Pros and cons of the budget, take advantage of the correction…

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The Pros

  • Government’s intention is to reduce its role in businesses and focus on governance.
  • Government expects real GDP to grow in the range of 6% to 6.5% compared to 5% estimated in FY20.
  • Huge divestment plan of Rs2.1 lakh crore compared to only Rs 0.18 lakh crore till date which provides a strong intention of the government.
  • Custom duty increased which is positive for Make in India, manufacturing like electronics.
  • Very encouraging measures provided for Infrastructure, Rural market and Aquaculture (Fisheries).
  • To raise fish production to 200 lakh tons by FY23 and to raise fishery exports to Rs.1 lakh Cr by FY25.
  • Huge plan of Rs103 lac cr infrastructure spending in the next 5yrs which is double that of last 6 yrs.
  • To double farmer’s income.
  • Debt borrowing plans are to be moderated. Debt as a percentage of GDP reduced to 49% from 52% in FY21. This is positive for bond market; interest yield can reduce in the medium to long-term.
  • New direct tax regime will be positive for salaried class between Rs5 to Rs15 lakhs.
  • Dividend Distribution tax has been abolished which is positive for FIIs & MNCs, marginally positive for retail investors but negative for promoters and HNIs.

The cons:

  • Fiscal deficit increased only marginally to 3.5% for FY21. But higher Government spending was required to boost the economy.
  • Budget speech has shown importance of Rural & Infra development but expenditure as per the budget document is subdued with only a 3% growth in rural development, defence, low deficit, subsidy and borrowing plans. This indicates that the government spending remains cautious and will depend on the trend of the overall economy and revenue.
  • The budget expects the nominal GDP to grow by only 10% in FY21. The real GDP growth will depend on the inflation which is high at 7.35% in Dec 2019.
  • The forecast for FY20 and FY21 does not look very realistic. FY21 economy is expected to be better but net revenue is expected to be muted than FY20. Income from divestment is very high (depending on LIC, BPCL and Air India sales).

The market was expecting this budget will provide a reset clause to economy. More goodies were expected for households with cut in direct tax and increase in exemptions. Measures for Industries were expected especially to Auto, Real Estate, Infra and Housing. Higher government spending was expected for FY21 to jump-start the economy. The budget has opted for a conservative approach hoping that the economy will stabilize based on the measures already undertaken by the government in the last 6months.

The sudden overreaction is mainly due to over expectations built in the market. This upset is not going to affect the market’s wealth creation since the main factors required to develop the economy & market is already existing in the system, supported by the corrective & supportive measures undertaken by the government during H2 CY19. The big picture is intact and the market will go back to basics and look for improvement in the economy supported by fall in stressed assets. The global financial market is improving. This budget does not change our thesis of 15% growth in earnings from FY19 to FY21. We stick to our one-year-target of 12,700 for Nifty 50, which is 10% return during which we expect mid and small caps to outperform.

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