Focus on control of expenditure, public investment

By Bharat Iyer

The Union Budget for FY18 signals policy continuity and provides balance. It carries forward the government's recent initiatives to crack down on the parallel economy , promote digital banking channels and disincentivise cash usage. Foreign direct investment norms are sought to be relaxed.
A mild fiscal stimulus has been provided, but the focus remains on boosting public investments and keeping expenditure in check, rather than handouts. The government's targeted capital spending is up about 14% and should provide a much-needed boost to the investment cycle against the backdrop of weak private sector sentiment. Personal income tax rates have been reduced for low income segments, both to provide relief and to make tax compliance more appealing.

The fiscal math appears credible, with nominal GDP growth budgeted at 11.75% and tax collections expected to increase by about 12%.

Importantly, there has been no meaningful change to the longterm capital gains tax structure on equity investments as feared in the run-up to the event -allowing markets to breathe a sigh of relief.

Real estate, building materials and cement and segments catering to the government's priority infrastructure areas -construction equipment, tractors, commercial vehicles and select capital goods -appear to be key benefi ciaries of the Budget proposals.Sin stocks get near-term relief as there were no punitive taxes.

On balance, we believe it would not take too much for economic growth to mean revert (move back to the average) in FY18, off a low base. The global growth environment for calendar year 2017 appears to be meaningfully better than in 2016. The demonetisation impact has not been as much as feared initially as seen from high frequency data points.

Concerns of a liquidity crunch are also moderating as a substantial part of the demonetised currency is being replaced with new notes. The deluge of liquidity into the system has resulted in very easy monetary conditions and aided transmission. Lending rates are now down almost 200 bps since the easing cycle commenced.Against this backdrop, the fiscal stimulus provided should be seen as a catalyst rather than having to do all the heavy lifting.

The Budget is the beginning of a n eve n t h e av y f i f t y d ay s.Expectations are for the RBI to cut policy rates by 25 bps next week.Subsequently , attention will shift to politics, given the assembly elections in five states. The external environment also needs to be watched, particularly given the signals of increased protectionism in the US. Markets could turn volatile in the event of adverse outcomes in any of these events.

SECTORS TO WATCH OUT FOR

REAL ESTATE

TRACTORS

COMMERCIAL VEHICLES

(The author is Head of Equities at JP Morgan India)