additional tax revenues through a tax amnesty scheme.
SOE divestment may be used as a way of encouraging participation by retail investors in the equity market. If asset sales are carried out at reasonable valuations and these provide good returns to retail investors, it can arguably create a virtuous cycle in attracting more capital from them. This would also ensure more productive deployment of savings in financial assets, arguably.
As said, a tax amnesty scheme may face legal difficulty, but can arguably be overcome by the government’s majority in the Lok Sabha/Joint Session. However, it is more likely that such a step will be taken in consultation with the Supreme Court, rather than independently.
Sectoral impact – Positive for cyclicals; consumption recovery hopes premature
We expect a road map for SOE bank recapitalisation to alleviate concerns about their growth. We expect the thrust on infrastructure spending to increase in the budget. We expect progressive steps to increase oil & gas production and lower fuel subsidies, and the budget may provide some direction. We expect diesel to gradually get de-regulated through monthly hikes, and gas prices to be revised, but the government’s ability to immediately raise LPG and kerosene prices amid rising gas prices is likely to be limited, given the inflationary challenges. Inflation moderation and fiscal consolidation imperative imply a muted outlook for consumption (including discretionary) recovery in the near term, except selectively where pent-up demand is evident.
Remain bullish. Buy Financials, SOEs (oil & gas, banks), power/infra/industrials
We remain bullish on Indian equities. We believe investors will be willing to give a premium for the growth hope and look beyond FY15 earnings estimates. Based on our topdown expectation of 15% earnings growth in FY16 & 15x PE (price-to-earnings multiple), our Nifty target for end- 2014 is 8000. There could be upside to the target based on how policy-making evolves.