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* Populism to accentuate fiscal slippage
* The interim Union Budget FY20 is reflationary, with 13% spending growth on the back of 14% growth in FY19. While FY20 numbers are less relevant, given this is an interim budget, the budget is clearly geared toward electoral expediency with a significant focus on uplifting the farm and housing sectors, job creation, and alleviating the distress in the MSME sector. The fiscal math assessment is more relevant for FY19 as FY20 numbers will get substantially changed with the formation of the new government after the 2019 General Elections.
* FY19 match looks less credible: In our view, the fiscal numbers for FY19RE do not look credible and we believe that the revised estimate of fiscal deficit of 3.5% of GDP, higher than budgeted at 3.3%, is still very optimistic. We find that the asking run-rate for Dec-Apr’ FY19 for gross and net tax collection will be ~30% YoY given the dismal pace till Nov’18 at 7.1% and 4.6% YoY, respectively. In addition, disinvestment proceeds are estimated to be Rs800bn, which looks to be a daunting task given that Apr-Nov’18 mobilization is only Rs150bn.
* Risk of further fiscal slippage: Given the above scenario, we believe that the tax revenue shortfall will alone create a shortfall of Rs1.3-1.4tn, thereby exposing the fiscal deficit estimates to an upside bias of ~60-70bps from the upwardly revised 3.4% level. As a corollary, the capital outlay, which is estimated to grow at 20% in FY19 and 5.1% in FY20BE, can be significantly compromised, implying deteriorating quality of fiscal spending. Hence, we believe that the impetus to the capital goods sector from higher public spending can wear off even as private capex remains modest.
* Rural and consumption push
* Higher food subsidy: The increase in subsidy budget to Rs3tn, which grew 33% in FY19 over the previous year, is largely due to a downward revision in FY18 estimates. It also reflects a rising proportion of food subsidies, which have risen to 1.7tn in FY19RE, a growth of 71% yoy, mainly due to higher MSP. Petroleum subsidy of Rs248 bn in FY19BE (1% YoY) reflects a roll-over of payments to the next year, with a rise of 51% at Rs375bn and some sharing of burden by oil companies.
* Huge rural push: The budget has a significant rural push with Agri-sector allocation rising by a huge 65% along with a 73% rise in allocation in FY19BE and FY20BE. Total agri-plus-rural allocation in the union budget is estimated at Rs2.2tn, and inclusive of contribution from the state governments, the total could be closer to Rs4.8tn.
* Boost to disposable income to stimulate consumption: The introduction of minimum income scheme for marginal and small farmers, income tax relief to income earners below Rs0.5mn, exemption on notional rental on second house, and pension scheme for the unorganized sector are measures that can boost consumption going forward. In addition, there are several measures, including interest subventions, to address high employment generation sectors such as housing and MSME.
* Budget to boost consumption demand: Overall, the macro context of the budget appears to be stimulating consumption demand and we expect inflation, both headline and core inflation, to remain elevated. We have maintained that so long as the core inflation remaining high at 5.8-5.7%, the scope for the RBI to change its monetary policy stance is limited. But contrary to our call, if the central bank indeed moves toward easing, one can expect further boost to consumption spending.
* Market outlook: fiscal slippage a dampener
* Market outlook:
While the reflationary stance of the budget could provide a boost to corporate earnings, especially in consumption, agri-rural sector, retail lending, and housing, there can be implications for inflation and interest rates as well.
* We maintain our Nifty target range of 11000-10400:
We are Overweight on IT services, Pharmaceuticals, BFSI (primarily private banks), and Specialty Chemicals; Equal weight on Auto & Auto Ancillaries, Consumers, Oil & Gas, Metals & Mining, and Fertilizers & Agro-Chemicals; and Underweight on Capital Goods, Construction & Infra, Cement, and Telecom. We also continue to remain cautious on Mid & Small-Cap stocks.
* Sectoral Impact:
* Agro Chemical & Fertilizers: Coromandel International, Chanbal, GSFC, RFC, and NFL could be the winners
* Auto: Sector to benefit from higher rural spending, two-wheelers in particular
* BFSI: Home finance companies to gain from various measures; better scope for private banks to fund consumption demand; PSU banks are the losers due to hardening yields and a lack of clarity on recapitalization
* Consumer sector to gain from higher disposable income: Staple consumer items to see continued momentum in volume growth; HUL, Marico, Nestle, and Dabur could be the winners here
* Infra and cap-goods: To benefit selectively from allocations in roadways, affordable housing; however, a big risk could emanate from spending constraints
* Oil & Gas: Lesser provisioning of subsidy in FY19 at Rs248bn, resulting in a roll-over into FY20BE; risk for the sector remains until the elections
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