The Budget's push to close the gap between the haves and have nots is set to boost aam aadmi's consumption.

The Budget's push to close the gap between the haves and have nots is set to boost aam aadmi's consumption. Investors can take a cue from this and look at companies which will be benefitted by the budget proposals

By the time you read this article, the Union Budget 2009-10 would have been older by a week. A week is a long time to reflect on a policy document that has raised more questions than it has answered. This is especially true of the investor community and India Inc that had high hopes from Pranab Mukherjee in run-up to the budget day. The hopes were not entirely misplaced. The country is facing one of the worst economic turmoil in nearly a generation and the United Progressive Alliance (UPA) has been voted back with a strong mandate. This is bound to raise expectation to high level.
But if the stock market reaction is any indicator then Mr Mukherjee and his team at North Block seems to have grossly disappointed their exalted audience. Really? Or is it is a case of grapes going sour? After a detailed reading of the budget proposals, it is difficult to rule out the possibility of the latter situation being true.
An analysis of the various budget proposals by ET Intelligence Group suggests that the government aims to put more money in the hands of the consumers. The move will boost consumption in the country, which will in turn drive-up the economic growth. While in the last five years economic growth was driven by investment demand, next few years may favour companies in the consump- tion space.
This may dull the prospects of investment driven, high-beta stocks and pull down the benchmark indices, which are full of them. However, this should not bother retail investors who invest in stocks rather than indices. All one has to do is to rebalance your portfolio by increasing exposure to the sectors driven by consumption demand.
To fully appreciate this policy move, we need to get to the genesis of it. This new fiscal instance at the central level has evolved in the backdrop of stagnating consumption demand in the country and rising economic gap between rural and urban areas and that between the top performing states and the laggards. For instance, the share of private financial consumption expenditure (PFCE) in India's gross domestic product has been on a decline since the last five years. The decline has exacerbated in recent times due to the recent economic crisis. In FY03, private consumption accounted for well over two-third of the country's GDP at market price. This ratio declined to little over 51% in the March '09 quarter.
PFCE covers all kinds of consumer goods and services including food, beverages & tobacco (F&B), expenses on fuel, power & rent, transport services, healthcare, education and recreation among others. According to figures released by Central Statistical Organisation (CSO), total expenditure on F&B goods grew at compounded annual growth rate of 3.1% (at constant prices) during FY2000 and FY08. This was much lower than GDP growth of 7.2% per annum during the period. The government cannot afford to ignore the situation; especially one elected on the plank of helping aam aadmi (the common man).
National Sample Survey Organisation's (NSSO) report on household consumer expenditure in India during 2005-06 brings out the consumption deficit at the household level. According to the report, there is a huge disparity between the monthly per capita expenditure (MPCE) of urban and rural India (Look at the adjoining chart). The total MPCE on food for rural India stood at Rs 333, against Rs 468 in case of urban India. The inequality is more glaring in case of the non-food expenditure. The findings reveal a massive gap between rural and urban expenditures in case of various items ranging from staple food items like milk & milk products, vegetables, fruits, beverages and processed foods to items of basic necessity like clothing & footwear, medical care and education.
The report also shows that nearly half the households in the country reside in either katcha or semi-pucca houses. This means a large portion of the population is still to develop a taste for goods and services that help build a modern home such as running water, electrical fixtures, tiles and a modern bathroom among others. If the various government programmes manage to close the gap by even 20% in next five years, a huge consumer market will open up for India Inc.
The beginning of this stance was made by nationwide implementation of National Rural Employment Guarantee Act (NREGA), which guarantees 100 days of employment to every unemployed rural adult. It was followed by Sixth Pay Commission Awards. Cues For Investment
This significantly raised salary levels of employees in the government and public sector undertakings. The latest budget is another step in this direction. The minimum wages paid under NRGEA programmes has been raised to Rs 100 per day. The amount is higher than the World Bank defined global poverty line of around $1.5 dollar per day of income per person and may become a floor wage rate across the country in due course. Besides, the allocation for NREGA is raised by 144% to nearly Rs 40,000 crore.
Simultaneously the budget has significantly stepped up allocation for infrastructure sector including urban infrastructure, rural electrification, housing and highways among others. Further, allocation for education and healthcare has also been increased. The government intent is clear –spread the fruits of economic growth and raise the potential number of consuming household in the country.
Companies from sectors like FMCG, consumer durables, telecom services, automobiles, agri-inputs, healthcare, cement, metals, power, capital goods and construction are going to benefit from the government's thrust to reduce consumption gap.While large players in these sectors are bound to benefit, smaller and regional players with their local focus are better placed to profit from the increased purchasing power. Do read our detailed coverage on various sectors to know how investing in the new theme of Bharat Nirman can benefit you.
kiran.somvanshi@timesgroup.com
Inputs from Pallavi Mulay