Budget 2016: Adhering to fiscal consolidation path is good, but also revive investment cycle

 By Dinesh Thakkar The Finance Minister (FM) will present the Union Budget 2016-17 on February 29, 2016 which will be the third budget from the NDA-led government in its current term. All eyes are set on whether he will be able to increase investment spending, while adhering to the path of fiscal consolidation. [caption id=“attachment_2640726” align=“alignleft” width=“380”]  Budget needs to be growth oriented and the FM will have to push capital and infrastructure spending higher[/caption] We cannot emphasize enough on the importance of both these objectives. The government realises the importance of increasing investment spending to stimulate an economy already facing global headwinds. The budget needs to be growth oriented and the FM will have to push capital and infrastructure spending higher, if the investment cycle is to be revived. Even so it’s critical for the government to rein in the fiscal deficit in a year when it has received a windfall gain from a drop in crude prices and macro indicators are looking at their strongest in recent years. The RBI governor has clearly outlined his views against relaxing the fiscal deficit target. With a reined in fiscal deficit, the RBI would have enough headroom to cut rates further, which would be positive for the economy. Our Take We expect the FY2016 target set under the Fiscal Responsibility and Budget Management (FRBM) Act of restricting the fiscal deficit to under 3.9% of GDP to be attained; however, the FY2017 fiscal deficit target of 3.5% of GDP appears slightly challenging, although not impossible. We bake into our estimates strong preference towards increasing infrastructure spending, while achieving the FRBM targets partially in FY2017. This spending would be supported by savings from crude and an increase in the service tax rates. We also expect measures to unclog the financial sector by tackling the NPA menace and recapitalising the PSU banks. Overall we expect a pragmatic budget focused on growth and one promoting India as an investment destination by eliminating tax distortions, while taking further measures to improve the ease of doing business. 7th Pay Commission + Rural Spending = Consumption Boost We expect higher spending led by the implementation of the 7th Pay Commission recommendations and the One Rank, One Pension (OROP) scheme to boost consumption. Also with the rural economy reeling under the stress of two consecutive droughts and slower growth in minimum support prices, we expect a 10% increase in allocation towards rural schemes to contain the agrarian slowdown. Budget conviction picks In line with our view that investment spending will continue to remain high we see infrastructure, cement and capital goods companies as the direct beneficiaries of the budget. We prefer Sadbhav Engineering and KNR Constructions with their focus on road/highway, while BEL remains our best play on defense spending. We like Ultratech within the cement space. Increased allocation to rural schemes and higher salaries & pension bill will have a positive impact on consumption, benefitting two wheeler players such as TVS Motors. With housing expected to see some push, LIC Housing remains our best play on that sector. The writer is Chairman and Managing Director, Angel Broking.