Thursday, March 15, 2012

Budget 2012-13- Last chance UPA

(This appeared today on the Moneylife website) The budget is the last hope for the market run up to continue in 2012. Almost all of a year’s gains seem to have materialised in the first two months of the calendar. And being the fools that we are, we think the budget is the sole instrument of change. Personally, I do not see anything material in this forthcoming budget. Numbers, in terms of fiscal deficit being here or there, are good for debates on television. The unchangeable truth is that India will continue to run trade deficits for the foreseeable future. A consumption led demand push has kept growth buoyant as aspirations of the burgeoning upper middle class take wings. Liberal lending by banks and NBFC have helped create this demand pull that has resulted in the domestic economy being on a high. Even with a slowdown, we are still talking about growth upwards of six to seven percent. This growth is there, in spite of our politicians and the Central Bank. Neither have the ability to take it to the next higher platform (like China, which has pursued growth with single minded focus). Barring some irrational hold on sectors like Oil, Banking and Telecom etc the government has kept its nose out of industry and commerce. Minor irritants in the form of tariff adjustments should not make a material dent to industry at large. Also, the government has displayed a singular lack of will in pushing through creation of infrastructure, which in turn is the single biggest hurdle for accelerated growth. So, irrespective of the government’s worst efforts, it is reasonable to assume that growth will not slip below six percent or so. As a rule, it pays to keep out of stocks that are vulnerable to governmental action/interference. What keeps these shares in demand is the HOPE that government will let go. Good luck to those who have this hope. The government will not let go of what is not yet freed because it is their last few tickets to stealing fortunes. The Ugly combination of inflation and continuing trade deficits will ensure that India always has this issue of piling debt and continuing erosion in the value of the home currency. It keeps getting propped up by a combination of remittances by overseas Indians (which also includes some money laundering), loans from foreigners, FDI and portfolio flows in to debt and equity. Our growth rate ensures that we are like the one eyed amongst the blind and the foreigners’ compulsion to invest (as they need to find new places to grow the markets) will keep FDI and portfolio flows happening. We can also expect Indian government succumbing to foreign pressure and open up whatever sector is still closed to them. Only those sectors where the politician is directly impacted (real estate and agriculture) at personal levels, FDI or portfolio flows may not be allowed. Allowing FDI/FII in to any sector means increased demand for transparency and that is not welcome. So, in the budget, I do not look for anything. Fiscal deficit (any new definitions like “Primary deficit” by the clever people at North Block notwithstanding) will be closer to double digits if we take in to account the State governments’ shortages. Socialist policies introduced by the Nehru family will ensure that money is wasted on schemes that permit leakages to the politicians. Do not look for reason or rationale in their benevolence to some obscure tinkering which favours some relative of some politician. This budget CANNOT propel India to the next level of growth. So, if the budget is veneered with bold statements of apparent intent, ignore them. The political cauldron will NOT let change for good happen. It is certainly a matter of belief rather than of logic as far as I am concerned. If there is a big rally and talk of a dream budget, exit if the rally takes the market beyond 6300 on the NSE or above 20000 on the BSE. I also hope that the budget stops the practice of favouring some industry or section of society with sops that come at the expense of revenue collection and being impartial to others. For instance, it would be great if the IT exemptions to SEZ/ IT are totally withdrawn. One has been abused by the realtor gang and the other has gone to fatten companies like Infosys, Wipro and TCS. In this world, businessmen will invest so long as there is an opportunity and profit. A few thousand crores of tax concessions to a handful of companies means that the gains go to line the pockets of these company promoters alone. Instead, however much we may argue against, it is better to spread it amongst a larger group of people by reducing the tax rate. Any support that is given financially to any section of society is never constructive. For instance, it is my personal experience that something like NREGA has actually destroyed the will/need to work in some pockets that I have been exposed to. Instead, if the government had used the subsidy money to set up a power plant, however small, it would have been of greater benefit. However, in reality, I expect many more schemes of populist nature to dot the budget. Tightening the belt is unknown to our politicians who use the budget as a tool to supposedly win votes. Of course, the result of the UP elections would mean that the government has prepared two sets of budget and may choose an option that seems politically expedient post the result. Do not get swayed by a hike in some income tax exemption limits, unless it is significantly large enough to boost consumption. If so, be prepared for higher inflation also. Even if the government wakes up and pushes some supply boosting measures, it would be two to three years before the supply actually increases. I am afraid that the UPA government will become more left than the leftist and lead us on the path to a lower growth trajectory. I hope my pessimism is misplaced and that the Finance Minister will present a budget that does not favour some particular business alone. I hope that he reduced the subsidies on fertilisers, diesel and power. R. Balakrishnan ( March 4th, 2012

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