Friday, February 26, 2010

Amaar Sonaar Bodget...

The extremely clever budget unveiled by the FM confirms that the economy has its own momentum in spite of the government. Yes, of course, the stimulus in the form of excise cuts last year, did add a few more rupees in to the pockets of the businessman. The NREGA outlay has been enhanced, to ensure rising consumerism. The budget has been on expected lines and the FM has taken advantage of the fact that most people’s eyes were on the fiscal deficit number. By curtailing some spending, partially rolling back the excise stimuli in the backdrop of good industrial growth, his task became easy. In fact, the buoyancy in industry has enabled the FM to surprise the small universe of taxpaying Indians to have some increased money in their pockets. As usual, huge increase in outlays on education and healthcare (from a small base, so it seems large) which one hopes will reach the target audience.
Fiscal deficit (whilst being high) at 5.5% of GDP (a higher base than last year, remember) is not very low, but the markets seem to have taken to it kindly. Non plan expenditure, thankfully, is only up by 6%. The plan outlay has increased by 13%. Of course, we never get to see what actually happens later. Typically, the capital expenditure falls short of estimate to give in to rising revenue expenditure demand. Surprisingly, some government departments show a drop in expenditure allocation (Law & Justice,Mines, Supreme Court, huge drop in Petroleum ministry outlay,etc).
The budget is high on expectations from industry. Near 15% growths in revenues have to come from excise and the budget document shows a near 30% increase in customs duty revenue. The budget banks on the momentum of economic growth rather than give any thrust to the economy.
The corporate sector does not get anything. Partial withdrawal of stimuli by bringing excise up by two percentage points and increase in MAT by three percentage points is what they have got. Demand continues to be strong and governments for years have not bothered with increasing the supply side. In this context, the companies can easily pass on the increases to the buyers or at worst live with slightly lower margins. Of course, there are usual suspects in the industry basket, who seemed to have successfully lobbied overtime and got honourable mention in the budget speech itself. A reduction in duty for ‘magnetron’ in Microwave ovens, which may bring down the cost by around Rs.200/- on a microwave; a reduction of duty by 5% on medical equipments; a duty cut in Rhodium (a precious metal used in jewellery) and reduction of duty in watches that are imported! These kinds of actions definitely smell. The corporate sector appeared relived that the last year’s undeserving cut in excise duty was only partially taken away. For the corporate sector, this budget does nothing good. Service Tax remains undisturbed waiting for convergence with the GST.
Imposition of MAT should impact some of the Infrastructure companies marginally. However, it may not impact the earnings so severely. The action of putting more money with a few taxpayers, is good for sectors like automobiles, FMCG etc., Of course, it is likely that the lowering of income taxes may partly be saved.
Moving to the Direct Taxes Code and uniform GST now have deadlines (1st april 2011) for implementation. I hope that there is no extension in this. So a breather for the mutual fund industry gives them another year to continue with corporate and banks’ money.
For the markets, the budget is a big non-event. Yes, there was a holding of breath in the run up to the budget. But, nothing unexpected has happened to disturb the market. If anything, a few more rupees are available with some stock market investors, who also pay some taxes. This budget does not give the market any reason to move either way. What happened after the budget was more of a relief rally. What could happen is that FII money, if it was waiting on the sidelines, anticipating a bad budget, could come in to the market and spark a rally. In my view, our markets are fairly valued, with a lot of high growth expectations. No need to go through the budget to take any investment decisions. Interest rates should stabilise since the borrowing plans of the government do not seem too extravagant.
One interesting development is the opening up of banking licenses to the private sector. It would be interesting as NBFC’s start to talk with small private banks for marriage. We could also see some of the ‘hidden’ owners of old generation private banks breathing a sigh of relief as this will provide the opportunity to legitimize the holdings. The valuation of NBFC’s (those perceived by the markets as being desirous of getting in to banking) and small private sector banks will turn volatile. Of course, this is negative news for PSU banks. More competition as well as loss of whatever talent is left is on the cards.

Usual cautionary note is that the fine print is yet to be read and analysed.

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