Investors in Indian stocks should breathe easy after the government’s annual budget focused on heavy spending in the rural and infrastructure sectors and eschewed any pinching tax proposals, delivering a powerful stimulus to boost growth and consumer demand.

There were no giveaways either, despite concerns New Delhi might play to the gallery to woo voters in assembly elections over the next few weeks in the states of Uttar Pradesh, Punjab, Goa, Uttarakhand and Manipur. To Finance Minister Arun Jaitley’s credit, he also resisted temptations to loosen cash strings too much and kept firmly on course to the fiscal consolidation path.

“The government has presented a popular, but not a populist, budget,” analysts at securities house Nomura told their clients. “The message from the budget is that the government continues to prioritise macro stability over growth. We believe this is a very strong and positive signal, given it was under significant pressure to tilt towards populism.”

For investors in particular there was no shift in tax policy vis-a-vis on long-term capital gains, amid fears the government may be looking to squeeze the market fraternity. Little surprise stocks rallied sharply after the budget in what was a relief rally.

The top-30 Sensex climbed 1.3 per cent over the week to 28,240.52 and the 50-share Nifty gained 1.15 per cent to 8,740.95. Shares in BSE Ltd, Asia’s oldest stock exchange that started operations in 1875, soared as much as 48.9 per cent on their trading debut on the National Stock Exchange and closed at Rs. 1,069.20, up 33 per cent from their issue price of Rs. 806.

Rural focus

The budget increased capital investment by 25.4 per cent, rural and farm spending by 24 per cent and raised the outlay on health by 28 per cent for the financial year 2017-18 that starts on April 1.

As the majority of India’s 1.3 billion people live in villages or semi-urban regions and depend upon farm-related incomes for their livelihood, the government’s focus on rural spending should help bolster demand in a key area. All the big consumer goods makers, from Hindustan Unilever and diversified ITC to Godrej Consumer, rely on rural demand.

Makers of motorcycles, small trucks and cars as well as entertainment are driven by consumer spending in the hinterlands.

In other words, the main theme for equity investors would be to look at companies that depend upon domestic demand. With the global situation marred by protectionism in major markets such as the US and Europe, countries that have large domestic markets could be better off for investors.

Christopher Wood, equity strategist at CLSA, believes measures to boost low-cost housing and the rural economy would help revive the construction sector, which has potential to create jobs.

In his popular newsletter, Greed & Fear, Wood continues to view 51 per cent allocation to domestic demand-focused stocks in India in the Asia (excluding Japan) long-only portfolio as a long-term investment as well as a “barbell” hedge on other more cyclical names. Barbell is an investment strategy primarily applicable to fixed income, in which half the portfolio is made up of long-term bonds and the rest comprises very short-term bonds.

CLSA increased weightage on Indiabulls Housing and Zee Entertainment in its model portfolio.

Tight rein on deficits

The total budget allocation for infrastructure is Rs. 3.96 trillion, including Rs. 640 billion to build highways. Railways, airports, ports, logistics and housing are all in line for the investment push.

Companies that make steel, cement, railway equipment and construction firms such as Larsen & Toubro Ltd, Hindustan Construction Company and IRB Infrastructure Developers should all benefit.

Jaitley pencilled in the fiscal deficit at 3.2 per cent, two percentage points more than the target, of gross domestic product in 2017-18, but this would largely depend upon the government’s ambitious divestment plan of Rs. 725 billion — up nearly 60 per cent from the expected proceeds this year.

“The revised fiscal consolidation path is not materially different from the previous road map and our projections. We expect the government will meet its deficit targets, based on achievable budget assumptions and demonstrated commitment to fiscal prudence,” Moody’s Investors Service said in a report.

“However, given significant spending commitments and structural hurdles to rapid increases in revenue collection, there will be limited room for slippage.”

Rates to drop

With the government aiming to limit state borrowings, and keep a tight rein on deficits, there is every likelihood of the central bank lowering interest rates when it reviews monetary policy on Wednesday. Economists expect the repo rate to be reduced by 25 basis points to six per cent, which would be the lowest in more than six years.

Consumer price inflation fell to a more than two-year low of 3.41 per cent in December, the latest month for which data is available and well below the Reserve Bank of India’s comfort level of 5 per cent, preparing the ground for lowering borrowings costs.

Cutting interest rates would provide considerable relief to manufacturing companies, reeling under a slowdown in economic activity after the government’s shock ban on high-value bank notes in early November. The decision to remove Rs. 1,000 and Rs. 500 notes, which together comprised 86 per cent of the currency in circulation, triggered a severe cash crunch as the authorities did not have sufficient new notes to replace the outlawed ones.

The cash shortage squeezed consumer spending, triggered pile up of inventories and caused factories to shut shifts. The disruption is expected to knock one percentage point off India’s GDP growth in the current financial year to 6.5 per cent. In his budget speech, Jaitley said the problems caused by the demonetisation would not spill into 2017-18.

Factory data from a private compiler showed activity returned to modest growth in January, after contracting in December. The Nikkei Manufacturing Purchasing Managers’ Index rose to 50.4 in January from 49.6.

“January saw only modest increases in order books, production and buying levels, but the quick rebound will be welcome news to policymakers,” said Pollyanna De Lima, economist at data compiler IHS Markit.

“Improving confidence among firms bodes well for the outlook, with the expansion in manufacturing output likely to pick up pace in coming months.”

The writer is a journalist based in India.