Jaitley's Operation Green or Operation Cover-Up? - The 5 Minute WrapUp by Equitymaster
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Jaitley's Operation Green or Operation Cover-Up?

Feb 1, 2018

Tanushree Banerjee, Editor, The 5 Minute Wrapup

Pink and green. Signs of good health and prosperity. Not colours one associates with documents as serious as the economic survey and the annual fiscal plan. But PM Modi and his ministers certainly know how to add a splash of colour.

The bright pink Economic Survey... Operation Green of the budget... were they really just there lighten the mood? To stoke voter sentiments. Or are they quite literally covering up the 'greys' that should not be seen in a pre-election year?

To be fair, the Budget alone cannot be the policy document to address all the economy's critical areas. Several policy and reform measures must do that collectively. So, as investors, we cannot, and should not pin our hopes on this annual spectacle.

But the least we can expect is that the documents like the Economic Survey and the Budget speak the truth. The Honest Truth.

Without covering up the grey areas of the economy that will impact our investments the most.

The GDP growth and fiscal deficit target for the next financial year are commendable. No lying about that. Those may even earn us some brownie points with the rating agencies, and push us a notch higher amongst emerging market indices... At least temporarily.

But if Jaitley's trying to say that these will avert the demographic disaster we are heading towards - sorry, we are not buying it.

All the government will end up doing is rob Peter to pay Paul.

So now, what should you be worrying about as an investor?

Well, let's see.

Minimum support prices have turned out not to be the ideal solution to improve farm income. Far from it. And without sustainable growth in farm income, the rural spend and growth of FMCG companies will remain mediocre.

The biggest gap in India's demographic dividend is that most graduates are not 'employable'. And the pitiful attempt to improve the quality of education will leave most service sectors starved of quality manpower. Can India's IT companies then deliver?

Tax sops for the small enterprises, sops for textile and leather industries and building roadways and railways will help. But even put together, they are unlikely to create the 30,000 jobs that India needs every day...

Without those jobs, even urban consumption spend will languish and hurt the topline growth of most companies.

Capital outlay plans of most companies have been in the cold storage for the past two years. Banks have sanctioned funds but have not disbursed them. And without the existing capacities getting utilized enough, the companies have very little incentive to block capital. Again, the biggest reason for earnings growth not taking off remains unaddressed.

And if merging the public-sector units and pumping taxpayer money into failing banks would have been a true solution, these entities would have fetched astronomical valuations.

The biggest lie that both the Economic Survey and the Budget have peddled is about the future of these enterprises. And about the government's business of being in business...

Without the energy and banking behemoths getting the management credibility they deserve, shareholder wealth in them remains a far cry.

For you, the investor, the only silver lining is that there are businesses that will do well irrespective of the economy.

Spotting the stocks that will really be pink and green i.e. healthy and prosperous, when everyone else in the market gets overwhelmed with the 'grey' in the economy, will be a huge opportunity.

Indian Economy Moving towards Formalization

The government presented the Economic Survey of India (2017-18) on Monday. One thing that stood out in the survey is the formalization of the economy.

The below chart illustrates the same.

A Large Increase in Registered Indirect and Direct Taxpayers

Since the launch of Goods and Services Tax (GST), there were 9.8 million unique GST registrants, an increase of 50% compared to the previous tax regime. There has also been a large increase in voluntary registrations, especially by small enterprises that buy from large enterprises wanting to avail themselves of input tax credits.

Similarly, after November 2016, 10.1 million tax filers were added compared to an average of 6.2 million in the preceding six years. Further analysis suggests that new filers reported an average income, in many cases, close to the income tax threshold of Rs. 2.5 lakh, limiting the early revenue impact. As income growth pushes many of the new tax filers in time over the threshold, the revenue dividends should increase robustly.

These changes can have profound effects on the Indian economy. With the increasing tax base, the government will have a significant amount of resources to spend on infrastructure, health and education, While the fiscal deficit will be stable.

As organized players gain market share, it will begin to reflect in corporate earnings and stock prices too.

How Will the Real Estate Sector Make a Comeback?

Recently, Smart Money Secret Team went for a research meeting with a real-estate developer in North India. The purpose of the meeting was to understand the company-specific issues and about the overall sector. At the start of the meeting, here's what the management said:

  • "This is the worst of times in the real estate sector. This sector has seen triple blows- namely, RERA, demonetization, and GST. It can't get anything worse than this. However, such regulatory changes will weed out a lot of unorganized players from the market and our competitive position will improve further."

Now the real estate is a cyclical sector. When you talk about cyclicality, it's all about demand and supply. Currently, there is a sluggishness in demand and homebuyers are behaving extremely cautious. On the other side, a lot of unsold inventory led to huge supply. This has created a wide gap in demand-supply dynamics. However, we believe, regulatory push such as RERA, GST, etc. will restrict the supply side of the equation. Only developers who have all approvals in place can launch new projects.

Similarly, the government has started a slew of initiatives to revive the demand. This includes interest rate subsidy, reducing the holding period for long-term gain tax, change in the definition of affordable housing, etc.

This will help the sector arise from the ashes.

What this means is, there's an opportunity in the sector, and you must pick the best company in a cyclical sector. The Smart Money Secret Team has recently recommended one of the best companies in the sector. Click here to find out.

What the Markets Looked Like Today

After opening the day on a positive note, Indian equity markets recovered after the big fall that occoured post the announcement of long term capital gains tax. BSE Sensex ended the day lower by 58 points and NSE-Nifty was trading lower by 11 points. Auto and FMCG stocks were the biggest gainers.

Tanushree Banerjee
Tanushree Banerjee (Research Analyst)
Editor, The 5 Minute WrapUp

PS: The economy might be grey, but the picture can still be rosy if you know where to look. To keep your wealth safe, click here.

Investment Mantra of the Day

"Stop trying to predict the direction of the stock market, the economy, interest rates, or elections." - Warren Buffett

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1 Responses to "Jaitley's Operation Green or Operation Cover-Up?"

B.SUDHAKAR

Feb 3, 2018

I was wondering why the stock market reacted to the budget on the second day totally different from the behavior on the day it is presented. Same Brokers, Same traders, Same sectors!
Is there a special revelation on the second day?
The same overbought situation as it was the day before. Then what made it to wipe out so much capital in just a few hours?
If it continues the same trend, then we should congratulate Vivek Kaul for his piece on 'chickens wating to get slaughtered'

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