By Ambareesh Baliga
Indian Markets had been upbeat on the Narendra Modi Government since the last 18 months but lately their hopes increasingly have given way to dispair. One can always argue whether such hopes were misplaced in the fist place as repairing the Indian Economic fabric would take a few years as Mr. Modi and his team have no magic wand. Others may argue that 18 months is sufficient to make a difference especially when India is in such a sweet spot.
In midst of this we are approaching the Budget season, the 3rd Union Budget to be presented by the BJP Government. This could be the last chance for Finance Minister Mr. Arun Jaitley to present a Budget which could be a catalyst for higher economic growth and prosperity by 2018-19 which is a crucial general election year. This budget needs to have elements to kick start the economy taking advantage of the 18 month International publicity blitzkreig by Prime Minister Modi and the inclination of the International Investors to participate in the India Growth Story. However, they need to be sure that the India Story is an implementable opportunity and this Budget could strive to achieve that. And the growth needs to be inclusive.
The Finance Minister will have to focus on the 67% population dependent on Rural Economy. Two years of failed monsoon and slower rise in MSPs of agro-commodities along with government flagship schemes like MNREGA failing to show the desired results have left the rural economy in dire state. With 58% of rural household heavily dependent on agriculture, with a mere 1.1 pct growth in FY16 and 0.2 pct in FY15, impact on demand is obvious. Rural wage growth is also negatively impacted. Thus the budget is expected to have increased focus on rural spending, such as roads, irrigation and social assistance.
We should see also see structural reforms like amendments to the RBI Act, further divestments in PSUs, infrastructure push, bankruptcy code, banking and labour reforms. Benefits from the fall in international crude oil prices is expected to be judiciously used where as larger than expected subsidies will be disappointing.
In the Infrastructure segment, roads, railways and renewable energy sectors should get high allocation despite the recent withdrawal of grants to Railways. Defence will continue to get higher allocation as always. The Budget, by giving push to infrastructure spending, would lift domestic demand through a virtuous cycle.
With focus on housing for all by 2022, we could expect home loan rates to inch lower along with higher incentives as a sweetner to boost property ownership especially in the affordable space. It will help generate jobs and improve demand for construction materials providing a major fillip to the economy.
With important state elections in the next 18 months, there would be focus on implementation of ongoing pro-poor schemes more effectively. An approach towards inclusive growth, priority sector spending, investment in health and education, investment on infrastructure & agriculture development will however squeeze the fiscal situation and the challenge will be to maintain a balance between the two.
Originally fiscal deficit target was 3.6% of the GDP in 2015-16 but it has been postponed by a year. Now, target is 3.9% for the current fiscal and 3.5% by next year. I believe if fiscal slippages result in asset accretion and job creation, it would be taken taken positively by the markets.
Since the rural economy revival is the need of the day to drive consumption spending, sector related to rural economy such as agri inputs, irrigation, NBFCs and infrastructure space (mainly housing, roads, cement) could benefit. A direct beneficiary of economic revival would be automobiles, especially the Commercial Vehicle segment. The focus on “Make in India” should benefit manufacturing sector in general.
The current pull back to Nifty 7200 levels from the recent lows has a potential to get extended to 7400 levels before the Budget session begins. If the Budget turns out to be a Landmark one unlike the last two Budgets, we might see the commencement of fresh bull run.
The writer is an independent stock market expert. His views are personal