A 2.5 per cent gain by Nifty 50 in the run-up to the Union Budget (or till date) is an exception compared to the past wherein the market has mostly declined in the one month ahead of the Budget. This indicates that the market is looking to the Budget with optimism.

And why not? India Inc has been already badly bruised by demonetisation and the resultant slowdown in most sectors. Surveys by rating agency CRISIL show automobiles, cement, steel, paper, aluminium and fertilisers had the lowest capacity utilisation — many of these are among those that have been hit hard by demonetisation.

“According to the RBI’s OBICUS survey, capacity utilisation in manufacturing was 73 per cent in the quarter ended June 2016, or well below the threshold required to trigger fresh investments. Things haven’t changed materially since. As for the private sector, the appetite to invest is just not there amid high leverage and impaired balance sheets,” it said in a note.

Thus, it’s time to give booster shots. Analysts at Goldman Sachs expect the Budget to be good for most sectors, particularly infrastructure, capital goods and financials.

Reviving consumption

Consensus view or expectation is that the government’s key focus would/should be to revive consumption (hit by demonetisation) especially rural, boost spending on infrastructure and promote growth of medium and small enterprises wherein employment opportunities have been affected due to demonetisation.

“We think that spending from budgetary resources will be tilted towards boosting consumption, with rural (MNREGA, roads, housing) and social sector (education, health) being the key focus areas. Central Government spending in both these areas has been scaled back by 0.7-0.8 per cent of GDP each in the past five years. Thus, some revival is now necessary,” said Edelweiss.

Anand Rathi expects increased capital spending on infrastructure, especially on roads, power transmission, defence, low-cost housing and railways.

Reducing tax burden

Reviving consumption by reducing the tax burden on the common man will lead to increase in purchasing power (read disposable incomes). Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, expects increase in tax exemption limits (including 80C) and home loan interest deductions. This will be positive for sectors, such as housing finance companies, fast-moving consumer goods, retail and automobiles, according to brokerages.

Boosting infrastructure spending could/should be done through spending more on labour-intensive sectors, such as roads and affordable housing. Engineering and construction companies, such as Siemens, Larsen and Toubro, Inox Wind, Suzlon, Bharat Electronics, and BEML, would be the beneficiaries.

Inflationary risk

However, one will have to watch for any upside risk to inflation from crude prices and a lower and slower cut in interest rates by Reserve Bank of India. Elara Capital expects RBI to ease policy rates by 50 basis points in the first half of this calendar year with 25 bps coming in the monetary policy post-Budget.

There are very few sectors which are expected to be negatively impacted by the announcements in the Budget. Some of these include quick service restaurants (Jubilant FoodWorks, Westlife Development), media and technology, which could be slapped with higher service tax in alignment with the implementation of the Goods and Services Tax.

Like in the past, cigarettes could again come under the net of higher excise duty. Anand Rathi expects 8-10 per cent increase in excise on cigarettes, necessitating price increases and bearing on volumes of cigarette manufacturers, such as ITC, Godfrey Philips, and VST Industries.

The party for the market and the beneficiaries will continue unless the government tinkers with long-term capital gains tax, either through imposition of tax or the holding period.

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