Budget 2019: A fine balancing act between fiscal prudence & development

By S Naren

The interim budget 2019 is a pro-rural, housing and middle-class centric one. The fiscal outlays were increased to promote a slew of schemes related to agriculture, defence, electricity, animal husbandry, and more. Yet, the finance minister managed a fine balancing act between fiscal discipline and developmental needs of the economy.

On the fiscal front, the government has adhered to fiscal prudence. Fiscal deficit for FY19 (current financial year) at 3.4 per cent of the GDP is a minor slippage of 10 bps over the budgeted estimates. The current account deficit for FY19 remains contained at 2.5 per cent.

As for the socio-economic agenda, the budget focused majorly towards addressing the agrarian crisis in the country.

Among other things, the budget also announced several measures for middle-class taxpayers. The key highlight was the tax exemption of income up to Rs 5 lakh per annum. This will boost the disposable income and purchasing power in the hands of a taxpayer, in turn increasing low-ticket consumption.

Another notable positive is the government’s initiative to aid the sagging real estate sector. The budget has proposed to provide the benefit of rolling over capital gains for the investment made in two residential properties (earlier, the benefit was limited to one property). A notional rent earlier applicable to the second house has been waived off, considering the situational needs of citizens like migration for job opportunities or family reasons. Key tax breaks for construction of affordable homes and other incremental measures indicate that the government is looking at real estate as an essential driver to augment the economy.

In all, a series of impactful tax breaks for income taxpayers coupled with farmer benefits should be positive for consumption and auto. Further, infrastructure, banking and sectors deriving benefits from rural growth stand to benefit.

Equity markets could remain volatile and the upcoming general election (in April/May) remains the key trigger for the rest of the year. We believe it is conducive for investors to accumulate equities in a staggered manner through SIP/STP.

For lump sum investments, we recommend large-cap-oriented schemes and/or asset allocation through hybrid category like balanced advantage funds. As for themes, we are positive on special situations and those benefiting from volatility. Themes such as banking and infrastructure could also be explored in 2019, post the recent oil price correction.

As for debt, investors could look at dynamic duration schemes and low-duration funds, which tend to mitigate interest rate volatility (investing in instruments with maturities of one to three years) along with accrual schemes, which can capture the current elevated yields.

The author is Chief Investment Officer, ICICI Prudential Mutual Fund.