In its first full-year budget, Narendra Modi’s government pledged to cut corporate tax by 5 percentage points over the coming four years, announced plans to lift infrastructure spending by £7.32bn to boost growth and said a "universal social security" will give poor Indians access to subsidised insurance and pensions
Arun Jaitley, finance minister, said: “We inherited a sentiment of doom and gloom. The investment community had almost written us off. We have come a long way since then.”
“We have turned around the economy, dramatically restoring macroeconomic stability and creating the conditions for sustainable poverty elimination, job creation, durable double-digit economic growth.”
The budget pointed out that India’s GDP growth is currently between 8 and 8.5 per cent but the government is aiming for this to move into double-digit territory in the near future. It also expects consumer inflation to remain close to 5 per cent, which creates room for monetary easing.
Indian was the standout equity market of 2014 as investors flocked to the country after pro-business reformist Modi won the general election with promises of overhauling the economy. FE Analytics shows the MSCI India index is up 48.86 per cent over one year, far outpacing the gains since the FTSE All Share and global equities.
Performance of indices over 1 year
Source: FE Analytics
Although the weekend’s budget did not radically reshape India’s economic policies, the investment world has welcomed it after pointing to that Modi’s style is to make incremental changes rather than massive, headline-grabbing overhauls.
Kunal Desai, head of Indian equities at Neptune Investment Management and manager of the Neptune India fund, says some investors may have been disappointed that Jaitley did not announce bolder reforms in the budget.
“So-called big bang reforms were unlikely to be introduced during the budget session. The finance minister was keen to highlight that the budget day represents just a single day out of a full year when reformist steps can be taken,” Desai said.
“Indeed, we believe that this is one of the most attractive features of the Indian market: the reform agenda is being characterised by a constant drip of reformist action rather than short periods of hyperactivity.”
Neptune India is biased towards domestic cyclical stocks and mid-caps. The portfolio is overweight financial, consumer discretionary and industrials sectors but has a large underweight to consumer staples.
Hermes Investment Management says “patience is a virtue” when it comes to the India story, pointing out that transitioning the country from a mostly rural economy to one where more than 25 per cent of growth comes from manufacturing, for example, will take a great deal of time.
“The slower-than-expected rate of reform in Modi’s first year has been disappointing for investors, whose high expectations may not transform into higher earnings in certain sectors. These include areas that we have avoided – such as industrials, capital goods and consumer staples companies – in the near term,” the firm says.
“However, during our visit last month, extensive conversations with companies and government officials lead us to conclude that the Indian economy is firmly on a path of sustainable growth, one with steps that we describe as correction, transition and growth.”
Performance of Bric markets over 5yrs
Source: FE Analytics
Teera Chanpongsang, portfolio manager of the Fidelity South East Asia fund, has an overweight 7.3 per cent of his portfolio in India and also views the budget as being a good one for the future of the country.
“The budget is in line with the government’s policy direction – a direction that has been consistent since Modi was elected,” Chanpongsang said.
“Overall, I think it was a good budget as the government has made it clear that they need to stimulate infrastructure spending; evidenced by a 33 per cent increase in infrastructure spending, the establishment of a national infrastructure fund, and revisiting the public private partnership framework.”
“Additionally, the clarification of the general anti-avoidance rules and the planned introduction of [a goods and service tax] are positive developments. A key message is that the government is focusing on economic growth whilst maintaining fiscal discipline.”
Mike Sell, head of Asia at Alquity Investment Management, gives the Indian budget an eight out of ten. He rates the cut in the corporate tax rates as the speech’s highlight but says a country-wide goods and service tax, plans to streamline taxation in the property and measures to simplify business start-ups as other positive.
Alquity has an “extremely positive” house view on India, saying it is “one of the most powerful stories in the entire emerging markets asset class”. The group’s Asian fund has 20 per cent of its portfolio allocated to the country while its Indian Subcontinent fund is heavily positioned in pro-growth sectors.
“Given the high expectations, finance minister Jaitley was never going to make everyone happy. No budget announcement anywhere in the world ever does,” Sell said.
“However, he has delivered a pro-growth budget which reinforces our strongly positive view on the Indian economy and stock market – even after the significant move in the latter over the last year.”