(February 28th is the creative accounting day. New terms are invented and fine print gets a new meaning. All of this is courtesy the annual budget that is presented on this day every year)
I have enough money to last me the rest of my life, unless I buy something."
— Jackie Mason
Once upon a time, the stock markets used to wait with bated breath for the budget, every year. The british tradition of five pm budget was carried forward for a very long time, till a finance minister remembered that we were no longer a part of the British Empire.
Till 1991 or so, budgets used to be a sad thing. Every year, we had to anticipate where the customs or excise would be raised. We rarely saw broad fall in any tariffs. So, there would be more of relief rallies in sectors where the anticipated hikes in tariffs did not materialise.
After 1991, it has come down to anticipating where the good things in life will happen. We now tend to look more for generic changes across the board rather than for one particular sector or company which has lobbied (in whatever way) for and got something that will help it or hurt its competition. Those still happen, but to a far lesser extent than the past. One often wonders after finding out that some obscure provision has been changed to benefit just one company. But, Indian politicians being what they are, this will not go. To take advantage of this, one has to have inside information, which in these cases would be mostly the promoter, his family and related circles.
Now, the budget is becoming more and more of a non-event as far as the stock markets are concerned. Now, there is anticipation built upon the following areas, in general:
i) Drop in income tax rates;
ii) Drop in peak import tariffs;
iii) Drop in VAT rates;
iv) Tax breaks on housing loans, education etc.,
v) Removal or modification in subsidies;
vi) Increased budget on education etc
Reforms outside the budget are more likely to impact corporate India. The budget can only bring forth so much. Given the fact that the government is a hotchpotch of different parties, full- fledged reform is ruled out. The Congress party has always pretended to be Socialist, so we will have terms like ‘aam aadmi’ dominating the budget. As is said, “The fortune is at the bottom of the pyramid”, in more ways than one, includes collection of votes.
The budget is a presentation of the nation’s profit and loss and balance sheet on an annual basis. The one big difference is that we NEVER get an audited actual. Perhaps the nation’s wise men have realised that an audit means nothing. The budget virtually tells you the ‘state of the nation’ at a point of time in history. Political compulsions, nearness of elections (both state and central) and a new found desire to please the global financial community seem to be the main drive behind the budgets of recent years. The budget has also undergone some clever nomenclature changes, to present a better picture of financial health than it actually is. For instance, the fiscal deficit now has a new component called ‘primary’ deficit.
At the end of the day, what really matters is the sources and uses of money. The sustainable sources are tax revenues alone. What we see is that we use a majority of non-recurring revenue to present a picture that is removed from truth. What happens is that when revenue falls short of expenditure (which has been India’s story since independence, the government resorts to ‘borrowing’. This means that the government pushes in to circulation, money which is not backed by anything. So, it results in inflation. To this central government budget, we have to add the fiscal waywardness of the Indian states (alas, we are creating more and more of them, with disastrous financial implications). The net result is that we have a fiscal deficit of over ten percent of our total expenditure, which is mind numbing. Indirectly, the annual budget has a recipe for ten percent inflation. What saves us somewhat is the money that the foreigners bring in by way of direct or portfolio investments. Add to that the remittances that the Non Resident Indian sends, our finances appear to be healthier than what they really are.
For instance, in 2010-11, the government will take credit of the revenue from the auction of the 3G Licenses. Strictly speaking, it is like selling the family jewels to meet monthly expenses.
Indian fiscal situation has been out of control for a long time. It is not expected to get any better so long as we have a weak Central government, which is surviving at the mercy of wayward regional parties. These regional parties compound the national problem by adding their own doses of free television sets, one rupee a kilo rice and so many other wasteful schemes, to stay in power. Add to that the perceived ‘farmer’ lobby which results in heavy subsidies on fuel, fertilizers, electricity etc., there is no way that India can ever balance its budget.
So, if you see, at the end of the day, the budget is becoming more and more of a non-event so far as the investor is concerned. Of course, we will have the usual suspects (fertiliser, railway machinery suppliers, irrigation, education etc) where there will be a build up of hope. The Railway budget is another anomaly which exists in India. There is no rationale behind a separate budget for the Railways. It is time that it is a part of the national budget. The only thing one can see from a separate railway budget is the poor return on money that the nation gets and unnecessarily creates a power lobby of its own.
So, as far as investment goes, it is best to ignore the budget and carry on with bottom up investment themes. The budget may provide momentary hopes and agonies for the momentum traders. Naturally, there will be expectations that get built in. I have normally seen that the higher the expectation, the lower is the post budget returns from the market and vice versa. This is simply because the stock markets are comprised of expectations.
The budgets are not likely to offer any structural solutions. Let us see if there is one big bang on taxation. It is time that we live with tax rates that are fixed for life. And the other foolish expectation is whether a centralised sales tax (GST) gets in to play quickly. Most important, let us hope and pray that the Finance Minister does not introduce a new ‘Voluntary Disclosure Scheme’ to bail out the crooks who deserve to be hung). For more reforms, wait for a government with spine and majority.