Govt may attempt populist measures but will be fiscally conservative: IIFL Securities Chairman

We think that the government will continue to be fiscally conservative. It will attempt some populist measures, but food subsidy being cut gives it the room to do this up to ₹1 trillion. There is a risk of customs duties being raised on selective items as this government has been inclined to be protectionist in its pursuit of domestic manufacturing. We expect continued thrust on capex, focused on infrastructure build-out as construction pulls labour in from rural areas and this can prevent a recurrence of rural distress in the lead-up to the elections.

There has been talk about capital gains tax being hiked, but we think that in the long run investors should expect short-term and long-term rates to reach 20 per cent. This increase can negatively impact sentiment, so we are of the view that nothing immediate will be done on this when domestic flows are strong and equity investments are featuring increasingly in household savings.

Disinvestment targets need to be pruned after successive years of disappointments. Further, tax collections have been strong, so there may not be a pressing need for the Centre to project a large amount here. We expect budgeted amounts for food, fuel and fertiliser subsidies to come off year-on-year by ₹2 trillion, which should mean 5.7-5.8 per cent fiscal deficit projection is possible and the medium-term fiscal consolidation programme stays on track. Strength in tax collections means that investment spending will rise, but we think, on strict apples to apples basis, by around 12-15 per cent.

Nifty will be under pressure for some time as global growth slowdown trickles down to India also, and some earnings downgrade of Nifty is likely. It will be heavier on commodities producers, especially upstream oil. Other commodity-consuming sectors and oil marketing companies will have the opposite impact, i.e, earnings upgrade during 2023. On balance, Nifty will hold as the higher multiple sectors see upgrades relatively.

Nifty is one standard deviation above its long-term mean. From these levels it is possible that returns are modest (10 per cent maximum).  Strong momentum in domestic growth suggests that major downgrades may not happen, and Nifty should not have a large downside either. We would think that Nifty will spend 2023 in the range of 5 per cent plus/minus current levels…so between 17,000 and 19,000.

All asset classes will be under pressure globally due to continued monetary tightening in the first half of 2023. Thereafter, if inflation falls rapidly, as seems more than likely given recent soft sequential trends (US core inflation has trended at 4.7 per cent sequentially for the last 5 months average annualised), then we can have the much desired soft landing and asset prices may stabilise. In India, there should be milder echoes of this. We think equities will underperform by 5 per cent worst case.

China reopening, the US over-tightening, Russia-Ukraine crisis resolving are three major events. China reopening could be inflationary (more demand for commodities) as well as disinflationary (supply chains healing), so it is difficult to say which one will prevail. The US over-tightening in order to snuff out inflation decisively is a possibility, since it is difficult to engineer a soft landing and inflation scare has begun to dominate the US Fed speak. Finally, Russia-Ukraine crisis, if it resolves will create a happier supply situation, but the likelihood is low. The dollar may continue to depreciate and China reopening could give emerging markets a fillip.