Union Budget 2018: What Brokerages Made Of India’s Union Budget

Finance Minister Arun Jaitley unveiled the Union Budget 2018, focussed on improving the health of the rural and farm sectors while stepping up infrastructure spending. He brought back the tax on long-term capital gains and indicated that the government will achieve only moderate fiscal consolidation over the next few years.

Equity investors will now pay more tax on long-term investments as the government proposed to reintroduce a 10 percent tax on long term capital gains in excess of Rs 1 lakh. However, all gains up to Jan. 31, 2018 will be grandfathered, said the finance minister. Distributed income by mutual funds will attract the same rate.

In another key announcement, Jaitley said that India will end 2017-18 with a fiscal deficit of 3.5 percent of the gross domestic product, as opposed to the targetted 3.2 percent. The fiscal deficit should be brought down to 3.3 percent in FY19, he added.

Nilesh Shah of Envision Capital told BloombergQuint that these developments were in line with the market's expectation and that investors “will learn to live with it”.

Here's what brokerages made of Jaitley's fourth full Budget.

Morgan Stanley

The market had already priced in the long-term capital gains tax so that announcement is largely neutral for stocks, the financial major said in a research note after the Budget.

The note added that equity markets are “hinged to global outcomes in the near term” and earnings growth is likely to accelerate in 2018. This means the “demand supply for shares get tighter”, it said.

• Strong growth estimated for infrastructure continues to boost the case for industrials.
• Positive on corporate bank, infrastructure, discretionary consumption, domestic materials and software stocks.
• Some near-term headwinds for bonds due to higher than estimated government borrowing target of Rs 6.06 lakh crore.

Also Read: Union Budget 2018: Government Gives Itself A Fiscal Long Rope

Edelweiss

The Budget extended the consolidation path with a focus on "rural spending, housing, MSMEs and infrastructure (especially railways)," said Edelweiss in a research note.

The government's National Health Protection Scheme plan that aims to cover 10 crore families with a Rs 5 lakh per year benefit will be a positive for general and health insurance companies, Edelweiss said.

• Higher MUDRA financing and proposal will curb bad loans in MSME sector should benefit the likes of Capital First, Shriram City Union, and regional private banks.
• Higher allocation for affordable housing scheme will benefit housing finance companies and players in the affordable housing space like Dewan Housing, Repco and Gruh Finance.

Also Read: Union Budget 2018: A Budget Short On Details And Lacking A Growth Push, Says India Inc

Capital Economics

The finance ministry was faced with a "tricky balancing act" as it aimed to shore up popular support ahead of the 2019 general elections while also continuing to demonstrate its commitment to fiscal prudence, according to Capital Economics.

The slower pace of fiscal consolidation would mean that government spending would be less of a drag on growth than would otherwise be the case, it said. The wider deficit will be financed by more government borrowing and that explains the rise in bond yields. "We expect state budgets also to be loosened," it added.

Also Read: Union Budget 2018-19: In Charts

Bank of America Merrill Lynch

The sectors exposed to rural India will benefit from the Budget announcements, but there “isn't much to excite and an already inflated market”, said BofA ML in a research note.

The LTCG tax announcement makes equity taxation worse than that on debt on a three-year investment period, BofA ML said. This may not be enough to stem the strong domestic inflows of funds in the equity market, it added.

• Impact of the healthcare scheme will depend on the details of its implementation.
• Oil subsidy provisions may be insufficient if oil stays at current levels.

Also Read: Union Budget 2018: Get Ready To Pay More Tax!

Citi

The rhetoric on populism in the Budget speech was higher than the spend allocated towards it, said Citi Research in a note. The fineprint failed to calm market jitters, it added.

The bond issuance details suggest that switches due by March will unexpectedly supply duration equal to almost three recent sized bond auctions, Citi said. Coupled with the unfavourable shifts in demand dynamics for government bonds, this could keep fixed income markets under pressure, it added.

• Rupee to be mostly driven by equity market sentiment and the dollar.
• Awaiting more details on healthcare plan to judge fiscal impact.
• Excise duty cut on petroleum products to have around impact fiscal deficit by 20 basis point.

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