The government has taken a socialist hue, promising universal ‘everything‘ to those who cannot afford it.
Fiscal math looks messy but a closer examination suggests that these targets can be achieved, but it would be no cake walk.
FY18 slippage (3.5% of GDP vs. 3.2% target): Culprits are GST collections & higher revenue expenditure; the headline numbers will not reveal this instantly due to inclusion of GST compensation cess under revenue receipts
FY19 consolidation (3.3% of GDP): Expenditure is more-or-less adequately budgeted, but tax buoyancy of 1.4x (particularly from indirect taxes) hinges on improved GST compliance and growth. There is some buffer to cut back capex or drive harder on divestments in case of a revenue shortfall, both of which have consequences for the investment cycle
Skittish equity markets calmed: Grandfathering of LTCG realized till Jan 31, 2018 but 10% LTCG tax post that for gains > Rs 1 lakh (Rs 0.1 mn) has soothed nerves. Sanguine market is helpful for bank recapitalization, divestment and risk appetite
Agri/rural push has come through as expected: Efforts focused on improving price realization over time. For now, higher MSP is the solution and a price-deficit like mechanism is on the anvil
“Modi-care”: 100 mn poor households will see their health insurance cover increase from Rs 30k to Rs 500k. Sentiment booster for sure, but there are Q marks on how it will work.
Implications
Market reaction: High deficit to put RBI on a cautious footing leaving interest rates elevated. Depreciation bias for rupee as FIIs evaluate India allocation in fixed income duration
Market drivers: earnings growth and state elections
Top buys: Apollo Hospitals, Coromandel International, Crisil, Dilip Buildcon, Godrej Agrovet, HDFC Bank, Infosys, JSW Steel, Maruti, SBI Life
India
NRI
