramin Agricultural markets to small farmers who are unable to access APMCs and to integrate these into the nationwide e-NAM electronic agricultural market for better price discovery.
• Doubling of fund allocation to ministry of food processing.
• A 21.5% increase in allocation to crop insurance scheme
• A Rs 500 crore allocation for “Operations Green” to promote farm producers’ organisations, agri-logistics and processing facilities
• Rs 2000 crore toward agri-market infrastructure fund for developing and upgrading agricultural marketing infrastructure

Statistics for marketing sourced: www.edgeonline.com.au/seo-gold-coast

The above not only lays the path to doubling of farm income by 2022 but also seeks to generate more employment opportunities in rural areas. From a stock market perspective, a host of consumer plays can be beneficiaries of higher money in rural areas. Starting from consumer goods to consumer discretionary including electronic goods makers, to automobile both commercial and domestic, the promise of a rural volume ramp up and consequent earnings growth can drive some of the stocks in these sectors up.

Other than this, insurance, banking and infrastructure and capital goods do receive some impetus from the budget allocations. Reduction of corporate tax to 25% for companies with turnover of less than Rs 250 crore may also provide some boost to smaller listed companies. However, the tinkering with import duties across a host of items appear to suggest that we may be in for a period of import substitution – auguring well with the ‘Make in India’ campaign. However, their impact on corporate earnings would be too vague, at this juncture, to comment. In fact, whether this will impact production/export for goods where import component is high will also have to be seen.

In all, it is our thought that the consumer story may once again find market favour in the upcoming months, especially if quarterly earnings support this. This, together with any revival in production activity, would be the factors to look for internally, apart from how the government manages its fiscal situation.

In all, not a budget to provide much cues to the market. What it does is to remove one uncertainty from the list of factors that could move the market. The relief is that the budget did not take the easy route to garnering political gains. For the markets, it is back to basics of inflation, corporate earnings, and yield movements. So let’s continue to focus on those.