Budget 2018 has been all hog on rural India which contributes around 17% to India’s GDP but employs almost 47% of the workforce. It endeavors on improving ‘Ease of Living’ for the population after scoring on the ‘Ease of Doing businesses’ parameter. The highlights of the budget have been the Government’s initiative to address rural health issues by providing free health cover worth Rs 5 lakh per annum to every rural household.
New policies like setting higher MSPs equivalent to the 1.5x cost of production and higher allocation to enhance the secondary income of farmers etc. would enable improvement of earnings in the rural economy. Total spending on rural infra is proposed at Rs 14.34 lakh crore. Focus on MSMEs along with maintaining a fiscal consolidation roadmap with small slippages and re-introduction of long-term capital gains tax were a few other highlights of the Budget.
The government has increased budgetary support to infrastructure expenditure for FY19 by 20% to Rs 5.97 lakh crore which includes Rs 1.48 lakh crore allocated for Railways. The Government also intends to expand airport capacity more than 5 times to handle 100 crore trips every year. All these measures would help improve the quality of life as well as the living standards and boost job creation in both rural and urban India.
The government has introduced 10% long-term capital gains tax with a clause of grandfathering the gains till Jan 31, 2018. The markets are exhibiting nervousness despite the fact that the budget is bringing no structural change in the India growth story which remains intact and is going strong.
In contrast, the Budget is an attempt to improve the per capita income of the majority of Indian Diaspora which in turn will support the consumption-led demand in the long run. The current market correction should be seen in the light of the excesses that were built up lately and risk aversion was difficult to find.
Investors should use this opportunity, hunt for valuation bargains and keep investing in a staggered manner so that their purchase price is averaged. The current correction reminds of the events like taper tantrums by US Fed, Brexit, US Presidential elections etc. that the markets have a tendency to overreact and in future, these happen to be the missed opportunity for the investors in hindsight.
US Fed left the rates unchanged in its January 2018 meeting, reposed faith in the strength of the economy and anticipated rise in inflation indicating that a rate hike is expected in its next meet. The US 10 year yields have inched near to 3% indicating a rising interest rate scenario. Euro zone economy is improving and ECB has already contained its asset purchases.
All eyes would now be on March policy meet of ECB for guidance on interest rates. The Japanese economy has expanded for eight straight quarters driven by a pickup in consumer spending alongside solid exports and business investments. Calls for stimulus tapering are growing in Japan’s central banks following the robust economic recovery.
Thus the easy liquidity fueling the global equity markets is on the verge of getting absorbed and a probable shift in asset class towards debt markets is in offing given the rising yields. The crude oil prices are trading around $70/bbl; further rise in oil prices would impact India’s import bill and hence the fiscal balance.
The third quarter result season has posted strong revenue & profit growth; though the earnings growth in Q3 is seen on the back of a low base effect, the fact that the earnings revival is in place and growth is back on the table cannot be denied. Robust demand following a good monsoon, improving rural economy and consumption led demand is fueling the earnings growth.
One should never forget that the markets are primarily driven by earnings growth. Improving economics, low-interest rate regime, robust macros and contained inflation is going to support the earnings and help our markets trend its northward course over the long period. There are chances of some intermittent risk aversion given the headwinds associated from global markets, high crude prices etc. but investing with keeping the margin of safety would always help investors to create wealth over the long term.
An investor should always remember the quote by ace investor Joel Greenblatt on the margin of safety, “One way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety.”