Budgetary support or reforms in sectors like infrastructure, oil and gas, power, steel, automobile are a precursor to growth in the capital goods industry. We expect the Union Budget to continue to lay emphasis on infrastructure.
This, in turn, will drive public as well as private investment, and will eventually benefit the capital goods industry.
Apart from infrastructure, the focus of the budget is likely to be on agriculture, a push for rural income, smart cities, renewable energy, the modernisation of the Indian railways, and the implementation of schemes like piped water to all, housing for all by 2022.
The capital goods and engineering industry will be the indirect beneficiaries of these measures. A rise in agriculture activity will result in an increase in rural income, and that will induce growth in industries such as cement, steel, and power, which in turn will generate further demand for capital goods.
We believe this budget would try to facilitate better public private partnership (PPP) framework to increase the flow of investments to infrastructure projects.
Continued budgetary support to the department of heavy industries will encourage the competitiveness and the technological development of the capital goods industry.
The focus would be on generating investments in advance manufacturing and digitization including IoT, additive manufacturing, robotics, automation. Improving the efficacy of GST implementation would help to reduce supply chain cost for the industry.
We think additional measures needed for a taxpayer friendly, transparent (anti-profiteering) GST regime would facilitate smoother trade.
An increase in the allocation for roads and highways and budgetary support to Pradhan Mantri Gram Sadak Yojana (PMGSY) will stoke the demand for construction equipment.
Increased fund allocation for urban development under the Atal Mission for Rejuvenation and Urban Transformation will be positive for companies which are into water and sewage management, which include Va Tech Wabag, Voltas, Ion Exchange, etc.
Similarly, the allocation for smart cities will be positive for companies providing digital infra, transmission and cable services e.g. L&T, ABB India, Kalpataru Power Transmission, KEC International, Siemens India.
Rural support schemes will serve as a catalyst in improving the demand for consumer electronics and appliances. An increase in disposable income in the hands of both the middle class and rural India is going to spur the demand for consumer durable goods such as TV, AC and washing machines. Category penetration levels should, therefore, improve fast.
On the defence sector front, while there is no denying that upgrading the armed forces is the need of the hour, it is safe to assume that there will not be a substantial increase in military budget this year.
Even under previous budgets, revenue expenditure of the government has prevented the government from implementing major changes in the defence budget. The government must try to keep the revenue expenditure within the GST collection limit.
If the defense budget must be increased, the government must look for revenue sources in other places including direct taxes. Another disadvantage is the weak economic growth of the country in the current fiscal year.
It is worth noting that our country’s economy is still recovering from the impact of GST and demonetization. Considering these factors, only a meager increase can be expected in the upcoming defense budget of the country.
We believe that defence companies like Bharat Electronics, Garden Reach Shipbuilders and Engineers, and Cochin Shipyard are best placed with a healthy order book and strong execution capabilities.