The much awaited union budget is now out and its impact on the markets in the near term in my view should be on the negative. Subsequent to the Railways budget which came out in the last week and was extremely lacklustre in terms of either improving passenger amenities or boosting railway infrastructure by investing in various projects the Union Budget in the near term seems to have also missed an opportunity to give a clear direction for various economic initiatives of the government except for the pet projects of Bharat Nirman which have got lot of attention. The reason for this is not what is in the budget or what is not, but the fact that subsequent to the election results, there were huge expectations with regards to policy announcements regarding the long term direction of reforms, de-regulation, disinvestment, reduction of fiscal deficit etc. The markets were excessively buoyant post-election results and the Indian markets over the last few days had come to be the best performing markets in the world for the current calendar year. I believe that the markets in any case were ripe for a correction and they just needed an opportunity to correct and the budget will become a reason for that.
As far as the budget proposals are concerned the factors which are likely to have a negative impact in the near term are
– the high fiscal deficit and no clear roadmap for the reduction of the same. Although as i have written in one of my previous articles the fiscal deficit is less of an issue for fast growing economies it runs the risk of getting the rating agencies talking about downgrade in ratings, increasing the overseas borrowing costs of corporate India etc.
-While there is a clear illustration of the expenses which will be made under various schemes, there is no specification on the revenue side,
-there is no clarity on disinvestment and its direction. There is too much of a mention about the virtues of public sector nature of government companies (specifically the mention of banks and bank nationalization).
– There is a mention of oil price and fertilizer segment deregulation but no specifics. Most fertilizer companies believe that implementation of direct subsidies will be very difficult and will take atleast a couple of years to implement.
– There is increase in rate of MAT, however no route towards the return to FRBM targets,
– no specific measures of improving credit flow towards infrastructure investments etc. The only means of improving financing to infrastructure projects is the refinancing by IIFCL. Here the government could have done better by improving the flow of money to infrastructure projects through easier forex borrowings where my preference was for the forex risk to be taken over by the government.
However lot of such initiatives can obviously be outside the budget and I am sure that the government will come out with policy announcements through respective ministries over the next few weeks.
The positive factors are
-the elimination of FBT, CTT and surcharge on personal income tax, the surcharge removal will add to disposable incomes
– increased focus on rural development which should boost rural income and demand, the boost to rural incomes is likely to be substantial given the fact that the extra 0.8% of fiscal deficit which has been predicted above the expected level of 6% is primarily on account of Bharat Nirman schemes which have a strong multiplier effect
-a degree of focus on renewal energy, however much more could have been done. The entire world has a clean energy initiative and its high time India also has its own
-a move towards giving subsidy to improve the agricultural supply chain, I think this is one of the biggest positives where cold chains, warehouses etc will have a huge impetus in reducing agricultural wastage and improving productivity
-a greater focus on education and setting up of new institutions for the same is also a big positive
-The strong increase in allocations to the Urban Renewal Programme and irrigation programmes is a move in the right direction
On an overall basis I believe that the markets were ripe for a correction to 3800-3900 levels of the NIFTY and 12500 levels of the BSE Sensex as the markets were looking too top heavy and they had build up excessive expectations vis-a-vis sectors like infrastructure, banking etc. Given the fact that we have had an over 15 week rally in the markets, I believe that post budget we should see a 4-6 week corrective phase which should see the excesses in the markets getting purged and the markets returning to a more reasonable valuation level. In the corrective phase the sectors that benefit from higher consumption like FMCG and automobiles should outperform along with other defensive sectors like Pharma. The budget also is a big positive to the cement sector where there is likely to be a huge surge in demand due to all the nation building programmes and there has been no increase in excise duty which was generally expected.
However in the long run the sectors that contribute towards the growth of the Indian economy like construction, capital goods and banking should be picked up for the longer term bull market which will play out over the next four years. Most of these sectors had seen stocks running up by 100-150% since March and should see a correction of 20-30% from the peaks and at that levels it should make sense to invest into the markets in these sectors. I believe a return of sanity will provide good opportunities for building up a portfolio which was difficult to do in the kind of momentum market we saw over the last few weeks.
Happy times for investing will be back again as fear returns