Though its budget—which the Indian government announced on Saturday—is incremental and a disappointment to those hoping for radical changes, MoneyShow's Jim Jubak illustrates how it does avoid a big danger.
The budget the Indian government announced on Saturday, February 28, for the fiscal year that begins on April 1, wasn't a home run, but it was probably good enough to keep Indian stocks moving higher in the months ahead.
The $288 billion budget does indeed deliver the hoped for big increase in infrastructure spending. Annual government spending on roads, ports, railroads, and the like will increase by $11.36 billion. (That would take infrastructure spending to 14% of the budget from 11%.)
And it does include looked for reform measures such as stepped up enforcement of tax evasion and a new 2% tax on the superrich, and some important pro-business items such as a cut to corporate tax rate to 25% from 30%.
But it's an incremental budget, and as such, a disappointment to those hoping for radical changes that would replace the current thicket of local taxes with a national sales tax or that would simplify a land purchase consent law that now makes it extremely difficult to win approval to build everything from a factory to housing.
The budget does, however, avoid a big danger. The government has proposed increasing the fiscal deficit target to 3.9% of GDP from 3.6%, but that hardly constitutes the kind of big blowout that would send the Reserve Bank of India running from further cuts to interest rates. The budget also kept a longer-term target for reducing the deficit to 3% of GDP, although it added a year to the timetable. (The deficit for the fiscal year that ends this month is forecast at 4.1%.)
The Mumbai stock market has moved up modestly today (and in a special Saturday session) on the budget news with bank stocks leading the way higher. (The government has proposed paying subsidies for fuel and food directly into bank accounts. That would add millions of accounts to India's “banked” population.)
That strikes me a reasonable response after a strong rally in Indian stocks has sent prices to 16.5 times projected earnings. But with growth projected, by the government, at 8.1% to 8.5%, the rupee up 1.9% in 2015, and interest rates likely to fall this year as the central bank cuts rates, I still favor selected picks in the Indian market. With that in mind, I continue to recommend bank stocks such as HDFC Bank (HDB), a member of my Jubak's Picks portfolio. I'd also look to add exposure to India's infrastructure sector after this budget. The best way to do that is through the EGShares India Infrastructure ETF (INXX), also a member of that portfolio. (HDFC has hit my original target price; I'll have an update on the stock and a new target price tomorrow.)
