ETMarkets Smart Talk: Fiscal deficit above 6% could result in a kneejerk reaction on markets but devil lies in the detail: Sachin Shah

“Yes, I think probably anything more than 6% will probably be taken a bit negative. But as long as it is sub-6%, it should be okay, that is one part of it,” says Sachin Shah, Executive Director & Fund Manager, Emkay Investment Managers Limited.

In an interview with ETMarkets, Shah said: “But as I said, the more important thing is the devil is in the details. How are you going to manage your fiscal deficit? Is it at the cost of capital expenditure?,” Edited excerpts:

If you look at the D-Street, it is already in a party mode with Sensex and Nifty sort of touching fresh record highs in the run-up to the main event. However, probably in a week or so, we have seen mild consolidation, but that is about it. So, what is D-Street pencilling in?
Actually, for the last almost six-seven months, the markets have been very-very buoyant, and they have continued, of course, in the last three-four months also.If you see the first quarter of the financial year 24-25, I think most of the portfolios are up in the range of 15% to 20%.

Although, we saw some knee-jerk reaction, post-election results, but I think that was short-lived for less than 24 hours.

And markets have taken into stride that there is political stability, there is political continuity and I think the other very important aspect is that today the confidence in the earnings growth is fairly high.

Like today, when we look at our own portfolios, we believe that at a portfolio level, there is a very high probability for the next two years, the earnings growth could be in high double digits, high teens to high double digits, anywhere between 15% to 20-25%.

Now that is a very good number considering we have had last three years of bumper run and I think next two-three years if we can still do about 15-20% kind of compounded growth.

The outlook on India GDP growth is very-very strong. I think probably India must be the only country or maybe just one or two countries where the calendar year 24 GDP will probably be higher than calendar year 23.

I think in absolute numbers, anything above 7-7.5% we would be among the top countries as far as the overall growth is concerned. And there is a lot of conducive environments for overall equities.

Now, you did talk about the political continuity and staying with that theme, with NDA 3.0 leading the charge this time around, do you see a populist budget? What could be the major highlights this time around?
Yes, so that is definitely a tricky one and the fact is that if you think about it today, there are already two or three states. If we have to take a cue from there, there are two or three states including Maharashtra where we have seen some measures of populism, somewhere whether you call it the women giving Rs 1500 or I mean, across a couple of other states also something or the other has happened.

And these are again, I would say NDA states. So, there might be some bit of populism in the budget also and that is where I come across as far as the tricky part is concerned.

If we are going to have some loose strings as far as the populism is concerned, the challenge is that your tax collections may not be very surprising from what they have been already building now.

We have had a couple of years of good surprises as far as tax collections are concerned. But I think now the base has got firmed and whatever numbers they are building in, maybe that is the best case that one can assume.

If you are going to have some revenue expenditure or some populist kind of measures which will lead to revenue expenditure, the tax collections may not be very different than what you are budgeting in.

Then, can the fiscal deficit be a bit higher or will the capital expenditure take a backseat? So that is the tricky one I think is something what we would like to look out for as far as the budget is concerned.

But in the meantime, let me also get your quick view on will this budget sort of lay down the foundation of Viksit Bharat by 2047 because this is one thing which has been stressed upon multiple times, be it in you could say in the interim budget and the other following events as well. So, what are your views because that is clearly the vision of the Prime Minister.
No, clearly, I think that is something what they are extremely focused about and I think they (govt) are working towards it.

So, one of the common threads across the last almost 9-10 years of budget is that there is a lot of continuity across so many policies, across so many schemes that they announce.

And budget is just a one-year event where we talk about what has been the revenue and the expenditure and the breakup of that. But I think the key thing is today, for any kind of investor, whether it is your foreign investor, whether it is your domestic investor, whether it is your corporate, whether it is your industrialist, one very critical thing that all of them look forward to is the continuity in terms of the policies.

Because when you are going to invest millions and billions of dollars, I think these are not one-year plans. These are at least 5, 7, 10-year plans. So, say, for example, PLI schemes. These are very long-term plans and the corporates have actually reciprocated to that scheme brilliantly.

The interim Budget did announce an outlay of Rs 11.1 lakh cr. Where is the big-ticket spending that will happen in the final Budget. We have already seen some big moves in Railway stocks in the run-up.
So, again, if you take the last five years, year after year the capital expenditure, whether it is railways, whether it is roads, whether it is water, whether it is irrigation, whether it is affordable housing, all of that has been increasing year after year, including defence across the board. So, I think that focus remains.

And, of course, railway needs a tremendous amount of capital expenditure and the government has been providing for it year after year. So, today, even when we talk to so many vendors to the railways, they all are extremely upbeat in terms of their order book.

They are extremely upbeat in terms of the way railways is releasing new orders. They are extremely upbeat about the new plans that the railway has for the next three, five, seven years.

So, everybody is in the capacity expansion mode at their end because see, they are the people who are at the ground. They are the people who are dealing with railways day in and day out.

They do not just do their capacity expansions or planning on the budget announcement. They are the guys who are actually getting their hard-core order book. They are getting their infrastructure in place which is where the proof of the pudding is.

So, clearly, the focus is on railways. I think entire infrastructure, whether it is railways, ports, airports, across the board, including defence, we have seen a tremendous amount of focus and we really hope that this continuity is there even for at least next five years.

What is the kind of fiscal deficit target you foresee for FY25? Is there a number that you think could halt or put brakes on the bull run?
Yes, I think probably anything more than 6% will probably be taken a bit negative. But as long as it is sub-6%, it should be okay, that is one part of it.

But as I said, the more important thing is the devil is in the details. How are you going to manage your fiscal deficit? Is it at the cost of capital expenditure? Or are you going to burden the taxation on some certain class of the people?

I mean, how are you going to manage it also is a very critical thing because that is more important as far as the foundation is concerned. You may be able to manage.

See, you have to also understand one very important thing that government still has a very large window as far as the disinvestment proceeds are concerned. They have not yet utilised that window for the last so many years in a big way.

Today, the markets are very conducive, particularly the kind of re-rating that we have seen in so many public sector units across the industries.

So, I think that is one very large window or one large room that probably the government has to manage the fiscal deficit without compromising on capital expenditure and also might have some room as far as some bit of populist measures.

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