Earlier today, Finance Minister (FM) Arun Jaitley presented the highly anticipated Budget for FY2018-19. Walking the precarious line between fiscal prudence and populism, FM Jaitley has deftly structured the Budget around ‘Consolidation’ of various reforms that have seen the light of the day, under the leadership of PM Modi.
The intent and thought process in today’s Budget speech, reminds us of these lines in the famous poem “Chalna Hamara Kaam Hai” by Shri Shiv Mangal Singh Suman –
GATI PRABAL PAIRON MEIN BHARI,
PHIR KYOON RAHOON – DAR DAR KHADA,
JAB AAJ MEREY SAAMNEY HAI RASTA ITNA PADA,
JAB TAK NAA MANZIL PAA SAKOON,
TAB TAK NA MUJHEY VIRAAM HAI –
CHALNA HAMARA KAAM HAI
In our view, the budget in most proportions delivered what was expected and needed around the following sectors:
- Rural, Farm-Income & Agri focused
- Promoting Healthcare
- Ease of living for Senior Citizens & Middle-Income Group
- Thrust on Infra Creation
- Providing high quality Education
- Support to the MSME sector
- Upliftment of the poor and women welfare
We think this budget is generally along expected lines. The emphasis was expected to be on agriculture, rural and boosting farm incomes and that, in fact, turned out to be the central theme.
One of the fears market participants had going into the budget was a populist budget having a negative impact on fiscal prudence. We applaud the Government for resisting this temptation and instead, choosing programs targeted at raising Kharif MSP by 1.5xs of cost price, enabling farmer productivity and increasing farmer income.
Secondly, the government announced a slew of measures intended at delivering growth through infrastructure creation of roads / highways / airports / agri-clusters / food processing, improving rural quality of life via initiatives structured around electricity, education, health care and sanitation.
However, the Budget also bought back the heavily discussed and dreaded Long-Term Capital Gains Tax (LTCG) which has caused a dampening of sentiment; albeit TRANSITORY in our view - investors will move to the new normal very soon, given the sharp growth trajectory of the Indian economy as well as the dearth of lucrative investment altrenatives. Apart from this, personal income tax slabs were kept unchanged, while introducing standard deduction for the salaried class. There was also the benefit of corporate tax rate at 25% for companies with turnover up to Rs. 2.5bn (vs. Rs. 0.5bn earlier) - That will spur a rise in profitability and increasing investment and savings; job creation and all of this will find its way back into the economy
All in all, we believe that the Budget presented today ushers in constructive steps towards building a “NEW INDIA” with strong fundamentals for GDP growth more than 8% CaGR over the near to medium term. It also has set the right tone and policy framework wherein there is premium on honesty, targeted benefit of transfers to the intended, a recapitalized banking system that is able to support growth.
Schemes aimed at enhancing rural and farm incomes will lead to a surge in demand for consumer durables, autos, and building materials. Universal Healthcare and quality education were given prominence in the budget, which will aid social health of the economy and in the long run reduce subsidy burden and thus fiscal deficit. Alongside, focus on promoting tourism, higher targets on road, highway and airports construction, as well as changing the definition of investment grade credit from AA to A will open significant avenues for corporate India to borrow from the bonds market.
Targeting economic growth of 7.5% in FY18 and 8% in FY19, while keeping the fiscal deficit at 3.3% of GDP in FY19 - seems to be achievable given the enormous tax reform (GST) undertaken by the government, reduction in subsidies and freebies, and additional income from 10% tax levied LTCG and Dividend distribution tax (DTT) on mutual funds schemes, asides the Rs. 800bn disinvestment programme.
From a sectoral perspective the Sectors to Benefit are as follows –
- Infrastructure asset owners
- Building Materials – Steel / Cement
- Agriculture machinery / inputs / seeds & fertilizers
- Housing Finance Companies
- Affordable Housing
- Autos & Auto ancs
- Consumer Discretionary
- Travel & Tourism
–LTCG Tax Was 50:50 Expected, but Still a Negative on the Margin
The government chose to rationalize tax structures across asset classes. Equities enjoyed a tax advantage relative to fixed income and other asset classes. India now joins other world markets in instituting a 10% long term tax on equities, notably, the existing capital gains will be grandfathered, and the newly instituted long-term tax will be applied only on a going-forward basis starting 01-Feb-18. So, this advantage that was available to equity investors is no longer in place.
The Indian economy today is USD 2.5tr – 7th largest globally (3rd largest on PPP basis) and making rapid strides to emerge as the 5th largest very soon based on consensus estimates of world economists. We are of the firm view that the structural reforms witnessed in the past few months will form the pillars for accelerating corporate earnings as well as building on the buoyant business-consumer-investor confidence – which are the key ingredients for equity price appreciation.
We would strongly advise investors to remain invested and maintain a disciplined investing strategy with long-term pursuit of wealth creation and not be dejected by a meagre 10% LTCG.
We would like to discuss in detail on the effects of Structural Reforms on the Indian Economy going forward –
Structural reforms require immense political will and hence aren’t easy. However, there is ample economic evidence to prove that it works.
Reforming countries experience a growth acceleration in the medium term, following short term pain. Reforms in banking significantly raise growth and make economies attractive for FDI.
In our opinion, PM Modi’s govt. has pursued a three-pronged approach pf
a) Fiscal Responsibility
b) Stimulus but with Direct Benefit Transfers
c) Structural game changing reforms
By pursuing all three, the government has ensured additional multiplier growth benefits will come forth
The pursuit of the three policies creates a resilience to macro-economic shocks, raises economic growth and reduces unemployment. There is a lag however, on the materialization of growth benefits and in the short term, there is substantial pain and resistance to change.
Aadhaar, Jan Dhan, demonetisation, GST, and benami, are working synchronously to create a new, inclusive infrastructure. Central to the reforms is the move away from cash, towards electronic payments, away from black money to white, from unorganized to organised and towards a national biometric identification based financial system.
The government has also moved deftly with infrastructure stimulus through creation of roads/highways/ports/power and Bankruptcy Code for NPA resolution along with Bank Recap programme With RERA - the government has also strengthened its economic and legal infrastructure with real estate sector.
The proof in the pudding lies in the fact that India has jumped 30 spots in the World Banks’ rating for ease of doing business.
We are already seeing a sharp improvement in corporate earnings in Q3-FY18 with a positive management commentary and can attribute a high probability that all things equal – FY19 and FY20 would be very strong growth years.
We sum up the overall political will, traction of bureaucracy functioning and structural reforms implemented, with the lines of the poet – Sohan Lal Dwivedi
"CHALO NAYEE MISAAL HO,
JALO NAYEE MISAAL HO,
BADHO NAYAA KAMAAL HO,
JHUKO NAHIN, RUKO NAHIN,
BADHEY CHALO, BADHEY CHALO"
"May you walk for new paradigm,
May you set new example,
May you go for a new feat,
Don’t bow, don’t wait,
Walk on, Walk on."