Govt came out kings, if not aces- Business News
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Nilesh Shah: Govt came out kings, if not aces

Debt will be the favoured asset class this year, but this will be an opportune time to accrue equities as well.

  • March 11, 2016  
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Nilesh Shah, MD, Kotak Mahindra Asset Management Company

Budget 2016 was like dancing in a minefield . And the government did well to come out unscathed while delivering on its objective.

The market had expected the Budget to provide growth impetus, strengthen PSU bank balance sheets, encourage private sector investment, aid the much-battered rural sector and, at the same time, not impose a detrimental tax regime.

On all these counts, the government came out kings and queens, if not aces, given the limitations before it. The Budget was possibly themed on giving the infrastructure sector a big push, keeping taxation levels largely unchanged, and improving the ease of doing business.

The biggest takeaway was the government's disciplined approach in maintaining the quality and quantity of fiscal deficit and sticking to its projection of 3.5 per cent of the GDP for 2016/17. In fact, it has been pretty conservative in its estimates, including revenue generation from items such as voluntary disclosures and incentivised settlement of long-pending income tax litigations.

The fiscal deficit diligence has also raised India's prestige and its global standing. This will translate into more respectful assessment by FIIs and credit rating agencies. On a net basis, market borrowings for 2016/17 are project at around `4,25,000 crore - almost the same as that of last year. The projected supply is lower than the projected demand and this will lead to a rally in the bond market. More importantly, the finance ministry seems to have kept its side of the bargain. It has provided an incentive for the RBI to act more firmly on the repo rate.

The consequent rally in the bond market may accrue `30,000-50,000 crore for PSU banks from MTM gains. This, along with the `25,000 crore capitalisation of PSU banks, will improve their balance sheets and create a pivot for consolidation, privatisation and professionalisation. This fiscal leadership also reduces the capital cost in the economy, and provides ground to boost credit growth and stimulate private sector borrowing.

The government also made a major push for investment in roads and railways with `2.18 lakh crore of capital expenditure. The aim was to provide connectivity to rural areas, provide electricity to all villages and integrate the agricultural market digitally.

This will create a self sustaining momentum for income growth in the rural economy, which is expected to double in five years, create an insulated domestic demand in a slowing world and stimulate the capital exchange cycle.

We also believe that a path is being created towards sustainable double-digit growth within two to three years. Reducing borrowing costs, initiating key reforms such as the bankruptcy code and GST, and a strong infrastructure push give strength to this belief. While we believe that debt will be the favoured asset class this year, this will be an opportune time to accrue equities as well.

This is an accumulation opportunity for the investors, whom we advise to take the SIP route. Some cash must be put on standby, which can be invested during significant market dips. Investors must also position themselves in the bond and credit segments. While many may have missed out on the rally in gilt, the yield levels in private debt and AA segment may still be lucrative.

Written by  Nilesh Shah, MD, Kotak Mahindra Asset Management Company