Why the Union Budget is a big boost to Indian equities…

The Union Budget 2017-18 has been a morale booster for Indian equities. While there were some specific benefits for equities and some indirect benefits, the overall theme of growth and spending was the real story as far as equities were concerned…

Rural spending story… 

The budget has given a major boost to rural spending, outlay for irrigation as well as a record Rs.10,00,000 crore credit target for agriculture. In addition, focus on expanding MNREGA outlay and rural health is likely to have accretive results. The big push towards rural health and sanitation will be a game-changer. The budget also envisages major investments in post-harvest infrastructure. From an equity point of view, this will generate huge entry level rural demand for tractors, two-wheelers, cars, FMCG, agrochemicals etc.

Affordable housing story… 

The budget has accorded Infrastructure Status to affordable housing. It has also targeted building at least another 1 crore houses in the next few years to ensure housing for all. Special tax breaks for affordable housing will also stay. This will be a big boost for cement, construction and housing finance companies. The Infrastructure Status accorded will also change the economics of affordable housing for housing companies and financiers.

Low yields story…

A very subtle story emerging from the Union Budget is of the sustenance of low interest yields in the economy. Firstly, the budget has committed itself to 3.2% fiscal deficit in 2017-18 and 3% in subsequent years. This will keep the rates low in India and also keep the INR strong. Secondly, the government has scaled down its annual borrowing program by over 20% on a year-on-year basis. This will keep rates low and also ensure that private borrowing does not get crowded out. Low bond yields are normally positive for equities as it means that future cash flows will be discounted at a lower cost of capital.

Digital transformation…

This could be the next big tech story in India after outsourcing, ERP and analytics. As a logical sequel to demonetization, the government has ushered in a big push to digitization. Major incentives to companies for adopting the cashless route as well as special incentives for digital hardware and digital software are just the beginning. Digitization is likely to substantially reduce the cost of transacting over a period of time. Also, the focus on digitization will incentivize the honest taxpayer at the cost of the evader. This will widen and broaden the tax base. This could be the big boost to equities resulting from a mix of simplicity, integrity and lower costs! ©

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