Markets, expectations steam forward

Analysts expect fiscal stimulus from Budget, through higher spending as well as reduced taxes

With equity markets rallying eight per cent in the past month, expectations are high from the Union Budget. Analysts are expecting a fiscal stimulus from Finance Minister Arun Jaitley, through a combination of higher spending and lower taxes. The markets will also be eyeing the measures to counter the potential slowing caused by demonetisation, they say.

 

“The market, very logically, expects a fiscally stimulative Budget. For political and economic reasons, the government has to attempt to mend issues created by the demonetisation,” says Sanjay Mookim, India equity strategist at Bank of America Merrill Lynch.

 

Bharat Iyer, India equity strategist at JPMorgan, expects an increase in infrastructure spending in priority areas such as roads, railways, power and housing, to “provide some impetus to the economy impacted by demonetisation”.

 

Given the need for higher spending, market pundits expect the FM to stray a bit away from the fiscal consolidation path. Brokerages are expecting the fiscal deficit to remain between 3.2 per cent and 3.5 per cent of gross domestic product for 2017-18, not the three per cent under the Fiscal Responsibility and Budget Management Act. At 3.5 per cent, expenditure could be Rs 80,000-90,000 crore higher than in 2016-17. “It will be a tightrope walk to boost public spending and also keep the fiscal deficit within limits. Given the current conditions, it is highly probable that the fiscal loosening option will be explored by the government to step up spending on infrastructure and social programmes, and to provide direct tax incentives for boosting consumption,” says Ravi Muthukrishnan, co-head of research at ICICI Securities.

 

Market players are also expecting a stimulus in the form of lower corporate and personal taxes. They expect steps towards cutting corporate taxes from the current rate of 30 per cent to 25 per cent in the next one or two years. The reduction, however, will be accompanied with withdrawal of various exemptions.

 

“The effective tax rate for corporate India is 23 per cent, as against the peak tax rate of 34 per cent (including surcharge & cess), implying there will be some losers (currently paying low taxes) and winners (high tax paying companies) of the proposed rationalisation,” says Iyer. Mookim says an increase in income tax slabs at the low end is likely, as it might not cost the government much. Analysts expect consumer-focused companies to benefit on account of personal tax cuts, while higher capital spending could give a boost to companies operating in the infrastructure space. “We believe the expected measures to reduce tax liability for individuals might provide a needed boost to the consumer-related sector. Companies with higher rural exposure could be beneficiaries. Further, higher capital spending might help the defence, road and railways sectors,” says Gautam Duggad, head of research, institutional equities, at Motilal Oswal. Another domestic brokerage, Edelweiss, expects housing finance and cement companies could also benefit, as the government will try to boost rural and urban housing.

 

Given the rally in stock prices, market players are hoping the Centre will not tinker with the capital market tax structure. “As tax buoyancy is likely to improve, we believe any announcement relating to hike in securities tax or changes to the capital gains tax regime is unlikely, ensuring stability on the equity market,” says Muthukrishnan.

 

Any change to the existing long-term capital gains tax structure on equities is a key risk for the Budget, says Iyer.

Budget Plays

Sector analysts expect

gains from the Budget

Brokerages bullish on

JPMorgan

Housing finance, building materials and cement, segments catering to construction and low-end to mid-end urban consumption

Edelweiss

Those dependent on revival in rural consumption (consumer staples, two-wheelers), housing finance, cement and road-construction companies

Kotak

Two-wheelers, tractors, cement, energy, industrials, infrastructure, media and metals

ICICI Securities

Auto, FMCG, consumer discretionary (affordable segment), private banks (with retail franchise), NBFCs (pure-play home loan specialists), cement and energy

BoFA ML

Rural, staples, cement

Motilal Oswal

Companies with higher rural exposure; defence, road and railways sectors