India budget to unveil winners and losers

The first sign of whether the market optimism lavished on Indian Prime Minister Narendra Modi is justified or premature will be out on Thursday, when his finance minister unveils the country’s budget.

Japanese streets
Source: Bloomberg

Ahead of the landslide victory of his Bharatiya Janata Party in May, Indian stocks and the rupee had rallied to hit new highs, on the expectations of pro-business reforms to revive India’s sluggish growth.

There’s already been some indications the government will stay the course of steering clear of populist policies. Last month, it pushed forward to raise train fares by 14%, albeit a rollback from a 100% raise following protests from some Members of Parliament.

Winners and losers

Among the things India will need to focus on is cutting back on less effective redistributive polices, and fleshing out reforms to boost productivity and jobs growth.

A strong sign of these measures could be lending a short-term boost to investor sentiment for the rupee and stocks. A higher rupee though might hit IT companies which have a high proportion of US-denominated exports and business operations.

On the flipside, some sectors that might benefit from the budget might include those related to construction such as cement, if there are proposals to boost public housing and infrastructure. 

The oil and gas industry could also get a boost if the government continues its policy of diesel price hikes, and includes other measures to encourage domestic gas production.

The government is also expected to cash in its stake in public companies, and possibly open up industries to more competition. The coal sector has been a widely speculated target of such a move to boost efficiencies, and has seen Coal India’s share price rallying over 30% from the beginning of the year.

GST likely to be delayed

While a critical component of its reforms is the implementation of Goods and Services Tax (GST) Act, it’s unlikely this will materialise until a few years later. Besides keeping the budget from being overly forceful on the outset, getting the tax implemented involves the complexity of getting support from state governments and amending the constitution which requires parliamentary approval.

Amid the stubbornly high inflation, a nationwide GST could be some relief in softening food prices by removing multiple layers of state taxes. India has struggled to put a lid on rising food prices, which could get worse ahead of an expected drier-than-usual June-September monsoon season.

Asian market outlook

US markets retreated on rising speculation that interest rates will be hiked sooner than expected, sending 10-year bond yields lower. European markets also declined amid some disappointing industrial production data from Germany.

This morning, strong Japanese trade numbers helped extend the Yen’s gains against the greenback, which saw the Nikkei open weaker. Japanese exports rose 2% year-on-year, while imports fell 0.4% - the first dip in 19 months. 

With a lack of strong catalysts for the market today, investors are likely to position themselves for tomorrow’s data from China with its CPI data for June and developments from the Indonesian elections.

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