Budget - 2016

Changing Guard

Markets entered budget day on a bearish note anticipating negative outcome from Budget 2016. There were expectations of a 2% hike in service tax rate from 14.50% to 16.50%. It was also expected that LTCG on equities will be extended from one year to three years while some quarters were expecting the same to be taxed as well. What surprised the street was neutral stand on taxes and moderate increase in overall tax revenue. We did our own study of Budget 2016 and in our opinion it’s a CHANGE OF GUARD for the Indian economy.

1.       From services to agriculture & manufacturing – most of the thrust in the budget is towards agriculture, infrastructure and some manufacturing sectors. The budget is neutral to negative for services with marginal increase of 0.50% as agriculture cess. Agriculture, infrastructure & manufacturing are the biggest job providing sectors. Budget has given huge outlay for roads, irrigation, allied agriculture sectors and some of the manufacturing sectors got incentivized with change in excise and custom duty. This will help to balance the economy and increase weight of manufacturing sector in the economy.

2.       From urban to rural economy – this budget has focused on building rural economy by focusing on social welfare schemes and outlay for agriculture sector. Also outlay for roads will help in connecting villages. Higher taxes for four wheelers @ 1% to 4% is a clear signal that the government’s focus is to build rural India at the cost of urban India. This will help in reducing income inequality, improve rural wages and improve social infrastructure of country.

3.       From rich Individuals to poor people – some of the taxes like additional surcharge for Rs. one crore plus income and 10% dividend distribution tax for individual earning more than Rs. 10 lac dividend income is a clear sign that rich people will have to pay more taxes to benefit the poor.

4.       From profit & loss account to balance sheet – the government has been levying higher taxes on diesel and petrol over the last year. The budget has given direction that this amount will be spent on making roads. For last so many years we are struggling to convert our economy from consumer led to investment led. This budget will help in changing direction of economy towards investment.

In our opinion this budget was a balancing act and will try to move economy towards sustainability. This CHANGE OF GUARD will create wonderful opportunities for large sectors and companies. Sectors like two wheelers, cement, agri input, auto ancillary, chemicals, consumer durable, rural consumption and other allied sectors will gain. We strongly believe that this CHANGE OF GUARD will help some of the business to grow at higher pace and hence get premium valuations compared to the market. The recent correction has made this story more compelling.