( A column I wrote in Moneylife a year ago. Nothing has changed)
Union Budget & Investment
Beware of Budget proposals that mean only a short-term pop
By the time you read this piece, the first full Budget of the Narendra Modi government presented by Arun Jaitley would have left its impact. Should it change the way we invest in stocks? To answer this question, I have to ask: “Has it changed things permanently for the company or the sector that I am invested in?” And I am not referring to a mere change in temporary profit gains or some spurt to demand that makes a sector the ‘flavour of the day’.
For example, a spike in infrastructure spending may temporarily boost the revenue streams of companies engaged in infrastructure. Whether it’s cement or construction, it does not change the way a company makes money or change the fundamentals of a company. All that may have happened is that there is a temporary momentum in favour of the sector which may give it an earnings boost. It does not mean that the fundamentals of the industry have changed. Its dependence on government benevolence continues. Also, the stated long-range taxation can, at best, give a stable direction. A temporary tax-break, in the form of tax rebate, doesn’t change anything much.
However, let us look at a change in the regulatory framework. For instance, the government changes labour laws in such a way that it becomes easy for companies to shed excess labour, with minimum delays and harassment. That is a big change. Today, companies engage with third-party contractors to provide labour or outsource a lot of work, simply because there is no ‘exit’ policy for labour. It increases the cost of labour for the company (imposition of service tax, margins of labour intermediaries, etc) and also discourages taking on new labour. A shift on this would be path-setting as it would, ultimately, expand business and, simultaneously, reduce aggregate labour costs. It would bring about a lasting change in profitability.
Of course, we will all be reading pages on how the Budget pushes our personal bank balances higher, or lower, and thereby increases, or decreases, the money available for spending and investing. Similarly, some policy decisions that merely increase the flow of money into our markets are just that; they do not change the fortunes of the companies we invest in.
Many changes seem permanent but could be temporary. For instance, linking fuel prices to global prices is a contentious issue. No government has been able to demonstrate its commitment to market forces. I remember during the Atal Bihari Vajpayee regime, government had started to increase fuel prices gradually and was planning to remove all subsidies. It started off and then, as the general elections neared, the government froze. So, oil companies are stuck in this regulatory morass. Global crude oil prices have dropped sharply. Naturally, this makes it easier to manipulate and balance the subsidy. I am not sure that when the prices of oil go back to above $80/barrel, whether the government will allow free market forces to operate. This fear—that the government can hold back or interfere—puts a cap on the valuation that a company can get. I would view any change in such a sector as temporary.
So all changes in the Budget do not make for a change in my investment choices. They could simply mean a short-term opportunity, or a threat, to my portfolio. Budgets, often, provide us with trading opportunities. Has this Budget provided us with new ‘investment’ opportunities? There is no point in chasing a stock simply because of the Budget.
Yes, a Budget can do one big thing. It can impact our level of confidence in investing in stock markets. For India, the more important point seems to be whether it boosts the confidence of foreign portfolio investors since they seem to be the biggest buyers in our markets and, without them, the stock market does not, yet, have a trajectory of its own.