We had huge expectations from the 2015 budget presented by Arun Jaitley.It had been hailed as the “make or break” budget and most awaited budget in Indian history . Given the very steep expectations, I think Mr. Jaitley should be commended for meeting or exceeding the expectations of most of the key global and Indian stakeholders like Global investors/ FIIs, International brokerages, RBI, Indian Industry captains, Indian brokerages/ Financial community, stock markets. The strongest thumbs up signal was given by our globally renowned RBI governor with a surprise rate cut endorsing the fiscal discipline and growth oriented initiatives of the budget. Given that the Govt. hands were tied with fiscal constraints/ high fiscal deficit and major increase in revenue transfer to states, Jaitley did a commendable job in striking the right balance between Fiscal discipline, growth, Infra spending and social security.

Though, I agree with the experts that the budget was not radical and transformational and could have done more, it was still a very good, visionary & long term oriented budget. It had many elements which will significantly facilitate the turnaround in Indian economy and lay the foundation of a strong economy in long term. Let me put a few highlights and lowlights of the budget to reinforce my argument…

1) Balance between Fiscal balance & Growth : In the process of striking balance between fiscal discipline and providing a public spending push to kick start the credit/ investment cycle, he deliberately compromised on the deficit target which is projected a bit higher at 3.9% vs 3.6% for the year with the 3% target being pushed back by a year to 2018 from 2017

2) Kick starting investment cycle : Additional Infra spending push of Rs 70 K crore mainly on Roads/ Railways will help in starting the credit cycle<. Apart from that, Railways will spend another Rs 55K crore on projects/ capital exp, defense will spend another 95K crore on capital purchases and PSUs are sitting on a cash pile of >3 Lac cr from which they will spend additional Rs 80 K crore on capacity expansion/ capital expenditure this year. In total, we have an additional public capital or infra spending of 3 Lac crore(about 2.5 % of GDP) which should go a long way in kick starting the investment/ credit cycle which in turn will aid related sectors like capital goods, construction, Banking & Finance, cement, Auto(Commercial vehicles). This in turn will create more jobs, put more money in people pocket and will start a consumer boom also aiding consumer spending related sectors with a lag.

3) Agriculture – His emphasis on enhancing agricultural credit ( Rs 8.5 Lac Crore) , targeting Rs 35 K crore MGNREGA funds towards rural and irrigation related infra , creating irrigation(Rs 5.3 k crore) and rural infra(Rs 20 K crore) should go a long way to enhance rural economy and to target agricultural growth of 4% in long run

4) Infrastructure – Infra will get a big push with Govt announcing additional Rs 70 K cr on infra spend(mainly on Roads & Railways), 1 Lac KM of new roads, 5 plug and play UMPP power plants of 4000 MW each, setting up of National Infra and investment fund with seed capital of Rs 20 K cr, provision of Tax free Infra bonds for roads/railways, revamping PPP model to reduce risk for private players, proposed law on transparent public/infra contracts & disputes settlement, big thrust on affordable housing ( 6 crore homes by 2022). etc

5) Ease of doing business & make in India – Ease of doing business and make in India (manufacturing) will get a long term boost with many initiatives like postponement of GAAR for 2 more years, Tax reforms like rolling out GST in 2016 , reducing corporate tax rate from 30% to 25% in 4 years(to make India tax competitive), reducing tax disputes,new proposed law to facilitate quick/transparent public contracts & dispute settlements, reducing the tax on royalty/fees payments on technical services to ease technology transfer, reducing custom duties on 22 input/raw materials for manufacturing , increasing custom duties on imported commercial vehicles, reducing excise duties on local manufactured goods like Tablet PCs/ leather footwear, launching of National skills mission , setting up of MUDRA bank with a capital of Rs 20K crore to facilitate small entrepreneurs, capital expenditure of Rs 95 K cr on defence , scheme on promoting manufacture of electric vehicles, etc

6) significant financial sector reforms- Announcement on comprehensive bankruptcy law, bringing NBFCs under SARFAESI act to enable them to recover dues from defaulters, significant push to DBT(Direct benefit transfer) through Jan-Dhan accounts and Aadhar platform, discouraging cash transactions and promoting card transactions, coming out with gold monetization/ gold bond scheme to bring the huge gold hoarding(worth $ I trillion or 50% of India GDP) into financial system, encouraging domestic financial savings through additional deductions on pension/insurance/NPS , bringing commodity regulations under SEBI, strict proposed law on black money etc will go a long way in making financial sector stronger and curbing black money which in turn will help in turning around the economy strongly.

1) Some of the big bangs, transformational and radical measures which was expected after the big hype Modi had created during election campaigns were missing .
2) Roadmap on subsidy reduction plan was missing. There was no attempt to reduce the significant subsidies on food, fertilizer and power.
3) There was no mention on few critical tax reforms like DTC(Direct Tax code) , SEZ tax regime changes( elimination of MAT and dividend distribution tax for SEZs)
4) Absence of clarity on PSU banks reforms and lower allocation towards PSU Bank recapitalization (~8000crore only provided)
5) Corporate surcharge increased by 2% to 12%
6) Past retrospective tax incidences like Vodafone were not abolished
7) Nothing significant was announced for service, telecom and IT sector which constitutes major part of Indian GDP today
8) Though the intent on making manufacturing the backbone of Indian economy was declared again, some of the key details and roadmap were missing like labor law reforms , Special manufacturing zones or manufacturing growth strategy
9) No significant announcement on Energy sector
10) The plan expenditure as a percentage of total fiscal expenditure went down by 1.6% while non-plan expenditure went up by 1.6%.
11) Absence of any significant announcement to encourage new sun rise sectors like e-commerce and technology start ups( except Rs 1000 cr fund for incubation/ start ups)

Implications on Indian economy and markets:-

Though the budget was not radical and transformative , It had many elements (like those highlighted above) which will significantly facilitate the turnaround in Indian economy and lay the foundation of a strong economy in long term. Perhaps, the Government’s budget communication in Parliament have become over-hyped in India and we are putting too much of expectations around these communications. Its high time we should de-hype these budget communication and start focusing on the fundamentals of businesses, economy and investing. There are lots of actions which happens beyond the Government budget which really impacts the economy and thereby markets . For example , Government’s initiative to amend the Land acquisition bill, Government’s speed in clearing the massive infra and power projects stuck up in green approvals(already cleared 200 odd projects worth Rs 7 lac crore) , Government’s action to auction coal mines & secure coal linkage to all power projects, Government’s action on controlling prices , RBI monetary policy actions are all happening outside the budget process. Besides Government need not announce all the actions and measures during the first budget itself .

Now that the budget communication is over, what will really impact the Indian economy would be execution…execution and execution on the part of Government as well as corporate sector. Even if Modi’s government acts and executes 50% percent of key plans and measures announced in the budget , we will be seeing Indian economy in the 8-9% growth again( so called “ Ache Din”) in next 2 -3 years. Successive Indian governments and its infamous bureaucracy has never been seen as wanting in ideas and plans but severely wanting in execution of those plans and plugging of leakages in allocations. What will now impact the Indian markets going forward would be turnaround in economy through Govt. execution of reforms/budget announcements as well as growth in corporate earnings- actual and guidance numbers. Q3 corporate earnings were pretty disappointing. What will drive markets further will be corporate earnings in next few quarters, execution of govt. reforms/ budget announcements, kick start of investment/credit cycle, and macro-economic factors like turnaround in GDP growth, interest rates etc. Few global factors like US Fed hiking its interest rate and Greece crisis etc also might have short term impact on the markets.

Good news for Indian economy is that there are many domestic green shoots like low inflation rates of about 5%, turnaround in interest rate cycle, current account deficit at 1.5%, decent GDP growth numbers(as per new data which is being doubted) , significant reforms initiated by the new Govt. like Coal ordinance/ allocation, land acquisition ordinance, Insurance ordinance, Jan dhan(opening of 12 crore new banking accounts to ensure almost 100% financial inclusion), Make in India, Digital India etc. However , it needs to be seen if govt. would be able to get the parliament nods on these key ordinance laws.

Implications for retail investors – As I have been predicting since last 3 years in my blogs , we are sitting on a huge bull run which may last for many years , mainly on the back of an economy which is turning around and will start growing again at 8-9% in few years. Now that the hype over budget is over, the market will return to its normal self. This may lead to some consolidation and range bound movement in short run but the long term bull run is still very much intact. As the market have grown 40 % in last 14 months, some of the stocks have grown too fast (especially in cyclical sectors like Banking and Finance, Infra, power ,real estate etc) . We therefore need to tread with caution and cannot invest in any stock or sector . However , in this market where the index is fairly valued now , we still have many businesses which are solid and are available at reasonable prices to enter. Hence bottoms up strategy in picking up the rights businesses/ stocks in few chosen sectors is the best strategy. After the budget and recent RBI actions , few of my favorite sectors would be interest rate sensitive sectors like B&F (Banking & Finance), Housing Finance sector, Auto & ancillary sector as well as selected businesses in Infra sector . If I take up my 2015 & 2014 portfolio published in my blog , the leading stocks where I am investing now after the budget would be Yes Bank, ICICI bank , BOB(Bank of Baroda), Bajaj Finance in B&F sector, Dewan Housing, LIC Housing Fin in Housing Finance sector, Tata Motors, Bajaj Holdings(holding company of Bajaj Auto, Bajaj Finance and Bajaj Insurance companies),Apollo tyres in Auto & ancillary sector and REC, Coal India, Power grid in Infra sector. Apart from these domestic cyclicals, global defensive sectors like IT and Pharma are my evergreen favorites( HCL Tech, Tech Mahindra, Aurobindo Pharma, Torrent Pharma are my fav picks for current investing) where I always put about 20% of my money or more.

Remember that the key to make money consistently in Indian markets now is to find few of the best available businesses with strong growth track records, High return on equity/ capital, strong balance sheets , competent managements and durable competitive advantages , which are also very good proxies to Indian structural growth story and invest for long term , whenever the prices are reasonable . All these businesses have shown strong growth track records in last 5 to 10 years(> 15% CAGR) with good future revenue visibility, high and consistent ROE(>15%), strong balance sheets with free cash flows/low debt and competent/ honest managements. They are available at reasonable prices/ valuations too with PEG or PE/ROE ratios below 1.2

Hope the budget analysis and the implications on economy and your stock market investments was useful to you.

Happy investing