In our 2017 outlook, we suggested that three key domestic developments (aside of external factors) would have a bearing on the markets. One being budget, the second being rate cuts and the third being earnings growth.
With the budget being out, let us discuss what the budget can do for the economy and markets and what cues you need to take from them for your investments.
The following broadly sums up the actions intended in the Budget proposal of 2017.
- Budget 2017 can be called popular, aiming to touch many people and industries in small ways. It does not dole out largesse aimed at certain sections or to specific vote banks. To this extent, it can be called popular but not populist
- It appears to aim for macroeconomic stability than trigger immediate growth. It focuses on fiscal prudence and social and rural development and on stabilising slowing/weak sectors such as real estate and infrastructure
- It plans for better quality of spending, by slowing the growth of revenue spending and improving capex spending; thus, trying to keep inflation at bay and generate more productive spending
While the budget does not seek to lift any one sector (other than support the slowing real estate), the budget spending and reforms can be expected to have impact on various sectors.
Maximum coverage with minimum cost
The Budget proposes to reduce the direct tax impact of almost the entire universe of individuals filing returns, barring high net worth individuals with over Rs. 50 lakh income. The impact is maximum for low-income tax payers with taxable income of less than Rs. 5 lakh. It thus reaches out to almost the entire 3.7 crore tax filing individuals. This move, prima facie, can be considered a carrot for the salaried tax payer, probably hurt by demonetisation. However, it is also meant to encourage the non- tax-filing individual to come into the tax system with low, painless rates of tax. Whether this will achieve its purpose, one must wait and watch. As such, the revenue forgone, at such low slabs, won’t hurt the government to try this out.
The other move, seeking to reduce the income tax rates of 96% of domestic companies (MSMEs with turnover of up to Rs. 50 crore) to 25% rate, from the present 30%, is a far significant one as it provides relief to many small companies that do not enjoy much of the economies and bargaining power of their larger peers.
While there is no big bag stimulus to the economy from the above, one can expect the above measures to keep consumption chugging. Seen together with the rural and agricultural spending, India’s consumption story does not appear to have many risks.
Focus on development and stability
The budget has focused on steady spending in key sectors of social, rural and infrastructure development as shown in the table below. While infrastructure has received impetus, agri boost in the form of higher agri credit and internet waiver are also noteworthy.
Besides stable consumption from increased rural income, sectors such as auto, fertilizers and pesticides could also receive a fillip.
The budget has also been a proactive one in terms of providing significant boost to the real estate space, as the sector is expected to bear the brunt of demonetisation and cleaning up. Whether it is grant of infrastructure status for affordable housing, 100% deduction of profits in case of affordable housing with further leeway on carpet area, or longer time for taxing notional income on unsold inventory, all of these provide the much-needed boost to this space.
But some points to be noted are that much of this would help smaller players and not much of listed entities. Also, more than viewing it as a direct benefit to real estate, investors need to look at the opportunity that will come by in allied sectors such as cement, steel and home fittings, that receive a chunk of their business from the realty sector. Hence, the ripple effect of the support to this sector can be expected to be felt in related industries.
Better quality of spending
The 2017 budget proposal also stands out for its moderate spending, suggesting that it is fiscal prudence that scores. The expenditure growth for FY-18 is projected at 7% on a year-on-year basis. Here again, the growth is tilted towards capital expenditure (at 11% YoY) as opposed to revenue expenditure (6% YoY). The below chart will tell you that the revenue spending growth is among the lowest in recent years. Even in the case of allocation for MGNREGA, although it is at an all-time high, the hike is just 1% over revised estimates of FY-17. These numbers assume importance for 2 reasons: one, after a deterioration in the quality of spending from pay commission pay-outs in FY-17, the spending in FY-18 will ensure that inflation is kept at bay. More importantly, it has provided room for more productive capex spending, thus providing a multiplier effect on the economy, and some encouragement for private players to follow suit at some point.
While the above points talk of balance and positive impact to the economy there are some misses as well. While the banking sector received some relief because of NPA provisioning, not much has been budgeted for bank recapitalisation. This could remain a sore point for several public-sector banks still saddled with NPA issues, notwithstanding the liquidity from demonetisation. While there are reforms aimed at skill development and also labour reforms, there seems no concrete move towards broad-basing of skills in a country that derives much of its jobs from the IT sector. Protectionism policies in key IT markets for India, while less harmful for IT companies themselves, may serve a blow for budding IT professionals. Not much thought appears to have gone towards this.
What is the budget telling you?
The Budget proposal of 2017 may hold positives and some negatives for your personal finances. However, we believe there are some cues from the proposal that suggests that investing in financial assets linked to markets would be compelling now. Let us look at what they are:
FPI to hold steady: Foreign portfolio investors (FPIs)are the large stakeholders in the Indian stock markets. The budget had alleviated their key fears. One, capital gains tax continues to remain exempt if held for over one year. Two, certain indirect transfer provisions caused difficulties (by way of taxation) for FPIs when there was transfer of stake of investors of India-based funds located abroad but investing in India-based companies. The budget now proposes that such indirect tax provisions will not apply to certain categories of FPIs that include sovereign wealth funds, central banks, mutual funds and banks. The removal of uncertainty on these aspects together with high fiscal prudence (if the debt to GDP ratio recommended by the FRBM committee is followed, it could result in India receiving a higher credit rating from IMF), can make India a favoured destination for FPIs.
Move away from physical assets and cash: Apart from the many moves to curb cash transactions and also digitise them there are some subtle hints from the budget that suggests that it is good for you to move from physical assets to cash and that it is prudent to move to regulated investment options. Some of them are as follows:
- That the loss on income from house property is to be restricted to Rs 2 lakh for set off (and can only be carried forward) is a hint that treating property as a means of ‘investment’ for tax purposes is not a prudent one any more
- While the proposal to provide long-term capital gains status to land and property after 2 years of holding instead of 3 years might seem positive; what it also tells you is that you have a chance to liquidate your physical assets faster and make the shift to financial assets
- A draft bill to curtail illicit deposit schemes means that the government is serious about taking away high yielding-high risk unregulated schemes from the public domain.
Now view the above together with low bank interest rates, stagnant gold prices and a more transparent and less rigged real estate market. They all mean that your opportunities for building wealth lies more in asset classes such as equity and debt instruments and in products such as mutual funds.
What you should do
While the massive rally on budget day may be a hasty one, we believe that the markets are indeed factoring a turnaround in earnings. The budget provides scope for re-rating in certain sectors and that could in turn drive the markets. Having said that, as valuations are not at their best now, exposure to either large-cap/diversified funds or balanced funds would be the way forward. We would not hesitate to suggest partial deployment of lumpsum followed by SIPs in such funds.
As for debt, we believe that while low inflation could provide some room for rate cut, the case for investing in income accrual funds is higher today for investors looking to build long-term portfolios as the yield rally may be at its last stage.
FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis of investment decisions. To know how to read our weekly fund reviews, please click here.
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