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After a Tough January, Can India ETFs Surge on Budget Stimulus?

Sanghamitra Saha

India ETFs had suffered a lot in January having slid in the range of 2.16% to 10.36% in the past one month (as of Feb 1, 2019). However, the days ahead should not be this painful as prime minister Narendra Modi's government has come up with an interim 2019 budget with 750 billion rupees (about $10.6 billion) in cash for farmers and solid tax cuts for payers in the lower rungs, to appease key voters ahead of a general election due by May.

Inside the Budget

The budget proposals lowered the tax burden for the lower middle class, by exempting people earning up to 500,000 rupees from the previous cap of 250,000 rupees. The government also said that it would launch a pension scheme for workers in the unorganised sector, which has a strength of 420 million.

And for farmers, the budget offers direct cash support of 6,000 rupees to 120 million poor farmers and assigns more funds to a rural jobs guarantee scheme and rural development, including building roads and homes.


Why Such Stimulus?

As polls are drawing closer, prime minister Narendra Modi is facing increasing dissatisfaction. His Bharatiya Janata Party already lost three key state elections — Chhattisgarh, Rajasthan and Madhya Pradesh — in December. Opinion polls are giving cues to the fact that the ruling Bharatiya Janata Party could lose in the general election.

Economic & Stock Market Impact of Budget

The budget is likely to widen fiscal deficit this year and the next. India's fiscal deficit this financial year would be 3.4% from the targeted 3.3%, per the the country's acting finance minister. However, this simulative budget should boost consumption in the economy.

Like most economists, we also believe that tax cuts for small-payers and attention toward rural per capita income growth are likely to boost purchases of consumer goods, homes, automobile, tractors and domestic appliances.

Post the release of budget on Feb 1, 15 out of 19 sector sub-indexes compiled by BSE Ltd. Tacked on gains, led by a benchmark of auto and consumer durable companies, as quoted on Bloomberg. India VIX, a measure of volatility expectations, also dropped the maximum in more than seven weeks.

Investors should note that the Fed has also adopted a dovish stance on future rate hikes. This should keep the dollar at check and boost broad-based emerging market investing.

Any Wall of Worry?

Having said this, we would like to note that India ETFs have been off to a rough stretch this year, even after the release of pro-growth budget. An oil price rally could be a major deterrent to India investing (read: 3 Country ETFs May Suffer as Oil Springs Higher).

India is almost entirely dependent on imports to back its oil needs. Already, the country has been witnessing a rise in oil import bills thanks to an uptick in global crude oil prices. United States Oil USO and United States Brent Oil BNO are up 20% and 16%, respectively, this year on a fresh OPEC output cut and U.S. sanctions against Venezuela. Even on Feb 1, BNO and USO gained more than 2.8% and 2.5%, respectively, which in turn probably marred the appeal for simulative budget from India and weighed on most of the related ETFs (read: US Sanctions Against Venezuela? ETFs to Top & Flop).

ETFs in Focus

So, oil price issues and election uncertainties may keep India ETFs’ rally at check. Otherwise, consumer ETF Columbia India Consumer ETF INCO should be the biggest beneficiary of budget 2019-2020. The fund lost only 0.5% on Feb 1, the least in the lot. First Trust India NIFTY 50 Equal Weighted ETF NFTY added about 1% on the day.

Market Vectors-Rupee/USD ETN INR also shed a marginal 0.3% due to a subdued dollar, stemming from dovish Fed comments. Among other funds that lost little on Feb 1 are Franklin FTSE India ETF FLIN (down 0.74%) and iShares MSCI India ETF INDA (down 0.98%).

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iShares MSCI India ETF (INDA): ETF Research Reports
US Commodity Funds United States Oil Fund (USO): ETF Research Reports
Franklin FTSE India ETF (FLIN): ETF Research Reports
MKT VEC-RUPEE (INR): ETF Research Reports
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