investment strategy-01mar15

Union Budget Review

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Union Budget Review

01mar15

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Backdrop

• While economy has recovered cyclically, the ground reality is different – a

sluggish growth.

• For last few years, in the pursuit to achieve fiscal deficit number as per

FRBM, the side effect has been on public expenditure. Also, private

investment cycle has been clouded by stretched balance sheets,


investment cycle has been clouded by stretched balance sheets,

continuing implementation bottlenecks, increasing bad loans among

public sector banks. With slower real growth (than expected) and lower

inflation, revenue collection for Centre has been below its expectations,

limiting resources availability. Additionally, other issues of black money

kept abroad and higher current account deficit has been impacting. This

also means more money moving towards non-financial assets.

Accordingly, economic recovery backed by higher government spending

was considered to be feasible solution to the problem.

• With this backdrop, we think what Union Budget had a clear priority to

focus on - economic recovery.

Budget at a glance – realistic assumptions


Source – HDFC MF

Budget’s key assumptions


Source – HDFC MF

Key highlights - 1/2

Non tax proposals :• Ambitious target of achieving a fiscal deficit of 3.9% in current financial year, 3.5% in FY 2016-

17 and 3% in FY 2017-18.

• Goods & Services Tax expected to be implemented by 2016

• GDP expected at 8-8.50% in FY16


• GDP expected at 8-8.50% in FY16

• Tax free infrastructure bond to be introduced for road, rail and irrigation projects

• To introduce a sovereign gold bond with returns on par with gold prices

• Investment in infrastructure to go up by Rs.70,000 crore. (Rs.700 Bn)

• National infrastructure fund to be established

• Forward Markets Commission (FMC) to be merged with SEBI

• To allow foreign investments in Alternate Investment Funds

• To set up an agency to provide financial data security

• Cash transactions being discouraged

• To do away with the distinction between FDI and FPI

• Government to set up Public Debt Management Agency to strengthen Indian bond market

Key highlights 2/2

Tax proposals (including GAAR) :• To cut basic rate of corporate tax from 30% to 25%, over the next 4 years beginning 2016-17

• Wealth tax replaced with 2% additional surcharge on super rich having income of Rs.1 crore(Rs.10 Mn) and above.

• Mere presence of a fund manager would not constitute Permanent Establishment.

• Financial institutions to be prosecuted for negligence in order to curb black money


• Financial institutions to be prosecuted for negligence in order to curb black money

• Sukanya Samridhi Scheme gets EEE status (tax free)

• To provide additional deduction of Rs. 50,000 for contribution to NPS under Section 80 CCD.

• Travel allowance exemption for individuals to be increased from Rs. 800 per month to Rs. 1600 per month

• Alternate Investment Funds: Category 1 and Category 2 to get pass through status

• An increase in surcharge of 2% from 10% to 12% on additional income-tax payable by companies on distribution of dividends and buyback of shares, or by mutual funds and securitisation trusts on distribution of income.

• Service tax exemption withdrawn on the services provided by mutual fund agents to an asset management company.

• Government defers rollout of anti-tax avoidance rules GAAR by two years. GAAR to apply prospectively from April 1, 2017. Retrospective tax provisions will be avoided.

What we liked - 1/2

• A significant announcement was FM’s proposed law to tackle black

money including provisions of Imprisonment of up to 10 years and 300

per cent penalty on tax, for concealing income or assets abroad. This

along with the Benami Transactions (Prohibition) Bill, PAN disclosure for

any purchases of more than Rs.1 lakh – Rs.0.1 Mn, shall check the


any purchases of more than Rs.1 lakh – Rs.0.1 Mn, shall check the

circulation of black money in the domestic economy. This also will go in

adding back these components to GDP number.

• To develop a sovereign gold bond and to introduce gold monetization

scheme to allow depositors to earn interest. This will channelize

resources from non-productive physical assets to more productive

financial assets.

• The budget stepped up allocation by 0.5% of GDP (including infra spend

by central public sector enterprises), with a particular focus on roads and

railways — where multiplier and productivity effects are typically the

largest. This was a bold and much-needed thrust.

What we liked - 2/2

• Equally important is the announcement to create a comprehensive

bankruptcy code of global standards. Bankruptcy and exit appear

particularly difficult in the Indian context. It is hoped that a world-class

bankruptcy code — implemented with equal vigor will facilitate exit when

warranted. Potentially, this could ease some of the current frictions and


warranted. Potentially, this could ease some of the current frictions and

stresses in the public private partnership (PPP) framework. Also, NBFCs

registered with RBI and having asset size of Rs 500 cr (Rs.5 Bn) and

above may be considered for notifications as ‘Financial Institution’ in

terms of the SARFAESI Act, 2002. This may provide them more teeth to

recover money from defaulters.

• The other area where the budget scores highly is institutional process of

an agreement between the government and the Reserve Bank of India on

a formal monetary policy framework to keep inflation below 6% and for

the setting up of a monetary policy committee. Inflation-targeting is clearly

working and the sooner the institutionalized process, the better it is.

What we think could be challenges

• What if oil prices were to rise again? Increased oil subsidies will likely

impinge on capex spending — as it typically has in the past.

• This budget expectation will require a sharp pick-up in growth. What if

that does not materialize?

• What if asset sales — which are budgeted at a whopping Rs.90,000 crore


• What if asset sales — which are budgeted at a whopping Rs.90,000 crore

(Rs.900 Bn) — do not materialize?

• What if one needs more resources for public sector bank recapitalization

— which are sorely needed, but which got a paltry allocation of Rs.8,000

crore (Rs.80 Bn) ?

• This also means that shortfalls in revenue or overruns in expenses on

count of any of any of abovementioned event/s would result in capex

being cut.

Investment Strategy


Investment Strategy

01mar15


Equity is not cheap on historical parameters…


• Nifty TTM PE has crossed its critical level, i.e., last 10 years Average + 1SD. On month-ended

data basis, in last 10 years, this has happened only 16% of times. We have recently cut our

view from Overweight to Neutral, as markets have run up ahead of numbers. Also, going by

recent Budget announcements, while longer term picture remains positive, near term market

upside is totally dependent on global liquidity and the same is always difficult to predict.

• As a strategy for someone who is underweight on Equity, better to participate through SIP /

STP mechanism.

India - Fixed Income view – status quo . . .


• Post, Budget announcement, we believe, RBI shall continue with policy

rate cut actions, but may take a halt in near term as fiscal deficit target

has been increased for FY16 from 3.6% of GDP to 3.9% of GDP.

• There are enough global variables (crude prices, Greek’s stance on

remaining part of Euro, rate hike in US, etc.), for which RBI may like to

keep some kind of buffer (in terms of rate cut).

• We continue to expect further rate cut by 50 bps in CY2015. Accordingly,

we expect longer end to perform better in next couple of months.

Source – MOSL Research

India - View on Currency & Commodity

• We still remain positive on US

Dollar considering strength in US

economy vis-à-vis other

economies. Also, expectation of

higher interest rates in mid-2015


higher interest rates in mid-2015

may keep dollar strong in future.

Accordingly, INR may depreciate.

But, considering stronger foreign

exchange reserves position, INR

may relatively appreciate against

other trading countries.

• The drop in gold prices has lowered the consumption as well as

investment demand for it. Strengthening of dollar will put further pressure

on the downside. In INR terms, rupee may remain range-bound.

Source – investing.com

Contact Details

Jignesh Shah

Capital Advisors


+ 91 – 9820296989

[email protected]

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Thanks for your attention


Thanks for your attention


Economy & Finance

investment strategy-01mar15