The interim budget’s impact on the stock markets

I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.

Warren Buffet

The interim finance minister – Hon. Shri Piyush Goyal – presented the interim budget last Friday. Technically, the interim budget is supposed to be a stop gap budget, meant only for the express purpose of financing government expenses until the next elected government takes over. However, since it is the last budget before the general elections, historically governments have resorted to announcing populist schemes in the interim budget in order to woo the masses. And indeed, this has become the norm over the years. Hence holding true to this tradition, the finance minister doled out tons of largesse to the masses in the interim budget. Farmers with less than 5 acres of land will now get a cash benefit transfer of Rs 6000 per year directly into their bank accounts. This will benefit 12 cr farmers and cost the exchequer Rs 75,000 cr/per annum.  Allocation for MGNREGA which benefits landless farmers and laborers has been increased to 60,000cr. A mega pension scheme has been announced for the worker class who earn less than 15000 per month. The government will provide a matching contribution up to Rs 100 per month to provide them assured monthly pension of Rs 3000 per month when they retire. This will benefit 10 cr workers in the unorganized sector. Standard deduction has been raised 25% from 40,000 to 50,000. The tax-free income limit has been doubled from 2.5 lakhs to 5 lakhs. This will provide benefit of Rs 18,500 crore to about 3 crore middle class taxpayers.

So the question naturally arises – what does this interim budget do to the economy? Simply put it will put more money in the hands of the masses, increasing their spending power. It will stimulate rural growth, stoke inflationary expectations and put upward pressure on interest rates and downward pressure on GDP growth. The finance minster has already admitted that financing these schemes will increase the fiscal deficit from 3.1% to 3.4% of GDP. But analysts believe the deficit could be much higher. Financing this deficit will force the government to borrow from the bond markets which in turn will result in hike in interest rates. A small trailer of this was already witnessed when the 10 year bond yields jumped up about 1.7% immediately after the announcement of the budget!

What to hope for

As investors, the best thing to hope for is that the next incoming government comes in with an absolute majority. A hung parliament will be the worst case scenario at this time in India’s history, because then coalition compulsions will creep into decision making. In the worst case this will lead to proliferation of corrupt practices and in the best case the nation will be saddled with policy paralysis. Either way, it will be a setback for India from assuming its rightful stage at the world table. A stable majority government on the other hand will have the political support and the will to continue the path of fiscal consolidation for stimulating economic growth and the overall well being and prosperity of the nation and its citizens.

What to Do

As investors, it is futile to speculate which sectors of the economy and specifically which businesses within those sectors will do well due to the stimulus provided by the interim budget. Such top down approaches to stock picking are susceptible to errors of judgment that can go horribly wrong. A recent case in point was the big bet on the infrastructure sector five years ago by many fund managers and research analysts due to heavy spends earmarked for roadways, railways and waterways by the present government. However infrastructure stocks hardly benefitted from these spends and many of them continue to languish even till date. As investors, it is best to leave the market forces of demand and supply determine the winners and losers.
The best approach for investors is to always invest in businesses which fulfill the following three criteria:

1. Has a track record of making more money than its cost of capital 
2. Has a sustainable competitive advantage in the market place. 
3. Is available at reasonable valuations. 

The icTracker database is the only publicly available database that constantly scans stocks for these three criteria and the icAdvisor service is designed to guide investors to benefit from the findings of this constantly changing database.