The winners and losers from India’s latest budget plan

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Prime Minister Narendra Modi has delivered an interim budget likely to boost the government’s popularity ahead of polls that are now just months away.

The budget includes big announcements such as a major income support scheme for farmers and a new pension program for workers. It also includes a number of smaller measures that could prove popular, including tax relief for India’s lower middle class.

Delivered by Finance Minister Piyush Goyal because Arun Jaitley is in the U.S. for medical treatment, the budget speech was heavy on praise for the government’s programs over the last four-and-a-half years — sometimes prompting boos from the opposition.

Farmers, as well as companies with exposure to rural India and middle class taxpayers, seem to be the clear winners here at the expense of the country’s fiscal deficit.

WINNERS

Farmers

As expected, Modi’s administration has come out with a massive spending plan for the country’s farmers: A $10.5 billion (750 billion-rupee) farm income support program. Farmers with less than two hectares of land will receive $84 (6,000 rupees) each year. That’s likely to assist about 120 million small and marginal farmers, the government said. Agriculture-focused companies such as Shakti Pumps India Ltd., Jain Irrigation Systems Ltd., KSB Ltd., Kirloskar Brothers Ltd., Avanti Feeds Ltd., Waterbase Ltd., JK Agri Genetics Ltd., PI Industries Ltd. could benefit.

Taxpayers

Income tax payers earning up to 500,000 rupees will get a full tax rebate, while those earning up to 650,000 rupees will not need to pay tax if they invest in the country’s provident funds and prescribed equities. Goyal said this could benefit as many as 30 million middle class taxpayers. Anyone earning more will be taxed at the prevailing rates.

Rural India

Increased spending on the animal husbandry and fisheries sectors and an interest subvention plan for small-and-medium-sized businesses could benefit companies with exposure to rural India. That includes motorcycle companies and others with interests in the country’s heartland including Mahindra & Mahindra Ltd. and Larsen & Toubro Ltd.

Workers

A second big announcement in the budget was for a “mega” pension program for India’s informal sector workers with income below 15,000 rupees. The vast majority of the country’s workers are employed in small enterprises, often with little job security and no social security benefits.

Real Estate

The Bombay Stock Exchange’s real estate index climbed as the government reiterated its push for affordable housing and announced new measures that could boost home-buying. Goyal promised a home for every person in India, a country of 1.3 billion people, and proposed to allow investments of as much as 20 million rupees from capital gains for buying two residential houses, compared with only one at present. He also proposed waiving tax on the notional rent payable on a second self-occupied house. Companies that could benefit include Oberoi Realty Ltd., Prestige Estates Projects Ltd. and DLF Ltd.

Automakers

The S&P BSE Auto Index jumped as much as 5.3 percent, its biggest intraday advance since May 2014, as Goyal delivered his speech. Maruti Suzuki India Ltd., Hero MotoCorp Ltd. and Bajaj Auto Ltd. gave the biggest boost to the benchmark S&P BSE Sensex.

Modi

In his government’s budget, two major initiatives — a farmer income support plan and a pension plan — bear the name of the prime minister’s office. Although the farmers’ plan was expected, the pension announcement was not. And both could go some way to boosting Modi’s popularity ahead of elections.

LOSERS

Bond holders

Modi’s government will breach its fiscal deficit target for a second year, with the budget gap estimated at 3.4 percent. Bond holders could get hit if Moody’s or S&P downgrade the country’s credit rating. Moody’s has already said the government’s budget includes no new policies to increase revenues.

“Ongoing slippage from the government’s budgeted fiscal deficit targets over the past two years, and our expectation that the government will face challenges meeting its target again this coming fiscal year (ending March 2020) does not bode well for medium term fiscal consolidation,” said Gene Fang, an associate managing director at Moody’s Investors Service’s sovereign risk group.

Sovereign bonds slid after the government detailed higher-than-expected borrowing numbers for fiscal 2019-20. The yield on the most traded 2028 bond was up 14 basis points to 7.63 percent as of 2:43 p.m. in Mumbai.

Opposition parties

Modi’s administration has unleashed an interim budget full of populist goodies for farmers, the middle class and small-and-medium-sized businesses. Regardless of whether the government implements any of this with the election due by May, the announcements could still hurt opposition parties as they head out on the campaign trail with only manifesto promises to offer voters.

Farm laborers

Rural laborers who toil on farms but don’t actually own any land will not benefit from the government’s big spending plan for farmers. These workers are often already desperately poor, while most state-initiated plans to boost prosperity in the countryside tend to focus on land-owning farmers.

“It tends to ignore the landless farmers who will not be entitled to the annual support of 6,000 rupees,” said Jaijit Bhattacharya, president of the Centre for Digital Economy Policy Research in New Delhi.

Defense

In dollar terms, India’s defense spending is less than it was last year because of depreciation. This year’s budget allocates about 3.05 trillion rupees ($43 billion) for defense spending, most of which is eaten up by recurring costs that squeezes the money available for new arms purchases.

Last year, the government allocated about 2.85 trillion rupees ($40 billion). But the rupee has depreciated over the past year and on Feb. 1, 2018, 2.85 trillion rupees amounted to roughly $44.5 billion. That stagnation matters, because India is one of the world’s largest weapons importers. Effectively, the Indian government is compensating for depreciation and inflation, and will likely still sell this as an increase in defense spending.