Budget 2016 Analysis & its implications on economy, markets & investment

Budget 2016 Analysis & its implications on economy, markets & investment

Given the very steep expectations, I think Mr. Jaitley should be commended for meeting or exceeding the expectations of most of the key global and Indian stakeholders like Global investors/ FIIs, Indian Industry captains, Indian brokerages/ Financial community, stock markets. Given that the Govt. hands were tied with fiscal constraints/ high fiscal deficit, Jaitley did a commendable job in striking the right balance between Fiscal discipline, growth, Infra spending and social security.

Though, I agree with the experts that the budget was not radical and transformational, it was still a very balanced & long term oriented budget. It had many elements which will significantly facilitate the turnaround in Indian economy and lay the foundation of a strong economy in long term. Let me put a few highlights and lowlights of the budget to reinforce my argument…


1) Balance between Fiscal balance & Growth: In the process of striking balance between fiscal discipline and providing a public spending push to kick start the credit/ investment cycle, he didn’t compromise on the deficit target for FY 2017 and kept the target at 3.5%, despite big new expenditures of OROP(One Rank One Pension) and 7th Pay commission . This was a very positive signal to the Global investors/FIIs who have been lately fleeing in droves with their money . It’s a very positive signal to RBI as it gives RBI much needed room to reduce the interest rates which in turn can kick off the much awaited investment/ capex cycle. Subsidies have been reduced by 3% on food, fuel and fertilizer through better targeting.

2) Kick starting investment cycle through Infra spending : Additional Infra spending push of Rs 2.2 lakh crore including 97000 crore in Roads/ highways , will help in starting the credit cycle . Apart from that , Govt. will kick off UMPP power projects worth 1 lac crore . PSUs are sitting on a cash pile of >3 Lac cr and they could be pushed to spend on Capex or else return the money to Govt. as dividends .In total, we have an additional infra spending of 3.2 Lac crore(about 2.5 % of GDP) which should go a long way in kick starting the investment/ credit cycle which in turn will aid related sectors like capital goods, construction, Banking & Finance, cement, Auto(Commercial vehicles). This in turn will create more jobs, put more money in people pocket and will start a consumer boom also aiding consumer spending related sectors with a lag.

3) Agriculture and rural sector – His emphasis on enhancing agricultural and rural sector after 2 years of drought will be very important for rural demand and prosperity which in turn could create a boom in rural consumer spending
• Aim to double the rural per capital income by 2020
• Govt committed Rs 88K crore for the rural sector
• Allocation to MGNREGA is the highest ever at Rs.38.5 K
• Grant in aid to Gram panchayats – Rs 2.9 Lac crore (228% jump)
• 100% electrification of villages by May 2018
• Agricultural credit highest at 9 Lac crore
• Three major schemes to help underprivileged: Pradhan Mantri Fasal Yojana, health insurance scheme, launching initiative to ensure LPG connection for BPL families
• Total allocation for agriculture and farmer welfare at Rs 36 K crore
• 28.5 lakh hectares of land will be brought under irrigation(20% of land under cultivation)

5) Ease of doing business & make in India/ Startups –
• Initiatives include introducing targeted delivery of subsidies through Aadhaar, with a social security platform for use of Aadhaar; direct benefit transfers on a pilot basis for fertilizers
• Create closer engagement between states and districts—Ek Bharat, Shrestha Bharat
• Bill to amend Companies Act—enabling environment for start-ups
• Bankruptcy code to be introduced
• New manufacturing start up companies incorporated after 1.3.2016 to be given an option to be taxed at 25% + surcharge and cess provided they do not claim profit linked or investment linked deductions
• 100% deduction of profits for 3 out of 5 years for .MAT will apply in such cases.
• Changes in customs and excise duty rates on certain inputs to reduce costs and improve competitiveness of domestic industry in many

6) Undertake significant reforms by
• Giving a statutory backing to AADHAR platform to ensure benefits reach the deserving.
• Freeing the transport sector from constraints and restrictions
• Incentivizing gas discovery and exploration by providing calibrated marketing/pricing freedom
• Enactment of a comprehensive law to deal with resolution of financial firms
• Provide legal framework for dispute resolution and re-negotiations in PPP projects and public utility contracts
• Undertake important banking sector reforms and public listing of general insurance companies undertake significant changes in FDI policy.


1) Some of the big bangs, transformational and radical measures which was expected were missing
2) Roadmap on subsidy reduction plan was missing. There was no attempt to reduce subsidies significantly on food, fertilizer and power, except a pilot on DBT for fertilizers
3) There was no mention on few critical tax reforms like GST timelines , Land acquisition bill, DTC(Direct Tax code) , SEZ tax regime changes( elimination of MAT and dividend distribution tax for SEZs)
4) Absence of clarity on PSU banks re-capitalization roadmap and lower allocation towards PSU Bank recapitalization (25000 crore only provided)
5) Corporate Tax rationalization roadmap was not announced as the roadmap for Tax exemption elimination was announced except a minor reduction of 1% for Companies with revenue less than Rs 5 crore to be taxed at 29% plus surcharge
7) Nothing significant was announced for service, telecom and IT sector which constitutes major part of Indian GDP today
8) Though the intent on making manufacturing the backbone of Indian economy was declared again, some of the key details and roadmap were missing like labor law reforms timelines , Special manufacturing zones or manufacturing growth strategy
10) The capital expenditure to grow only 4% in FY17 vs. 21% in FY16 while Revenue expenditure to grow 12% vs 6% in FY16 due to OROP and 7th pay commission
11) Absence of any significant announcement to encourage new sun rise sectors like e-commerce.

Implications on Indian economy and markets:-

Though the budget was not radical and transformative, It had many elements (like those highlighted above) which will significantly facilitate the turnaround in Indian economy and lay the foundation of a strong economy in long term. Perhaps, the Government’s budget communication in Parliament have become over-hyped in India and we are putting too much of expectations around these communications. Its high time we should de-hype these budget communication and start focusing on the fundamentals of businesses, economy and investing. There are lots of actions which happens beyond the Government budget which really impacts the economy and thereby markets . For example, Government’s initiative to amend the Land acquisition bill, Government’s speed in clearing the massive infra and power projects stuck up in green approvals, Government’s action to auction coal mines & secure coal linkage to all power projects, Government’s action on controlling prices , RBI monetary policy actions are all happening outside the budget process. Besides Government need not announce all the actions and measures during the first budget itself .

Now that the budget communication is over, what will really impact the Indian economy would be execution…execution and execution on the part of Government as well as corporate sector. Even if Modi’s government acts and executes 50-70% percent of key plans and measures announced in the budget , we will be seeing so called “ Ache Din” in next 2 -3 years. Successive Indian governments and its infamous bureaucracy has never been seen as wanting in ideas and plans but severely wanting in execution of those plans and plugging of leakages/ corruption in allocations. What will now impact the Indian markets going forward would be turnaround in economy through Govt. execution of reforms/budget announcements as well as growth in corporate earnings- actual and guidance numbers. Q3 corporate earnings were pretty disappointing. What will drive markets further will be corporate earnings in next few quarters, execution of govt. reforms/ budget announcements, kick start of investment/credit cycle, and macro-economic factors like turnaround in GDP growth, interest rates etc. Few global factors like US Fed hiking its interest rate and Chinese economy slowdown/ Yuan currency devaluation/Chinese market crisis etc. also might have short term impact on the markets.

Good news for Indian economy is that there are many domestic green shoots like low inflation rates of about 5%, turnaround in interest rate cycle, current account deficit at 1.4%, decent GDP growth numbers(7.6%), pick up of automobile sector growth(double digit growth),consumer credit growth > 15% , significant reforms/ initiatives launched by the new Govt. like Jan dhan, Make in India, Digital India, start up India etc. However, it needs to be seen if govt. would be able to get the parliament nods on some key bills like GST, Land acquisition, Bankruptcy code etc.

Implications for retail investors :-

As I have been predicting since last 3 years in my blogs , we are sitting on a huge bull run which may last for many years , mainly on the back of an economy which is turning around and will start growing again at 8-9% in few years. The market has liked the budget announcements and signals and already started going up(went up 8-9% from its lows in last few weeks). Now that the hype over budget is over, the market will return to its normal self. This may lead to some consolidation and range bound movement in short run but the long term bull run is still very much intact.

Though the market has recovered some of its losses in recent weeks, it’s still very fairly valued as its about 16% below the market highs. In fact some of the key sectors and businesses are available at attractive valuations(under valued) from 2 -3 years perspective… Hence bottoms up strategy in picking up the rights businesses/ stocks in few chosen sectors is the best strategy. After the budget, few of my favorite sectors would be interest rate sensitive sectors like B&F (Banking & Finance), Housing Finance sector, Auto & ancillary sector , ever green defensive sectors like Pharma/IT as well as selected businesses in Infra sector . If I take up my 2016, 2015 & 2014 portfolio published in my blog , the leading stocks where I am investing now after the budget would be Yes Bank, Axis bank , Bajaj Finserv in B&F sector, India Bulls housing Finance, LIC Housing Fin in Housing Finance sector, Tata Motors, Maruti ,MRF tyres in Auto & ancillary sector and REC, Coal India, Power grid in Infra sector. Apart from these domestic cyclicals, global defensive sectors like IT and Pharma are my evergreen favorites( HCL Tech, Tech Mahindra, Dr. Reddy, Torrent Pharma are my fav picks for current investing) where I always put about 20% of my money or more. Incidentally, almost all these stocks and reasons for picking them along with their business/ financial performance is mentioned in my last blog in January 2016 titled “My 2016 top stock picks and 2015 portfolio performance”

Remember that the key to make money consistently in Indian markets now is to find few of the best available businesses with strong growth track records, High return on equity/ capital, strong balance sheets , competent managements and durable competitive advantages , which are also very good proxies to Indian structural growth story and invest for long term , whenever the prices are reasonable . All these businesses have shown strong growth track records in last 5 to 10 years(> 15% CAGR) with good future revenue visibility, high and consistent ROE(>15%), strong balance sheets with free cash flows/low debt and competent/ honest managements. They are available at reasonable prices/ valuations too with PEG ratios below 1.2

Hope the budget analysis and the implications on economy and your stock market investments was useful to you.

Happy investing

I am an IIM Bangalore Alumnus & NIT Allahabad Engineering graduate with 18 years of global experience into service and outsourcing industry. Value Investing has been one of my passions for last 8 years.

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