Beyond Bulls & Bears


Union Budget 2017-18: Key Takeaways

India’s economy faced a temporary liquidity issue when the government recalled all 500- and 1000- Indian rupee banknotes late last year as part of Indian Prime Minister Narendra Modi’s crackdown on corruption. So some investor apprehension surrounding the 2017-18 Union Budget—and the potential market impact—is understandable. Sukumar Rajah, managing director and chief investment officer, Asian Equity, breaks down the long-term fiscal plans of Modi and Indian Finance Minister Arun Jaitley, and explores potential benefits some investor-friendly policies could bring to the Indian economy in the year ahead.

This post is also available in: French Italian German Polish

When the Indian government announced the demonetisation programme in November, it made headlines around the world and led to some short-term volatility in the Indian equity market. In the aftermath, India lost its title as the world’s fastest-growing major economy,1 but we think the demonetisation programme has not been as disruptive as many observers had first feared and expect the impact of the currency replacement programme to be short-lived as new notes come into circulation.

With key state elections coming up this year, markets had anticipated a more populist budget than before. Instead, the focus of this year’s budget actually fell on fiscal consolidation—namely reducing the deficits of the government. We think this more fiscally conservative emphasis could help economic growth recover in the next two quarters.

In our view, the latest demonetisation move should be viewed against the backdrop of other far-reaching government policies. Despite the short-term impact from demonetisation, we think long-term measures such as the Goods and Services Tax (GST), financial inclusion schemes and improved efficiency in government schemes could make India’s long-term path much clearer.

The long-term focus on growth was clear in the budget. The transform, energise and clean agenda remained close to Modi’s core themes of maintaining fiscal discipline, with an emphasis on long-term fiscal health, higher spending on infrastructure, greater tax compliance and welfare funding.

Room For Growth With Indian Equities

The Indian equity market reacted positively to the budget, rallying on the back of relief from the lack changes made to long-term capital gain tax on equities. We still see room for further gains. India’s equity market is one of the most diverse markets in the world and has demonstrated resilience to external shocks. There are still a low number of domestic investors holding Indian equities, but this appears set to change.

The Indian government has also made efforts to attract foreign investors. These include scrapping the need for prior approval from the Foreign Investment Promotion Board (FIPB) and simplifying the foreign direct investment (FDI) process. As FDI flows become more long-term oriented, we have seen FDI inflows increase by 18% during the calendar year of 2016.2

That said, we think volatility from domestic corporate earnings could increase too, as some companies—namely in the consumer discretionary sector—will likely tide over the impact of the demonetisation programme, due to the lack of cash flow.

Sectors to Watch

This year’s balanced budget maintained a commitment to fiscal discipline, although some may have felt the Modi administration played it on the safe side.

Consumer Discretionary

  • The government’s focus on rural India and further tax rate cuts for lower-income taxpayers should likely benefit the companies able to deliver cheaper goods and services within this space.
  • The ban on large cash transactions could benefit organised players—registered companies that comply with government regulations and tax liabilities—in the jewellery industry.
  • The impact of the demonetisation programme has not completely disappeared and it would not be surprising to us if domestic corporate earnings remained volatile in the short-term. As a result, the consumer discretionary sector is likely to feel the effects.


  • Fiscal consolidation outlined in the budget should continue to improve the current liquidity outlook and offer some room to cut deposit rates, which have seen some recent pressure from lending rate cuts.
  • We think the budget will likely have no direct impact on Indian banks, but we feel the indirect benefits could potentially be plentiful, namely through digitisation, softer rates and economic growth.


  • A profit-linked scheme for affordable housing should boost demand for cement and other key house-building materials.


  • Some 60% of the budget for infrastructure has been allocated to transport—railways, highways, the metro, irrigation and ports.

In our view, the 2017-18 Union Budget struck a balance in regard to projected government spending—tackling the deficit, while supporting sector growth through public spending. The former maintains India’s credibility and investor confidence, while the latter gives economic growth the lift it very much needs after the demonetisation programme. As a result, we see numerous potential opportunities for investment in domestic sectors that should drive the domestic Indian equity market and pave a sturdy path for fiscal consolidation.

The comments, opinions and analyses are the personal views expressed by the investment manager and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice, and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

Get more perspectives from Franklin Templeton Investments delivered to your inbox. Subscribe to the Beyond Bulls & Bears blog.

For timely investing tidbits, follow us on Twitter @FTI_Global and on LinkedIn.

What Are the Risks?

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets.

1. International Monetary Fund, World Economic Outlook, January 2017.

2. Department of Industrial Policy and Promotion, December 2016.