With fiscal allocation to affordable housing, rural roads and electrification, the thrust on rural expenditure is expected to remain key.

consumption sector is expected to be in the limelight in 2018 due to an uptick in rural demand from ’populist’ measures by the government in the run up to general elections in 2018, stated Anand Radhakrishnan, Chief Investment Officer - Franklin Equity, in an outlook 2018 note by Franklin Templeton Investments - India.

"Populist measures undertaken by the government leading up to the 2019 polls such as rise in MSP and other schemes will augment farm income," said Radhakrishnan.

"A gradual recovery in non-agri segment of rural economy from demonetisation/GST related disruptions and expectations of a third consecutive year of good monsoons also hold scope for rural demand recovery," he said in the note.

According to the fund house, cumulative surge in demand is likely to improve capacity utilisation levels which in turn could lead to a recovery in private capex in 2018.

Radhakrishnan also believes that thrust on rural expenditure will continue to remain key with fiscal allocation to affordable housing, rural roads and electrification.

The report also stated that a recovery in demand in rural regions would contribute to greater domestic consumption as demand for two-wheelers, tractors, diesel, consumer non-durables and cash would increase significantly.

The fund house expects healthy budgetary allocation to road projects to continue in 2018. With fiscal allocation to affordable housing, rural roads and electrification, the thrust on rural expenditure is expected to remain key.

In case the government relaxes its fiscal deficit target for the next financial year to 3.5 percent from 3.2 percent in the current one, incremental allocation may be channelised to rural schemes, the fund house said.

Franklin Templeton believes that negative output gap in the economy holds scope for better capacity utilisation going forward, which should augur well for growth in corporate earnings.

"Case for revival in private capex stems from improving corporate earnings, better lending capability of public sector banks post recapitalisation and favorable market for equity issuances," the report said.

To capitalise on these emerging trends, the fund house suggested investors to stagger their investments into equities in 2018, to take advantage of the volatility seen ahead of general elections.

"Diversified equity funds with core exposure to large-cap stocks and prudent risk-taking in mid- and small-cap companies may be well positioned to capture medium-to-long-term opportunity presented by equity market," the fund said.

The fund house, however, expects investors to keep a keen eye on the fiscal deficit slippage, looming geopolitical tensions in West Asia, a fall in revenues from GST and tightening of global liquidity.

"We believe that Indian economy stands relatively resilient to external shocks on account of better levels of foreign exchange reserves, stronger balance sheets and improving degree of macroeconomic stability," the fund said.

 05 Jan 2018, 12:28 PM