$5 trillion economy: Budget 2019 takes an inclusive approach

S Naren

Building on the interim Budget, the finance minister presented the final Budget for FY20. The Budget can be seen as an inclusive and pragmatic approach to help the nation move from the current $2.7 trillion economy to a $5 trillion one over the next 5 years.

The government largely intends to achieve this through investment-led growth rather than the traditional consumption-driven method.

This was clearly visible through its initiatives such as reaching out to the global markets to raise sovereign debt, which is a first for the Indian government. The other initiative was the one-time government guarantee for the purchase of high-rated pooled assets of financially sound non-bank financial companies.

Also, with the FY20 fiscal deficit target reduced to 3.3 percent of GDP from the earlier 3.4 percent set in its interim Budget, the government has signalled its commitment to fiscal prudence over populism.

The government’s proposal of raising sovereign debt externally is a positive initiative since India’s external debt is currently low. However, at a time when the 10-year bond yield is in the negative in countries such as Germany and Japan, there could be a case of sizeable inflows into a fundamentally strong sovereign nation like India.

Such a development is a positive, but if not dealt prudently, it could turn out to be a negative. This is because within the short term, such an initiative will be supportive of both growth and the rupee. However, if the currency appreciates significantly it will be a long-term negative. At a time when domestic demand is under duress, such a development will further weaken domestic manufacturing and make the imports more competitive.

The other area which the Indian economy so far has been heavily relying on was the strong consumption growth story. Of late, that has come under pressure with the consumption demand numbers coming under pressure across the board and this trend is unlikely to change anytime soon.

This is because consumption by high tax payers was one segment which was adrift. But now, with the hike in tax outgo for this segment, the demand for luxury consumption item looks unlikely. Consequently, a slowdown in luxury car market, high end real estate and consumer discretionary space may be playing out in the quarters ahead.

Market Take

Equity

We remain neutral on equities with improved long-term outlook as the economy is expected to revive over a period of time, given the government initiatives. To play the long-term growth story, we recommend investing in multicap schemes and those benefiting from special situations.

Volatility is expected to remain in the near term as the economy is in a transition phase. Hence, we recommend investing in asset allocation schemes. Our outlook on smallcaps and midcaps has improved, where staggered investment is recommended.

Debt

We expect liquidity to continue improving and interest rates to come down. Liquidity improvement is positive for the short end of the yield curve. Expect spread compression to happen in the short term space in coming quarters. We are positive on the 1- 3 year segment of the yield curve and are positive on credit schemes as they provide better carry and good margin of safety at this juncture.