Nilesh Shah is back in the MF industry, and we have got back one of the most articulate speakers this industry has seen - an expert who has an uncanny ability to communicate his thoughts in a manner that everyone can easily understand and relate to. We spoke with Nilesh shortly after the FM's Budget speech to get his perspectives on the road ahead. Nilesh believes what we are seeing today is a transformational phase, perhaps as significant as what we saw in 1991. Read on to understand what is exciting Nilesh so much about the road ahead for the Indian economy and for our equity and debt markets.

This is a transformational Budget - just like Manmohan Singh's Budget of 1991-92. This Budget can significantly change the direction of the economy. Some market participants were expecting a T20 kind of a Budget, whereas the FM has delivered a test match oriented one. It's a Budget that gives you a clear picture of how some key structural changes will be effected in the economy over the next 4 years. Lets look at 3 main aspects which I think will structurally alter the direction of our economy.

Capital flows into infrastructure projects

One of the most significant aspects of this Budget is the multi-pronged approach to ensure capital flows into infrastructure projects.

1. Pyramid financing structure: In this Budget, the FM has announced setting up the National Infrastructure Fund, with a very innovative pyramid structure to make funds available for infra projects. So, the Government will contribute to this Fund, and the Fund will invest into financial institutions that lend towards infra projects. These financial institutions will then leverage this equity contribution and raise significantly larger resources to finance infra projects. To the extent that they extend equity participation in these infra projects, that contribution can be levered by the infra entity to raise more debt capital from the market. So, the multiplier effect of this financing structure will mean that there is no dearth of funding for viable and sensible projects.

2. Boost to private equity capital: Private equity players have brought in more money into the country in the last five years than FII investments in listed entities. The Budget had provided them the much needed clarity that they were keenly seeking on taxation of income, on exemption from MAT provisions, and also on rules relating to permanent establishment. This certainly goes a long way in easing the business environment for PE players, which should spur more activity and more investments.

3. Encouraging domestic savings towards productive uses: Monetization of gold is a big game changer. I have been an ardent advocate of this for some time, and I am happy the Government is acting on this. The amount we spend in forex annually on import of gold, silver, diamonds and other precious metals is more than the annual inflows from FII + FDI. That's the quantum we are talking about. If you successfully monetize gold, you don't need any foreign capital from a flow point of view. You require that money from a technology point of view, from a governance point of view - but not from a flow perspective, if you are able to monetize gold. The amounts that will be released into the system through monetization of gold, can go towards infrastructure projects.

4. Availability of bank finance: Net borrowing program of the Government has been kept at a reasonable level of Rs.456,000 crores. That means Government borrowings are not going to put a strain on bank resources, which will allow banks to make funds available for private sector credit requirements.

5. Elbow room to RBI: Revenue deficit is pegged at 2.8% of GDP, which is again very reasonable. This allows RBI either the flexibility to boost M3 growth which is at a 30 year low, or to reduce interest rates, which is necessary for reviving growth.

When you put all these pieces together, you can understand the magnitude of what the Government has planned, and the impact it can have on kick starting the investment cycle in the country.

Structural change in inflation management

Another big move that has been announced in this Budget is the establishment of the Public Debt Office and a Monetary Policy Framework. For the first time in our country, the RBI is being expressly given a mandate to manage inflation, with a specific target being set. We have seen the world over, whenever the Central Bank of the country is given a clear mandate to manage inflation and inflationary expectations, interest rates in the country invariably come down. There is not a single country in the world, where, after the Central Bank takes an express mandate to manage inflation, interest rates have not declined. For a country that pays 41% of its tax revenue as interest payment, if interest rates come down, imagine the impact on Government finances and therefore on the economy.

Ease of doing business

If you drive down from Mumbai to Pune, on the one hand, you have a good expressway, but on the expressway, you see huge lines of trucks lined up waiting to pay octroi duty. These are the kind of wastages of resources and time that make doing business difficult. GST will make India a common market and do away with these irritants. Likewise, we are going to see a National Agricultural Market, which will be a common market for all agri produce.

Take the initiative of peer to peer bill discounting for SMEs. Resource crunch is most acutely felt in the SME segment, and initiatives like this will make doing business so much easier.

The FM has announced plug and play for 5 large UMPP power projects - a concept that can be extended to roads, ports, airports and so on. Imagine launching 5 UMPPs through a plug and play - that alone will bring in Rs.100,000 crores of investments. These kinds of initiatives have the potential of changing the orbit.

Equity market outlook

There are a lot of near term concerns in the market, especially since the Dec quarter earnings numbers disappointed. For the first time, we had a 7% earnings de-growth in the last quarter, and this has got a lot of people worried. Why did earnings disappoint?

1. - Capacity utilization for India Inc continues to be sub-optimal

2. - Collapse in global commodity prices meant that there were significant inventory losses on raw materials already purchased at higher levels

3. - Working capital cycle continues to be elongated and interest rates haven't come down yet

Now, how can this change in the quarters ahead?

1. - Since no new capacities have come, incremental demand will result in higher capacity utilization and therefore better margins

2. - Working capital cycle will be lower simply because raw material costs have come down

3. - Interest rate cycle will benefit companies far more in FY17 than FY16

4. - Lower raw material costs will benefit margins from FY16

5. - From FY17, companies will also get the benefit of lower corporate taxes

If you put all this together, earnings will accelerate from FY17 perhaps far faster than market is pricing in today. Markets at current valuations and with FY16 earnings estimates may not look very compelling - but earnings momentum from FY17 onwards will be a game changer.

If you get any correction in the coming months either due to US Fed rate hike or Greece exit or domestic earnings disappointment, I would advice that you grab the opportunity to invest in equity markets, because earnings momentum from FY17 onwards will be very good.

Fixed income outlook

2.8% revenue deficit is good, Budget is not inflationary. The marginal tax hikes can be absorbed by the economy. Very importantly, the numbers put out in this Budget are realistic. All this will give RBI the elbow room to cut rates. They may not cut as aggressively as hoped by the market. You may get 50 bps in this year and 50 bps in the next year.

Grab duration - you are unlikely to get these kind of interest rates for much longer.

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