Fulfilling budget promises more important than pleasing the markets

Shyam Sekhar

When was the last time a budget fulfilled investor aspirations and made them gung-ho about the government’s ability to deliver big? There have been only two instances that I can readily recall – the budgets of 1991 and 1997. Interestingly, these budgets failed to really deliver big for the stock market after the initial euphoria died down. In fact, the economy was in no position to quickly capitalise on these budgets. The subsequent actions of the government were also weak. Policy follow-up simply did not live up to the hype and the government just didn’t translate the promise into action within reasonable time.

The benefits of such high-impact budgets possibly accrue after such a long time that we cannot directly correlate economic performance to that budget in particular. Interestingly, not a single budget presented by the NDA in its three terms delivered any dramatic euphoria to the stock market. Investors always had high expectations of several high-profile finance ministers and none really delivered a sustainable dream budget in post-liberalisation India. But, our economy has still grown decently over the three decades after liberalisation, mostly through incremental reforms. So, the fact that this budget did not do anything dramatically positive for the stock market and investor sentiments hardly matters.

Delivery on earlier promises important

What truly matters is if the government is able to fulfil promises made in earlier budgets, doggedly pursue incremental actions, show results from implementing earlier reforms and find ways to solve vexatious issues. These are things that the NDA has a better track record of accomplishing. They brought in a GST regime, which was stuck in politicking for over a decade, swiftly into force, constantly amended it to remove deficiencies and continued to willingly fine-tune the system to make it a robust tax network. The work of the NDA in disinvestment is another clear evidence of heavy lifting to achieve stated policy objectives.  As an investor, these efforts did not look very impressive to me in 2003. But, looking back, their approach of concerted incremental effort towards stated outcomes is possibly the only way to achieve the desired economic results in a democracy. The long and verbose budget of 2020 may look very idealistic to translate into action within a year. But, while budgets are meant for a year, their outcomes get created well beyond their period. Investors have a choice in understanding budgets and believing in policy making. We can swiftly conclude on the ability to make good the promises within a year and make investment judgements. Or, we can create a deliverable wish-list and constantly keep watch on the incremental outcomes. While the former is much loved and fashionable, it is the latter approach that creates meaningful wealth.

Every single budget has disappointed the market in more ways than pleasing it. The cause lies in the high recency bias working heavily to construct near-term market expectations. Market wants its concerns addressed swiftly in budgets. But, governments rarely address such concerns with alacrity.

Government accomplishes more in a slowing economy

On the contrary, most reforms are speedily catalysed only in a difficult economic context. Tough economic conditions result in more work getting done than in growth phases. Economic, political and social interests rarely triangulate perfectly and budgets are the best example of how they fail to do so. In fact, when budgets fail to impress, governments work doubly hard to quicken things up. We are heading into times when the government will work at its fastest to fix things. The triangulation will slowly fall in place. The investor approach to such a situation needs to be well constructed. You can’t be optimistic. You can’t be too lethargic and cynical. What you need to be is pragmatic, cognizant, foresighted and evidence driven. This is not going to be easy for investors attuned to nifty beating and trend chasing. The big returns are clearly going to be made only by those who step out cautiously and take calculated risks. Not by those who were hiding in safety and avoiding risks. This budget further draws the battle lines between two high-conviction schools of Indian investing. When sentiment driven investing stalls, thematic and ideation-based investing starts to gain ground. The year 2020 will see this repeat in a starkly contrasting manner from 2019. In that sense, this spring starts a new investing season.

(The writer is founder and chief ideator of iThought)