The Union Budget, to be presented on February 1, assumes greater significance as the Indian economy grapples with a slowdown.
With India confirming its first case of coronavirus, markets will have another reason to worry. Across the globe, ripple effect of the epidemic that started in China and has killed more than 170 people in that country are being felt. The spread of the virus is also a cause of concern for the global economy.
In India, the biggest challenge for the government will be to boost growth amid tight fiscal conditions. “The Modi government is likely to deviate from its policy of fiscal consolidation for the first time in six years and may go for a higher fiscal deficit to boost growth in the budget on February 1,” HDFC Securities said in a report.
As governments typically push reforms in the first two years of their terms, it’s normal to expect some path-breaking announcements in the Budget, though a lot can be done outside of it as well, the report said.
The government needs to give a serious push to improve the business environment, which will cheer D-Street. If history is anything to go by, the Budget could well turn out to be a non-event but stock-specific action will continue and once the dust settles, the Nifty could head towards 12,400.
“Budgets have lately become a non-event except for media and economists and its effect is worn off two-three days post the event. Markets may slide ahead of the Budget on apprehensions about the Budget and also due to coronavirus scare,” the HDFC Securities note said.
“However, post the announcement of the Budget, once the uncertainty is out, markets may bounce and rise towards the recent highs.” it
Here are six announcements that experts say will cheer D-Street:
Investors are pinning hopes on some relaxation in personal tax and tweaks in the Long-Term Capital Gains (LTCG) and the Dividend Distribution Tax (DDT).
Antique Stock Broking expects a tax rebate of Rs 12,500 to be extended for income between Rs 5 and Rs 10 lakh. It also expects a reduction in LTCG and DDT. An increase in deduction limit for homebuyers or in investment deduction is also expected.
Angel Broking expects the government to abolish LTCG on equities, while changing the definition of long term to two years from one.
“There are also expectations that the government might do away with the Dividend Distribution Tax DDT on equity given that the Government wants to attract investments,” it said.
The move will be positive for all consumption-linked companies and the overall market. It will also be positive for high-dividend firms such as MNCs, IT, auto, metals and oil and gas, say experts.
The government might not be able to contain the fiscal deficit in the target range of 3.3 percent, but a slippage towards 3.8 percent should be taken positively as long as it is intended to boost growth and kick start the investment cycle, say experts.
The quality of expenditure is something which the D-Street will look out for compared to any dole from the government.
“The steep fiscal slippage of 48bps in FY20 is largely due to growth slowdown and the lack of addressing sector-specific issues. The FY21 budget will probably look relatively slimmer with a deficit of 3.5% of GDP,” Emkay Global said in a report.
“Concentration on spending would again steer toward railways, defence and toward reviving sentiment in the real estate sector,” it said.
ICICI Securities is of the view that any sharp jump in fiscal deficit driven by non-development expenditure and any adverse direct tax-related announcement.
“Fiscal consolidation/prudence since 2013 helped to lower bond yields considerably, and a change in trajectory could have consequences on the interest rate curve and capital market stability,” it said.
A lower fiscal deficit will cheer the overall market and PSU banking space. A higher deficit and focus on the populist measures could lead to a rise in bond yields.
Push rural demand
The government is expected to push rural demand by increasing allocation to various schemes. The government may announce some more policy measures to achieve its target of doubling farmer income by 2022, say experts.
According to Angel Broking, the government is expected to reiterate its focus on the rural sector. Full benefits of the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) will be felt in FY21.
“We also expect some further measures like the tweaking of the MSP programme. The government is also expected to increase outlays for the MNREGA scheme and continue its focus on rural electrification and roads,” it said.
The move will be positive for consumption and agriculture-related stocks like M&M, Escorts, Hero, TVS, Bajaj Auto, HUL, Colgate, Dabur, Emami, Jyothy Lab, Bajaj Electrical, Crompton Consumer and Dhanuka Agrotech, according to Antique Stock Broking.
The government is expected to continue its focus on affordable housing and a greater allocation under the Pradhan Mantri Aawas Yojna could be seen along with focus on execution.
“The government could also increase the tax exemption limit on housing loan interest from current levels of Rs 2 lakh. The government could also look at expanding the scope of affordable housing by increasing the carpet area as well the ticket size,” Angel Broking said in a report.
The move will be positive for real estate and ancillary plays like cement, building materials and consumer electrical and durables.
Boost for auto sector
The government is expected to announce measures to shore up the auto industry, impacted by the credit crisis and BS-VI norms that kick in from April 2020.
“There is a very high probability that the government will announce an incentive-based scrappage plan in the Budget which will benefit the sector, especially the MHCV space, which has been the worst impacted,” Angel Broking said in a report.
The move will benefit all original equipment manufacturers (OEMs) and component manufacturers to benefit from expected increase in vehicle sales and reduced input costs of material.
The focus of the government could remain on areas that have the potential to generate employment, improve long-term efficiency of the economy and support consumption.
“We expect a continued focus on infrastructure and rural development in the upcoming budget. The government may also try to improve the quality of expenditure by boosting capex,” ICICI Securities said in a report.
According to Antique Stock Broking, the budgeted amount allotted to metro projects should be more than Rs 200 billion. The overall railway capital expenditure could be pegged at Rs 1.74 trillion.
The expenditure on roads in excess of Rs 724 billion, up 10%. The brokerage firm also expects the announcement of Atal Distribution System Improvement Yojana (ADITYA) to cut losses.
“The Centre to provide funding of up to Rs 1.1 trillion, which will work in three phases till 2024. The focus of the government is to reduce overall logistics cost,” it said.
The move will be positive for logistics, commercial vehicle, quality industrials, cement and infrastructure companies with strong execution capabilities.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.