The Union Budget had too many expectations built around it, especially considering that it came in the immediate aftermath of the demonetization. To be fair, the Finance Minister has done his level best under the circumstances and the constraints on resources and his capacity to be too liberal with the Fiscal Deficit. The following are the key announcements of the Union Budget that could have a bearing on the Equity markets and specifically for equity investors.…
Key takeaways from the Union Budget…
- The Union Budget has made a record allocation of Rs.10,00,000 crore for agricultural credit during the current financial year. This is likely to be a major boost to agriculture and a lot of sectors like agrochemicals, fertilizers, and drip irrigation systems as well as sector that see rural demand being generated by rural incomes.
- The enhancement of crop insurance coverage to 40% by next fiscal as well as an allocation of Rs.20,000 crore to the Micro Irrigation Fund will enhance rural incomes substantially. Focus on companies that are likely to benefit from a surge in rural demand and rural incomes.
- Affordable housing is likely to get a major boost from the Union Budget. In fact, Affordable Housing has been granted infrastructure status and that will largely change the economics of this sector and also encourage more projects in this space. Will be positive for affordable housing developers as well as for housing finance companies.
- The government has decided to curb the fiscal deficit for the current year 2016-17 to 3.2% of GDP and bring it down to 3% from the next year, which is line with the FRBM targets. This fiscal discipline will ensure to keep bond yields low and also enhance rating of India’s external ratings. The commitment to keep revenue deficit at less than 1.9% will also be positive for the currency. This will be an indirect benefit for the equity markets in India.
- In addition, the government has also substantially cut its annual borrowing program. This will not only reduce the cost of fund and yields but also avoid crowding out private borrowing in the markets. This will be positive for the equity and debt markets.
- The big boost could come from the massive allocation of Rs.396,000 crore to infrastructure, which includes the massive investment of Rs.131,000 crore in railways as well as a massive allocation to roads and highways. This is likely to be value accretive for companies in the roads, construction and cement space.
- The decision to enhance the Strategic Oil Reserves to 15.33 million metric tonnes this year is likely to give a better shield against rising oil prices. Low oil prices have given cheap oil dividends to Indian companies and that can be sustained now.
- The big game-changer could be that the Foreign Investment Promotion Board (FIPB) has been abolished. This will mean that most of the FDI in most sectors can now come in through the automatic route. This is a precursor to including more sectors under the automatic route as well as increasing the limits of FDI for various sectors. This could be a game changer for most sectors.
- A hidden benefit in this budget could be the decision to have a time bound listing program for PSUs. It will make a start with IRCTC, IRCON and IRFC. This will ensure a large quantum of quality paper in the market, greater choice for equity investors and better value in the market.
- The decision to increase the bank recapitalization allocation by Rs.10,000 crore will be a positive. Also, the FM has kept the upper limit open and will be willing to increase where necessary. This will be positive for PSU banks, where the higher capital allocation can help them aggressively expand their asset books.
- The decision to give a push to digital has come in various forms including customs and duty exemption on POS machines, big thrust to POS acquisition, rebates for POS software and last mile connectivity providers etc. This could be a game changer for these digital plays both in the hardware and software segments.
- Lastly, the tweaking of the income taxes rate will substantially increase the disposable income for lower income groups. While the FM has not touched the slabs, the rate of tax at the lowest level of taxable income has been reduced from 10% to 5%. While this could trigger a consumption boom, it could also trigger more investments in equities from lower income groups.
In a nutshell, it has been a balanced budget with clear long term benefits for the equity markets. One can debate about specifics like capital gains and exemption limits but it needs to be admitted that the FM has done a commendable at a time when the economy was caught between global and domestic pulls.