With the Indian economy growing slowest in a decade and internal factors like inflation, consumption and investment slowdown, Budget 2014 was the last chance for the UPA to be bold in stepping up and reviving growth.
While the finance minister has controlled fiscal deficit to 5.2% and averted looming sovereign downgrade, it has come at the cost of curtailed plan expenditure, which, in turn, affected economic growth. To make amends for the same, next year’s Budget targets 29% increase in Plan expenditure, but is loaded with aggressive tax assumptions like corporate taxes growing 17% compared to just 11% in FY13.
Specifically for the consumer segment, an increase in excise duties on cigarettes by 18% on all slabs will be negative for ITC as it marks the second consecutive year of 15% plus excise hike. There has also been an increase in surcharge from 5-10% on companies having income of over Rs10 crore. This will be marginally negative for consumer companies.
In the retail space, the finance minister announced a rollback of 12% excise duty on readymade garments. Earlier a net of 3.6% excise duty was payable on readymade garments (adjusting for the 70% abatement on 12% duty). This will be positive for apparel manufacturers and retailers like Shoppers Stop, Pantaloon, Page, Lovable, Raymond and Arvind.
The 3-4% benefit is likely to be partially passed on in the form of price cuts and will partially add to margins. Customs duty on specified machinery for manufacture of leather and leather goods including footwear has been reduced from 7.5 to 5%. This will also have a positive impact on retailers like Bata and Relaxo Footwear. The Budget was also positive for retailers like Titan and jewellery companies as there was no hike on gold import duty.
On the macro front, considering the experience of FY13 (revised estimates way below Budget estimates in several revenue and expenditure items), the FM will need to back up his aggressive assumptions with credible and ground breaking steps. But with no concrete ‘game changer’ proposed in Budget 2014, FY14 is expected to be a case of déjà vu, with Plan expenditure bearing the brunt of fiscal discipline, similarly impacting overall economic growth.
This time, with fiscal consolidation being topmost priority, there was little room with the government to stimulate economic growth.
Although the long-term factors for growth of Indian economy remain intact (demographic demand, relatively stable governments and policy frameworks, reliable legal framework), in the near term market indices are expected to be rangebound till more clear signs of earnings growth reviving emerge. Among the major sectors of the economy, infrastructure companies are grappling with underperforming assets consequently putting pressure on profitability of financial companies.
The oil & gas sector continues to grapple with operational issues (exploration policy) and financial (adequate and timely compensation for subsidised sale). Further, consumption sector has also begun to witness slower volume growth over past two quarters.
Therefore ironically, the two sectors that are relatively decoupled from India growth story and beneficiaries of depreciating rupee on account of worsening CAD – IT and pharma – remain most optimistic choices for growth.
On the backdrop of these factors, the Indian equity markets are expected to remain rangebound in the near term.
We continue to believe that individual companies will provide attractive opportunities rather than a broad-based ‘all boats rise in rising tide’ strategy for investment in Indian markets.
The writer is MD & head of research, IDFC Securities
