We Remain Constructive On Indian Stocks Post Union Budget: Ridham Desai

Managing Director of global financial powerhouse, Morgan Stanley and also Head of India Research, Ridham Desai in this authored article exclusively written for DSIJ explains why the Indian growth story continues even after the Union Budget tabled by country's Finance Minister, Arun Jaitley on February 1

The Budget retains India’s macro stability advantage over its peer group by pursuing the path of fiscal consolidation, gives a boost within that framework to growth by focusing on small and medium enterprises, infrastructure and housing, does not upset the capital markets by changing laws relating to long term capital gains and clarifying on indirect transfer tax for FPIs and gives a major fillip to transparency making concerted effort to reduce the use of cash in the economy. No wonder the market came away feeling good about the Budget despite the lack of a rate cut for the corporate sector or clarity on GAAR. We see the following positives: 

Macro stability: 

The commitment to reduce government debt to GDP from 68% to 60% over the next three years, the fact that India’s primary deficit is almost gone 

Growth:

The continuing focus on infrastructure spending which is likely to cross all-time highs in F2018. Mass housing gets special attention, the capital gains tax for property effectively declines due to the shift in base year to 2001 as well as reduction of holding period to 2 years. More funding and expenditures for the rural economy – likely to help consumption. A 5% cut in the tax rate for small and medium enterprises (Defined as firms with turnover of less than Rs500 million) plus a reduction in the presumptive tax on small firms. This has potential to boost employment as well as smother part of the negative impact of GST on small firms.

Capital Markets:

Likely listing of some of the most profitable entities of the railway ministry. Extension of concessional withholding tax for foreign investors in both euro and masala bonds. Clarification that indirect transfer tax provisions are not applicable to FPIs. Absence of adverse changes to capital gains tax on equity shares which was widely expected by the market 

Transparency:

Big focus on reducing cash transactions in the economy thereby boosting the digital economy – an overall transparency measure. Combined with the major change in funding for political parties (substantial reduction in limits of cash donations), this sets the stage for greater tax compliance in the coming years. There are other measures but all in all the government continues to push for greater transparency. The government’s indirect tax assumptions imply that they continue to work towards implementation of GST later this year.

There are some more details required on the following but they seem to be positive developments prima facie

A new law on contract farming

Simplification of labor laws 

Abolishing of FIPB (foreign investment promotion board which supervised foreign investments into India) plus some changes to FDI which possibly marks further liberation of FDI

WHAT WAS NOT SO GOOD IN THE BUDGET:

Lack of tax cut for large companies State owned recap amount remains subdued 

No clarifications on GAAR applicability to FPI 

Aggressive divestment target of Rs. 725 billion (up from Rs. 455 billion in revised estimates for F2017 and Rs214 billion done until now).

WE REMAIN CONSTRUCTIVE ON INDIAN STOCKS GIVEN 

Attractive valuations relative to EM and bonds

Likely earnings recovery evidenced by the recent earnings reports from domestic sectors 

Support from the ongoing structural shift in demand for equities from domestic households

THE KEY RISKS REMAIN

a surge in commodity prices and 

correction in global equities give India’s high correlation with EM equities currently