We are hopeful that government spending on public works will help our holdings in cement and capital goods-makers. This may depend on the quality of project execution. We own ABB, the power and automation multinational. UltraTech and Ambuja Cement, also in our portfolios, got an additional boost by way of an abolition of excise duty on ready-mix-concrete.
Elsewhere, budget details were either short or tentative. For instance, the measly sum of INR50bn ($739m) was earmarked for the recapitalisation of the hard-pressed state banks (which we don’t own). In seeking a trade-off between growth and asset quality, the government appears to have conceded that proper reforms will have to wait. Divestment, alas, is off the table.
We own the likes of HDFC Bank, ICICI Bank and Kotak Mahindra Bank, all of which remain well-capitalised for recovery and with a much better bad loan profile than the public sector banks. These lenders will look even better if Reserve Bank of India governor Raghuram Rajan can impose more conservative accounting on the sector.
Meanwhile, there was a boost to institutional reforms with a new legal framework announced for dispute resolution and re-negotiations on public private partnerships (PPP), although no word on the actual mechanics of debt recovery, insolvency and bankruptcy.
Some aspects of the budget’s small print were encouraging. Tariff hikes on tobacco were up ‘only’ 10.3%, a few percentage points ahead of inflation and within consumer tolerance.
Overzealous hikes in the past have typically just pushed smokers to buy non-branded cigarettes, defeating the intention of raising revenues. We own ITC, the leading cigarette-maker.
Overall, the sheen has come off India’s growth story a little as slowing global trade catches up with it – much as everywhere else. Earnings growth has been stalling, although there have been signs of resilience among individual companies.
This change in temper probably put paid to any big gestures in the budget.
That said foreign direct investment remains healthy while competitive federalism – the devolution of economic resource allocation and decision-making to the states – is producing results, especially in areas like ease of doing business.
We still like India from both a fixed income and equity market perspective and remain overweight versus benchmarks.