In­vestors have more rea­sons to in­crease equity

The Pak Banker - - OPINION - Nimesh Shah

Acloser look at Bud­get 2016-17 re­veals that it has set a firm and sus­tain­able re­cov­ery in mo­tion. The fi­nance min­is­ter has done this in a con­struc­tive way by stay­ing on the course of fis­cal pru­dence. With fi­nan­cial year (FY) 201516 tar­gets for fis­cal con­sol­i­da­tion be­ing met, the fi­nance min­is­ter has stayed firmly on course, with a deficit tar­get of 3.5% for FY17. This is eas­ily one of the good de­ci­sions taken with­out com­pro­mis­ing on ex­pen­di­ture re­quired for in­fra­struc­ture.

With the end re­sult in mind, I will put a con­struc­tive la­bel on the Bud­get as it is a vi­tal re­minder of the im­por­tance of fis­cal sta­bil­ity. While the fi­nance min­is­ter has not al­lo­cated large amounts to in­vest­ment in in­fra­struc­ture in the light of fis­cal con­straints, the amount is still vast enough to keep the growth wheels of the econ­omy run­ning.

This shows that the govern­ment has set its sights on a slow, grad­ual, and per­sis­tent re­cov­ery in the econ­omy.

A lower fis­cal deficit and the route to fis­cal con­sol­i­da­tion has been one of the most de­bated is­sues in re­cent times. But this is also a pre-req­ui­site for lower in­ter­est rates in the econ­omy. While con­sumer in­fla­tion has come un­der con­trol, in­ter­est rates in the econ­omy have still not come down mean­ing­fully, largely be­cause fis­cal ac­counts have been chal­leng­ing. The cur­rent ac­count deficit is also pro­jected to be 1.4% of gross do­mes­tic prod­uct (GDP) in FY17.

In the course of time, in­ter­est rates are likely to lower, boost­ing the prospects of the debt mar­ket. The ru­pee has not been as badly hit as some other emerg­ing-mar­ket cur­ren­cies; hence, if it is well-be­haved, we could see re­duced rates sooner.

In due time, ben­e­fits of lower in­ter­est rates will be felt in the In­dian in­dus­try and this will cre­ate a foun­da­tion for an eco­nomic up­swing in com­ing years. In the short run, though, lower rates would ben­e­fit in­vestors in debt in­stru­ments.

In the longer run, this would ben­e­fit eq­ui­ties as the Bud­get has not only made lower in­ter­est rates pos­si­ble, but also strived to ratchet up growth through the right in­fra­struc­ture ex­pen­di­ture.

The fi­nance min­is­ter has al­lo­cated Rs.2.21 tril­lion to­ward in­fra­struc­ture, and Rs.2.18 tril­lion to­ward roads and rail­ways. In­fra­struc­ture is one of the crit­i­cal sec­tors of the econ­omy and a push here would be good for the over­all re­cov­ery.

Bud­get 2016-17 has also fo­cused on the ru­ral econ­omy, which has been reel­ing un­der two con­sec­u­tive bad mon­soons lead­ing to lower spend­ing and in­come lev­els of the ru­ral pop­u­la­tion.

The Bud­get pro­poses to bring more eco­nomic ac­tiv­ity here. Be­sides al­lo­cat­ing Rs.877.65 bil­lion for ru­ral de­vel­op­ment schemes, it pro­poses Rs.385 bil­lion for ru­ral job plans. Also, Rs.85 bil­lion has been al­lo­cated in FY17 for elec­tri­fi­ca­tion of all vil­lages by 2018. It has been proved that sig­nif­i­cant strides in eco­nomic de­vel­op­ment hap­pen when elec­tric­ity can be availed by one and all.

Af­ford­able hous­ing got a fil­lip, which could keep con­sump­tion de­mand high. Small tax pay­ers have re­ceived ad­di­tional tax ex­emp­tions on in­ter­est pay­ments for loans for small-ticket houses. An equally pos­i­tive de­vel­op­ment for many peo­ple is in­cen­tivis­ing em­ploy­ment gen­er­a­tion in the pri­vate sec­tor by con­tri­bu­tions to the prov­i­dent fund sec­tor in case of em­ploy­ees draw­ing lower salaries for the first three years. This would step up pri­vate sec­tor em­ploy­ment gen­er­a­tion.

On bank­ing, in the wake of the cap­i­tal re­quire­ments, the govern­ment has upped al­lo­ca­tions for re-cap­i­tal­is­ing of pub­lic sec­tor banks to Rs.25,000 crore.

A healthy fi­nan­cial sec­tor is vi­tal as the econ­omy has to fire on all cylin­ders when credit be­gins to take off. Banks have to be ad­e­quately cap­i­talised and ready to pro­vide credit fa­cil­i­ties to the in­fra­struc­ture sec­tor in a huge way. Ad­di­tion­ally, cor­po­rate tax is be­ing re­duced. To be­gin with, com­pa­nies that have a lower turnover will see a re­duc­tion in their tax rates by 1%. The hous­ing in­dus­try has re­ceived a boost in the af­ford­able-hous­ing sub-seg­ment, which could keep con­sump­tion de­mand at sus­tain­able lev­els.

To be sure, the Bud­get has taken a slightly longer route to cor­po­rate sec­tor re­vival, but it's a steady and sus­tain­able one to take, which could ben­e­fit the in­dus­try for many years to come. Hence, in the longer run, equity in­vestors can ben­e­fit from this Bud­get.

The other piece of good news is that while the ground work is be­ing done to con­sol­i­date the econ­omy, equity val­u­a­tions have been com­ing down be­cause of global re-al­lo­ca­tions in fi­nan­cial mar­kets. Lower equity prices are a good op­por­tu­nity and we sug­gest go­ing over­weight on eq­ui­ties by end-2016.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.