One big event of the year in the domestic context got over today. Prior to the Union Budget there was a lot of apprehension about what will be contained in the budget and just because we had a decent pre budget rally in the stock markets a lot of people were concerned about various aspects related to taxation which the government could potentially impose, specifically related to the stock markets which could lead to a market correction. As I have pointed out in various times that I have been bullish on the markets and the views do not change post budget.
In the overall context the budget is a positive document for the economy. It has addressed issues related to rural stress and the fact that it is important to revive the rural economy. There have been decent allocations to the infrastructure sectors and the interest subvention to low cost housing should be quite positive for that sector. The other big positive was the reduction in the definition of Long Term for property investments which has been reduced from 3 years and a big positive for the Real Estate sector.
The reduction in tax rates for small taxpayers as well as for small corporates also is quite positive. A 5% reduction in tax rate for companies with turnover below Rs 50 Cr is a significant benefit to them. The fact that no major changes to indirect taxes were announced prior to GST is also a good move.
The biggest positive as far as the economy goes is the significant reduction in Net Market Borrowings of the government which will have the impact of reducing the crowding out of private investments and infact could lead to crowding in. This would also keep the system interest rates low as post demonetization there is as it is enough liquidity available and due to this interest rates will remain lower for longer. A lot of people have said that enough has not been done to revive private investments. The fact f the matter is that private investments will revive only when there is demand. When capacity utilization is low why will companies invest? As demand revives, capacity utilization revives and interest rates remain low new projects will be announced for sure. The government cannot demand private investments, they just need to create a conducive environment for the same which is happening slowly but surely.
I had made my views on the economy very clear at the time of demonetization. My view was that there will be a V Shaped recovery. The recovery is playing out now as cash availability has reached normal levels. This combined with lower interest rates sets the pace for a faster recovery in the future. Analysts in general are too pessimistic in their assessment as they are more focussed on Global issues, which are for real but not so significant that they will disrupt the story. Growing global trade issues combined with a potentially faster pace of interest rate hikes by the US FED are potential risks that could create volatility in 2017. However given the recovery process of the world economy and the fact that recovery is now getting entrenched will dominate ultimately.
CONCLUSION AND MARKET OUTLOOK
We went into the budget event fully invested. My view is that this year will be positive for equities and after two years where markets have gone no where there is possibility of significant upside over the next 2-3 years. All the parameters required for recovery like low inflation, low interest rates, a revival in consumption demand, infrastructure investments etc are in place now. Things should continue to improve going forward. The entire market should do well and the potential of stock picking is even greater when revival potential is strong and focussed investments should do much better than just following the markets.