Sensex Finishes Strong Cheering Budget Proposals
Closing

Share markets in India rose after finance minister Arun Jaitley unveiled a budget with a range of incentives for companies and geared towards boosting infrastructure and developing the rural economy.

At the closing bell, the BSE Sensex stood higher by 486 points, while the NSE Nifty finished up by 155 points. The S&P BSE Mid Cap & the S&P BSE Small Cap finished up by 1.7% respectively. Realty stocks gained the most, followed by auto, FMCG and bank stocks.

In a relief to taxpayers who are bearing the brunt of demonetisation, Finance Minister Arun Jaitley announced a reduction in the tax rate for individuals having income in the Rs 2.5 lakh-Rs 5 lakh bracket to 5% from the current 10%. This will lead to a 50% saving in the income tax if a person is earning up to Rs 5 lakh.

The government also kept the securities transaction tax (STT) and other taxes for the capital markets unchanged.

Asian markets finished mixed as of the most recent closing prices. The Nikkei 225 gained 0.56%, while the Hang Seng lost 0.18%. European markets are broadly higher today with shares in France leading the region. The CAC 40 is up 1.03% while London's FTSE 100 is up 0.95% and Germany's DAX is up 0.95%.

Extending gains for the sixth straight session, the Rs strengthened by another 24 paise to 67.63 against the US$. Oil prices were trading at US$ 52.93 at the time of writing.

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Shares of state-run banks such as SBI, Union Bank of India, Bank of Baroda, Punjab National Bank and Syndicate bank hogged the limelight and climbed by up to 4% as the government announced infusion of Rs 100 billion in public sector banks in the next fiscal.

The Finance Minister also proposed to double the lending target of Pradhan Mantri Mudra Yojana (PMMY) and set it up at Rs 2.44 lakh crore for 2017-18. The government's plan to recapitalise banks continues, despite the deluge of deposits in public sector banks (PSBs) following demonetisation.

Realty index surged 5% in today's trade after Finance Minister Arun Jaitley granted infrastructure status to affordable housing, a long-time demand from the industry. The new measure will reduce costs for developers and attract investors.

Sentiments also remained upbeat in the housing companies as holding period for capital gains on sale of immovable property (land and building) to qualify as long term capital gains is proposed to be reduced to 2 years from 3 years.

The base year for calculation of such capital gains with indexation benefit is also proposed to be shifted from 1981 to 2001. These steps are expected to reduce the capital gains tax burden on property sellers and thereby make movement of immovable capital easier.

Arun Jaitley announced the abolition of FIPB, a body that clears proposals envisaging foreign investment up to Rs 50 billion. The minister also announced that further liberalisation of the FDI policy is under consideration. Over 90% of the foreign direct investment (FDI) is coming through automatic route. FDI into the country increased by 30% to US$ 21.62 billion during April-September this fiscal.

The government also proposed to create an integrated public sector 'oil major' which will be able to match the performance of international and domestic private sector oil and gas companies. Oil & Gas stocks finished strong with HPCL and Petronet LNG leading the gains.

The government has pegged the fiscal deficit target at 3.2% of GDP for 2017-18. A fiscal deficit range will replace a definite target, which is expected to free the government's hands in meeting its fiscal goals. India's government deficit to GDP ratio is higher than most G-20 countries. Therefore, any attempts of relaxing fiscal consolidation to spur demand must be weighed carefully.

India Runs a High Government Deficit Among G-20 Countries

To ensure transparency in political funding in the country, the government has proposed that any maximum donation from any one source can only be Rs 2,000 from Rs 20,000.

This is something that we have been talking about for a long time. Vivek Kaul, our big picture expert had started a petition to end special privileges to political parties. Over 25,000 of our readers signed up for the petition to get equal rights and bring about an era of transparency in the funding of political parties.

The budget presented by FM was focused on boosting economic growth and hence it was a good budget. The finance minister has been to spend more in rural areas, infrastructure, and poverty alleviation and yet maintain the best standards of fiscal prudence. Finance minister stated the need to continue with economic reforms, promote higher investments and accelerate growth.

Market participants remained optimistic after the budget announcement. However, it remains to be seen how the policies and amendments mentioned in the Union Budget will be implemented over the year.

And here's a note from Profit Hunter:

Today the Nifty-50 index chart is up by 155 points as the market cheers the budget.

After the index peaked in September 2016 at 8,970 levels, it corrected over 11% to make a low of Rs 7,908 in December 2016.

Since then, the index is rallying strongly in an uptrend channel line. In the process, it overhauled two major resistances provided from 8,250-8,300 levels and 8,550-8,600 levels. On Friday, the index resisted from the channel's upper line after making a high of 8,672.

The index started the week on a negative note. It corrected to re-test the 8,600 levels (previous resistance turned support). Today, while the budget speech was on, the Nifty index traded in a very tight range. Right after, it shot straight up rallying sharply to gain 1.81%, clearly looking very happy about the budget announcement.

Currently, the index momentum is highly positive. But it is again trading at the channel's resistance line. Whether the momentum wins, or the resistance, will remain to be seen in coming sessions.

Indian Markets Cheers Budget
 Cutting Losses Short in Bosch 


Market Reacts Positively as FM Tables Union Budget 2017-18
01:30 pm

Indian share markets are trading strong after taking cues from the budget announcements. Sectoral indices are trading on a mixed note with stocks in the information technology sector and power sector trading in the red. However, stocks in the realty sector and the banking sector are witnessing maximum buying interest.

The BSE Sensex is trading up 246 points (up 0.8%) and the NSE Nifty is trading up 81 points (up 0.9%). The BSE Mid Cap index is trading up by 0.9%, while the BSE Small Cap index is trading up by 1%. The rupee is trading at 67.63 to the US$.

The Finance Minister tabled the Union Budget 2017-18 today. The Union Budget focused on 10 distinct themes: Farmers, rural population, energizing youth, poor and underprivileged, infrastructure, financial sector, digital economy, public service, prudent fiscal management, and tax administration.

The total budget expenditure of the budget this year is pegged at Rs 21,470 Billion. Despite the high figure the government has managed to keep the budgeted expenditure at a fiscal deficit of 3.2% as against the FRMB recommendation of 3% for the current fiscal.

Fiscal Deficit target of 3% of GDP

Fiscal Deficit target of 3% of GDP

The Finance Minister announced a slew of sops and tax benefits among other fiscal announcements. Presently the burden of taxation was mainly on salaried class. Post demonetisation there was a legitimate expectation of reduced burden. In accordance to this expectation, in news that will bring cheer to the majority of the tax paying population., the Income tax has been halved to 5% for those earning between Rs. 250,000 and Rs. 500,000. The Finance Minister said that this move is to reduce the burden on tax payers and bring in more people under the tax net, through lower rates.

All other categories of taxpayers in subsequent brackets will get benefit of Rs 12,500. Surcharge of 10% will be levied on persons earning between Rs 5 million to Rs 10 million. The surcharge of 15% on those earning above Rs 10 million will continue to remain the same.

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Among other tax benefits, Foreign Portfolio Investors (FPIs) will be exempt from indirect provisions reducing tax burden.

The finance minister proposed the change in the definition of 'Long Term' for long term capital gains in case of properties to 2 years from the current three years.

In another major development, in a push for Digital India, and curbing black money, the Finance Minister proposed to ban all cash transaction above Rs 300,000 from 1 April 2017.

To ensure transparency in political funding in the country, the government has proposed that any maximum donation from any one source can only be Rs 2,000.

Earlier, the donation limit was Rs 20,000. The Finance Minister Arun Jaitley also said these donations can be made either through cheques or digital means only.

The government has also proposed an amendment to the Reserve Bank Act to enable issuance of electoral bonds. These bonds can be redeemed by the political parties in registered accounts and within a specified time only.

This is precisely what we have been talking about for a long time. Vivek Kaul, our big picture expert had started a petition to end special privileges to political parties. And over 25,000 of our dear readers signed up for the petition to get equal rights and bring about an era of transparency in the funding of political parties.

Market participants remained optimistic after the budget announcement. However, it remains to be seen how the policies and amendments mentioned in the Union Budget will be implemented over the year.


Indian Indices Trade on a Volatile Note as FM Presents Union Budget 2017-18
11:30 am

Indian share markets are trading marginally higher after taking cues from the budget announcements. Sectoral indices are trading on a mixed note with stocks in the information technology sector and healthcare sector witnessing maximum selling pressure. Stocks in the realty sector are trading in the green.

The BSE Sensex is trading up 69 points (up 0.3%) and the NSE Nifty is trading up 17 points (up 0.2%). The BSE Mid Cap index is trading up by 0.4%, while the BSE Small Cap index is trading up by 0.5%. The rupee is trading at 67.61 to the US$.

Financial markets are keeping tabs on various announcements from Finance Minister Arun Jaitley's budget speech. So far Mr. Jaitley has touched upon some macroeconomic topics. He had announced that inflation has been controlled and the government has successfully launched massive war on black money.

As per Mr. Jaitley, the government will continue to uplift vulnerable sections of the society. Its focus is to energise youth and create jobs.

Apart from the above, Arun Jaitley also touched upon the demonetisation move and said that its impact is not expected to spill over to next year as the pace of remonetisation has picked up in the economy.

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The overall approach in budget, as per Mr. Jaitley, has been to spend more in rural areas.

Budgets have had a historical trend of rising allocation for rural welfare. This is seen in the chart below:

Will the Government Continue to Oblige?

Will the Government Continue to Oblige?

Notes:
MGNREGS - Mahatma Gandhi National Rural Employment Gurantee Scheme
PMGSY - Pradhan Mantri Gram Sadak Yojana

The government should fetch enough revenue so the above expenditure does not come through additional debt.

Owing to the above announcements, Indian Indices are trading on a volatile note. Also, market participants are watching out for themes in the budget that could affect their stocks.

My friend Kunal Thanvi wrote to you yesterday about some of these themes in The 5 Minute WrapUp. These included the fiscal deficit and financial stocks, the defence theme, digital India, etc. Apart from that, he also pointed two broad themes that investors should watch out for in the budget. Here's an excerpt:

  • Focus instead on two broad themes.

    First, the sectors and stocks that would be positively affected in the long term by any major announcements in the budget.

    Second, consider those sectors and stocks that won't be affected by the budget. You may not get short-term gains here but you could find good long-term value in them.

As per Kunal, these are the two broad themes for a long term investor to profit from the budget. In short, look out for value and follow a long term value investing approach.

It's also important to have a set process in place, as Rahul Shah, co-head of research at Equitymaster, showed us at the Equitymaster Conference 2017. Many of you have already tasted the fruits of one of Rahul's processes with his Microcap Millionaires service.

But at the Conference, Rahul asked attendees to mark 10 February 2017 on their calendars. The reason? He will send out his first Profit Velocity report to subscribers.

As you may have guessed, Profit Velocity is a system-based investing approach.

With Profit Velocity, Rahul believes that the system could help subscribers fetch gains several times those of the benchmark index. In keeping with that, our Founder Member opportunity, which closes shortly, offers an unprecedented 60% saving on the usual membership fees for Profit Velocity.


Sensex Opens Flat Ahead of Budget 2017
09:30 am

Asian markets are mixed today. The Hang Seng is lower by 0.91% while the Nikkei 225 is even. European markets finished broadly lower with shares in Germany leading the region. Meanwhile, share markets in India have opened the trading day on a flattish note with a positive bias ahead of the Budget announcement. The BSE Sensex is trading up by 58 points while the NSE Nifty is trading higher by 13 points. The BSE Mid Cap index and BSE Small Cap index have opened the day up by 0.4% & 0.3% respectively.

The rupee is trading at 67.81 to the US$. Barring information technology stocks, all sectoral indices have opened the day in green. Realty and consumer durables stocks are among the top gainers on the BSE.

Power stocks have opened the day on a mixed note. Jaiprakash Power and KSK Energy are the most active stocks in this space. According to an article in The Economic Times, Rural Electrification Corp (REC) has signed a loan agreement with Tamil Nadu's power generation and transmission utilities for financial assistance of Rs 68.9 billion.

Reportedly, the pact has been signed with Tangedco and Tantransco in Chennai for implementation of 800 Megawatt supercritical thermal power plant, renovation and modernisation of existing thermal power plants and establishment of new 765 KiloVolt, 400 KV substations in and around Chennai.

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Further, it will also support in other renewable energy, energy conservation, smart grid and automation power projects in Tamil Nadu.

In the meanwhile, REC has also inked three pacts to extend financial assistance of around Rs 600 billion to Andhra Pradesh recently. The financial assistance comprises Rs 400 billion to Andhra Pradesh Power Generation Corp, Rs 100 billion to Transmission Corporation of Andhra Pradesh and Rs 100 billion to AP DISCOMSs.

Apart from financial assistance, power utilities have agreed for availing Consultancy and Management Services from wholly owned subsidiaries of REC for their various projects for next 5 years, the reports noted. To know more about the company's financial performance, subscribers can access to REC's latest result analysis (subscription required) and REC stock analysis on our website.

Moving on to the news from stocks in steel sector, National Aluminium Company Limited (Nalco) and Neelachal Ispat Nigam Limited (NINL) have signed a memorandum of understanding (MoU) to set up a joint venture company for producing coal tar pitch in Odisha.

Under the JV, the coal tar distillation plant that is proposed to be set up. The plant will use the coal tar generated from NINL's coke oven plant at its 1.1 million tonne per annum integrated iron and steel plant at Kalinga Nagar in Duburi. Meanwhile, NINL will be preparing a techno-economic feasibility report for the JV project.

The agreement comes on the back of Nalco's new business plan to ensure backward integration and sustain the plans for forward integration.

Speaking of the aluminum industry, aluminium demand in India has been growing at a decent rate. This is on the back of increased usage of aluminium and its alloys in the automobile sector. However, the aluminium industry has been plagued by a massive oversupply that has put pressure on prices.

Aluminium Production in 2016

Reportedly, India's aluminium consumption is rising steadily and is estimated to reach eight million tonnes per annum over the next ten years driven by growth in automobile, electricity, building & construction and packaging sectors. The aluminium that is produced here has to meet the costs and environment challenges.

NALCO share price opened the day down by 1.3%.

Union Budget for 2017-18 will be tabled in the parliament today. You can read about the key takeaways and some important updates in our today's 5 Minute WrapUp. Stay tuned.


Economic Survey: A Central 'Bad Bank' Can Rectify Stressed Assets
Pre-Open

Amid the hullaballoo of the Union Budget, the economic survey tends to go unnoticed. Yet this - the flagship annual economic document of the Ministry of Finance - deserves attention. It contains a lot of economic data for the year as well as solutions to the challenges facing the economy.

The Economic Survey 2016-17 stated that Indian banks should be recapitalised at the earliest and a centralised bad bank needs to be established to take over large bad loans.

This survey predicts that India may be unable to grow out of its debt problem, which would soon take a toll on economic growth. That's because stressed corporates are reducing their new investments while stressed banks are unable to take new lending risks.

An article in The Business Standard holds that the survey's solution that suggests that the government will have to prepare a massive bailout mechanism for indebted corporates. This would be achieved through the establishment of a Public Asset Rehabilitation Agency (PARA).

This means that the government would buy bad loans from banks and reimburse them for losses or recapitalize them. The PARA would essentially take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.

The bad bank concept is not entirely new in India. When IDBI Ltd converted into a bank in 2004, the government set up a Stressed Asset Stabilisation Fund to hive off its stressed and non-performing cases worth Rs 9,000 crore. This indicates that segregation of good and bad debt isn't enough to solve the bad debt problem. Though this creates a good balance sheet, it does not necessarily solve the ground level problem of recovery. It is also seen as a 'moral hazard' shielding banks from their own inconsistencies and failure to take proper precautions.

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A bad bank may have been a solution in other countries, however, setting one up in India will be more complicated.

So, will the tax-payer's money be used to bail out the big corporates? The survey says the government could compensate banks for their losses by selling them government securities, or the government could recover its money if PARA manages to recover some of the bad loans it has purchased from banks.

But the experience of Asset Reconstruction Companies and other schemes haven't proved effective. Most of the restructured loans have interest rates added to the value of the asset over the past few years. But these assets, in fact, have lost value even at the cost level.

Also, the Strategic Debt Restructuring scheme has been a limited success. It was observed in restructuring cases that borrower companies were not able to come out of stress due to operational/managerial inefficiencies.

Alternatively, the Survey suggests that PARA could be funded through government issue of securities and/or through equity capital provided through RBI. This reduces RBI's cost of borrowing bonds directly from the government. Raghuram Rajan had also wondered why RBI should not use its reserves to recapitalize banks.

  • Now, let us understand the rationale for not taking this back from the RBI and using this to buy back bonds. You could do that. Or you could trump it from every rooftop that you have so much in terms of assets with RBI. Why do we think it's useful for it to stay in the RBI? Because you need an entity in the economy which has a pristine rating. So, for example, if you want to do swap arrangements with other economies, you are better placed if you have a AAA-rated entity.

So the recapitalization of PSU banks is only a short term reprieve. The real problems are far from being resolved. Investors should take into account the sustainability of credit growth and asset quality instead of investing in banks looking to writing off bad loans with newly acquired funds.