India’s benchmark blue-chip stock index, the top-30 Sensex, posted its biggest weekly loss in more than two-and-a-half years and there could be more profit-taking after the budget fell short of the high expectations from New Delhi’s business-friendly government that took office more than a month ago.
Far from any bold economic and labour reforms that were expected, Finance Minister Arun Jaitley chose to play safe by avoiding contentious issues. Among other things, he offered incentives for investments, raised the exemption limit for individual taxpayers and increased the ceiling on foreign direct investment in defence and insurance sectors to 49 per cent from 26 per cent.
To his credit Jaitley eschewed populist temptations, but surprisingly stuck with the previous government’s ambitious 2014-15 fiscal deficit target of 4.1 per cent of GDP without explaining how he hoped to achieve this. The budget was also short of specifics on some of the assumptions. Still, it held out promise for a revival of the manufacturing sector and a gradual recovery.
“Investors may need to rein in their expectations of how quickly the economy can be turned around,” HSBC’s Co-Head of Asian Economic Research Frederic Neumann and its India equity strategist Jitendra Sriram said in a note. “While there was no big bang, the overall tone was positive.”
They said the deficit target was “daunting” and a “tall order”, and required revenues to grow faster than GDP. “Without significant tax hikes, or a broadening of the tax base, the burden will fall on disinvestment. Lofty equities should boost proceeds, although that may not be sufficient to close the gap.”
“We therefore expect some slippage, with the budget deficit possibly coming in around 4.5 per cent of GDP for the current fiscal year — hardly a devastating outcome, but also not quite the belt-tightening seemingly delivered.”
Walk the talk
A big disappointment to foreign investors — whom Prime Minister Narendra Modi has been wooing — was Jaitley’s inability to scrap retrospective tax legislation. All that the finance minister proffered was to trust the new government not to impose such penalties, without giving any comfort to the many disputes including a $2.2 billion charge on Vodafone.
Modi was a vociferous opponent of the retrospective taxes during his blistering election campaign, and had hinted he would repeal the draconian law. So, the government’s failure to walk the talk when it mattered was a setback and would deter the smooth flow of foreign investment.
Even the open door policy towards investment in the defence sector could prove a non-starter because foreign companies would not be comfortable with giving proprietary technology to a joint venture in which they hold minority stakes.
Stocks investors who had driven the Sensex and the broader 50-share Nifty to all-time highs of 26,190.44 and 7,808.85 respectively just ahead of the budget, were quick to take some profits off the table after Jaitley failed to live up to market expectations.
The Sensex, which is modelled on the lines of NYSE’s Dow Jones index, shed 3.6 per cent this week, its steepest weekly decline since December 2011, to 25,024.35. The Nifty fell 3.8 per cent, its biggest weekly drop in 16 months, to 7,459.60.
Stay invested
“While initial market reaction has been negative, key to note is that the new government has been in power for just six weeks. We reiterate our view that (the) budget is just a first step in a five-year run. Moreover, the details appear promising where it ticks many boxes on reviving growth, focusing on infrastructure and increasing savings,” Citibank’s Rohini Malkani and Anurag Jha wrote in a report.
Arundhati Bhattacharya, head of State Bank of India, said the focus on infrastructure would possibly lead to a faster growth in productivity rather than consumption. “This will help creating a lower and stable inflation regime … (and) in conjunction with the recent railways initiative to transport perishable goods in AC compartments will address some of the supply side logistics,” she said.
“Overall the budget is growth enhancing and has laid down a very credible road map for economic reform with emphasis on both physical and social capital formation. There is a clear recognition that reforms must now be accelerated incrementally rather than through big bang announcements.”
Many fund managers also agreed the outlook for India’s nearly $2 trillion economy, which is likely to expand 5.5-6 per cent this year, and the stock market was upbeat on the back of improved corporate earnings.
“Overall, we continue to remain bullish on the markets and maintain our Sensex target of 27,000 by year-end though near term we could see some consolidation due to the monsoons. We recommend buying every dip,” Merrill Lynch analysts led by Jyotivardhan Jaipuria wrote.
“We think mid-caps will outperform large caps, domestic plays will outperform exporters. Our overweight sectors include autos, cement, banks, industrials and energy.”
The brokerage’s large cap buys were Maruti Suzuki, ICICI Bank, State Bank of India, Oil India Ltd and UltraTech Cement. Among mid-caps, it preferred Eicher Motors, Motherson, Yes Bank, Aurobindo Pharma, Bharat Forge, Bharat Electronics and Prestige.
Quarterly earnings
Software services bellwether Infosys, which kicked off the earnings parade on Friday, beat market expectations with a consolidated net profit of Rs28.86 billion for the quarter ended June, up from Rs23.74 billion in the same period a year earlier, while revenue grew 13.3 per cent to Rs127.70 billion as the NYSE-listed company added 61 new clients taking the tally to 910.
The company, with a cash pile of nearly $4.2 billion, maintained its revenue growth forecast for the full-year to March at 7-9 per cent.
“We continue to retain buy, target price Rs3,800 on Infosys given inexpensive valuations and possible improving revenue growth trajectory which should support margin improvements as well,” said Emkay Global Financial Services Ltd.
Bigger rival Tata Consultancy Services, India’s biggest software services exporter, which is scheduled to release its quarterly report on Thursday, should also upstage market expectations on the back of a pickup in global outsourcing deals. Other major results in the coming week include Kotak Mahindra Bank, motorcycle and scooter maker Bajaj Auto Ltd, Reliance Infrastructure Ltd and Reliance Power Ltd.
After markets closed on Friday, the government said industrial output in May grew an annual 4.7 per cent, the fastest pace in 19 months. Manufacturing, which contributes to more than three-quarters of the index, expanded 4.8 per cent, compared with a 3.2 per cent contraction a year ago. This should augur well for earnings.
Two data that will be on the radar of investors next week are the wholesale price index and the consumer price index for May. Both are due on Monday.
The writer is a journalist based in India.
