Celebrating Consumption

Credit was long-overdue for the honest, hard-working, tax-paying, salaried, middle-class Indian. And finally the applause came today – loud and clear!

Let’s look at this way, Government of India had a purse of about 1.25 Lac Crore going into this budget. They had two choices: Either add that kitty to the last year’s capex number of 11.11 Lac crores or to spend it in a different way which could perhaps add more to revive the economy. In long term, one would argue Capex will always benefit rather than general expenditure or tax-waivers. But if we were to take a finer look, even last year Government wasn’t able to spend the full projected amount of capex. By their own estimates, Govt should be spending about 10.18 lac Cr out of the planned 11.11 Lac Cr. And even to achieve this number, govt will have to massively increase its efforts in Jan-Mar quarter (which seems unlikely).

Given this conundrum, its perhaps pragmatic that government has chosen to put some money in hands of the middle class Indians to spend and consume more. And hence, the path chosen is to give a massive fillip to consumption by giving a huge bazooka of Income tax exemption. Salaried individuals earning up to 12.75 Lac per annum will now pay ‘NIL Taxes’. And for a Double-income couple this could be double dhamaka! That’s immense by all stretches of imagination.

Imagine these numbers for a moment:

• There were approx. 62.3 lac individuals filing taxes in the income range of 10-15 lac bracket. Assuming 70% of this to be in the 12.75 lac bracket – the number is about 47 lac.
• There were about 2.75 Cr individuals last FY filing taxes in the range of 5-10Lac bracket.
• And another 1.85 Cr individuals filing taxes in the income range of 4-5 Lacs
• Imagine this whole diaspora of 5Cr middle class Indians (and many more who will join this year) having additional 20k-80k additional to spend !

They will buy more two-wheelers, go for more movies & holidays, spend more on e-commerce and quick commerce, perhaps do more SIPs, spend more on home furnishing or décor, may be take higher home loans because of increased salaries and list is endless ! And may be this perk in consumption pushes corporate India to come in with private capex – something which has been sorely missing for many years now!

Guess, government weighed its options and went for the path less travelled by – selecting consumption over capex ! Though the capex number for this year is kept at 11.21 Lac cr, which will still be about 1lac Cr over this year’s actual number. However, Index which is clearly lop-sided in weightages towards Banking & Capital Good companies, will feel the pressure and pinch of this.

To the credit of government they haven’t moved their eyes off the larger goal of Fiscal prudence and are projecting a Fiscal deficit of 4.8% of GDP for this FY (as against 4.9%) and a neat number of 4.4% for next FY. These are putting India in good saddle and paving way for a global ratings upgrade sometime in near future (fingers crossed)!

What changes in markets:

• Clearly the positioning shifts and sector rotation will come into play. That’s where diversified approach always helps and sectoral approach hits.
• Long beaten sectors like consumer durables, discretionary, FMCG etc come back in favour. Should we say, Quality over Momentum ?
• Railways, Capital goods, Defence etc could face tough times because these sectors are already premised on high valuations.

What next to watch out for:

• Genie is not completely out of the bag and there are many things lined up in next one week to account for
• FII reaction to budget will be evident in full swing on Monday and by then all the fine-print would have been neatly decoded.
• Then there are Delhi elections on 5^th Feb with results on 8^th Feb.
• Followed by the MPC on 7^th Feb – and all eyes are now eagerly awaiting a rate cut coming from the RBI.
• And to make matters more interesting, Gov is likely to table a new “Income Tax Law” in coming one week which aims to simplify our complex maze of tax laws.

So clearly, this ain’t a jump-on-the-ship-moment as yet for traders. We need solid economic data to back a revival story in coming few months. But it is yet another milestone budget which is honestly attempting to swing the sagging needle of Indian economy. We still suggest investors to take a cautious approach and build positions over next 3-6 months by staggering out fresh investments. Investors will need new horses for courses to navigate a fresh new market scenario from hereon. For detailed portfolio action please reach out to our team at Moneyfront or for any tactical positioning in the market, please join our tactical strategies at Ultima Wealth (our new proposition).

For a change, first time the tax-paying Middle class of India has been put on a higher pedestal than all else in the budget.

It’s a celebration of honest tax-payer. Lets just rejoice in that.