Major boost to consumption but scepticism around growth stays

Budget leaves over ~1 trillion in consumers’ hands but tax targets look ambitious; could weigh on bond yields

With distress levels rising among farmers, unorganised workers as well as the middle class and the BJP recently losing elections in three key states, it is not surprising that the Narendra Modi government has announced sops for these three segments in its last Budget before the Lok Sabha elections.

From the market’s perspective, these measures are positive as they would help drive consumption.

These dole- outs — ~95,000 crore (~20,000 crore for FY19 and ~75,000 crore for FY20) to farmers with land holdings of up to two hectares and about ~20,000 crore tax rebate to individuals having annual income up to ~5 lakh — should leave more than ~1 trillion in the hands of these individuals/families, providing a boost to consumption.

The Budget’s measures also include a 25 per cent hike in the standard deduction to ~50,000 for salaried individuals.

All these should add at least 0.5 per cent to India’s GDP growth in FY20, estimate analysts. Little surprising then the BSE’s FMCG, Auto and Consumer Discretionary indices surged between 1-3 per cent on Friday.

However, there is a flip side, too. The Budget has allocated ~3.36 trillion as capital expenditure towards railways, roads, defence, housing, etc, which is a mere 6 per cent increase over FY19 revised estimates (RE). Experts say this could offset some of the growth provided from measures to boost consumption.

The fiscal math, too, is being seen with some scepticism. Dhiraj Relli, managing director and chief executive officer of HDFC Securities, says though this Budget has not caused any major disappointment, “GST collections growth at 18.3 per cent may seem a bit aggressive; net borrowings remaining flat at ~4.48 trillion in FY20 may also be challenging given the risks due to slowdown fears”.

In its post-budget note, Nomura said, “Overall, the government presented an expansionary Budget and prioritised populism over fiscal prudence. The deviation from the FY19 fiscal deficit target and the ‘pause’ on FY20 fiscal consolidation is a negative surprise, relative to our expectations. The cumulative effect of the cash transfer to farmers and the middleincome class will be a boost to consumption, but likely at the cost of crowding out private investments.” This growth mix generally tends to be a negative for macro imbalances, they add.

Apart from the Centre, borrowings by state governments are also seen rising significantly in FY20. This, at a time when global interest rates are elevated, could mean higher interest expenses for domestic companies and consumers.

The bond markets are already sensing the future. India’s 10-year government bond yields, after declining during the first hour of the Budget announcement, ended 9 basis points higher at 7.38 per cent over its previous close. The rupee, too, saw a weak trend and closed lower by 24 paise at 71.26 to a dollar.

For investors, higher bond yields of closer to 8 per cent could make equities unattractive. Already, the price/equity (P/E) valuations of the S&P BSE Sensex are high at 24.8 times its trailing earnings for 12 months ended December 2018.

And corporate earnings have been growing at a muted pace for the past few years. Unless earnings pick up, it may prove difficult for markets sustain these high valuations. The looming general elections and global headwinds (trade wars, slowdown, etc) will add volatility to the markets.

In this scenario, experts are thus advising that investors stick to quality names in the information technology, pharma, private banks and financials, and consumption sectors.