India's interim budget on expected lines
Portfolio Advisor, Fidelity India Fund
The Modi government presented its last interim Union Budget for 2019-2020 on Friday. As expected, the focus of the budget was on farmers and the middle class ahead of the national elections scheduled in April/May this year.
This social sector focus resulted in some fiscal slippage.
- Focus on rural India and middle class ahead of elections - the government announced relief to about 120 million marginal farmers (holding up to 2 hectares of land) by promising to transfer INR6,000 (US$84) per annum directly in their bank accounts.
For the middle class, it announced that there will be no tax on incomes up to INR500,000 (US$7,000). This is double the current tax exemption threshold of INR250,000.
- Higher fiscal deficit versus target - The government put fiscal consolidation on pause for the current and the coming financial year. FY19’s fiscal deficit target was revised to 3.4% vs. the earlier target of 3.3%. The target for FY20 has been fixed at 3.4% vs. the earlier target of 3.1%.
- Support for the property sector - a number of small and incremental steps were also announced to revive the real estate sector as a tool to stimulate the economy and the capex cycle.
Sectors to benefit:
- The relief to farmers and tax sops for the middle class should be positive for small ticket consumption and benefit select companies in sectors such as consumer staples and low value consumer discretionary items.
- Steps to revive the real estate sector should be positive for property developers and housing finance companies.
What this means for investors
The equity markets and currency market were stable on Friday, with the BSE Sensex index gaining over 0.6% over its previous day’s close and the Indian rupee depreciating 0.2% vs. the US dollar.
In the bond market, the 10-year government bond yield increased by 14 basis points from the day’s low.
“The Modi government’s last interim Budget was on expected lines. It was a pre-election budget with focus on social sector spending to please voters, which resulted in some fiscal slippage.
To balance the math, capital expenditure spending has been scaled back to a certain extent. However, compared to market expectations, the government’s social sector spending target is at the lower end.
Overall the budget should give some boost to consumption in the near term, but it also raises some red flags on fiscal consolidation over the medium term.
Given that the budget, in my view, is more or less on expected lines, I do not foresee making any major changes in the portfolio.
However, going forward I expect an increase in market volatility around the upcoming national elections, and this should lead to stock picking opportunities with a longer-term view.
I will continue to focus on identifying high-quality growth stocks characterised by their higher returns on equity, free cash flows and lower debt, with good quality management, scalable business models and reasonable valuations.”
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