Equity Outlook: Jump-starting the infra capex cycle

The Union Budget 2015-2016 is among the most pragmatic Budgets we have seen for a while now. By giving a big boost to infrastructure, it is a positive for capital goods, infrastructure and banking stocks. In anticipation of a pro-infrastructure Budget, foreign institutional investors (FIIs) had already invested $4.3 billion in the markets during January-February. The inflows have continued after the Budget. In the medium term, we believe, inflows should continue. India still remains the most preferred among emerging markets. The only risk, in the near term, would be that emanating from an interest rate rise by the US Federal Reserve.

The institutional investors, both local and foreign, consider this Budget very realistic, with very few negative surprises as both revenue and non-Plan expenditure estimates look achievable.

Apart from this risk, the underlying themes and sectoral impact of the Budget are as follows:

The past few Budgets have been more focused on consumption stimulus. It's exactly the reverse in this Budget. As a result, it might have an impact on consumption demand at the margin in the short run. Social sector spending has also moved to the state governments with transfer of Rs 5,23,958 crore out of central taxes in FY16 to states, which can spend resources according to their needs. It remains to be seen whether resources are deployed for consumption or investment. Hence, consumer stocks are likely to hold on to current levels and further gains will have to wait for actual spending.

The positive impact of increased allocation to the state governments is that it will also pave the way for implementation of the Goods and Services Tax (GST) regime in FY17. A key component of GST is a uniform goods and services rate. Further, the government has increased excise duty to 12.5 per cent from 12.36 per cent and services tax to 14 per cent from 12.36 per cent to align the tax rates to a tax-neutral rate for implementation of GST. A rise in tax rate will put more money in the hands of the government rather than consumers.

The Budget's focus on capex will give a much needed boost to the investment cycle in FY16 and is thus positive for capital goods, infrastructure and banking stocks. It has increased allocation to the Central Plan outlay by Rs 70,000 crore with a focus on roads and railways. Extra resources will be available to the infrastructure sector through issuance of tax-free bonds. The Budget has proposed to set up a Rs 20,000-crore National Infrastructure and Investment Fund. The fund size will grow multiple times by leveraging on government allocation as equity and boost infrastructure investments.

To summarise, we believe the Budget has set the tone for revival of manufacturing and capex cycle. By allocating significant resources to the infrastructure sector even while implementing the recommendations of 14th Finance Commission and ensuring a reduction in fiscal deficit to 3.9 per cent of the gross domestic product, the government has done its best to revive the economy.

In the near term, investors are focusing on the Federal Open Market Committee meeting on March 18. There is a fear that the Fed might either announce a rate rise or comment on that happening in the near future. The market is expected to be choppy in the very near term.

The author is head-institutional equities, co-chief executive officer,IDFC Securities