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BUDGET, GLOBAL MARKET & INDIAN STOCK MARKET

www.GreatTipsIndia.com



Updated: July 4, 2009 at 23:30



BUDGET, GLOBAL MARKET & INDIAN STOCK MARKET

Don't expect too much, you won't be disappointed.

Monday’s big budget appears to be the biggest trigger for the market that would decide the future direction of market. Given the escalating expectations, market is going to witness a correction if all those expectations are not met by the government, which struggles to strike a balance between fiscal and reform measures.

If the budget fails to meet expectation Nifty might correct to 4000 level, but positive outcome can consolidate the market at the current levels.

Budget would be a mix of triangular factors - investors’ friendly, rural oriented and infrastructure focused. Based on these factors, this budget will reflect the future projection of individual companies, which will perform in the market accordingly.

However, budget is not the only trigger that will single handedly derive future course of action for the market. Global cues equally remain relevant for the market despite India’s positive growth projections.

On the other hand, any probable correction would encourage fund managers to buy fundamentally good stocks at the right valuations. In the last one month, valuations were stretched riding on the crest of budgetary expectations.

The market is going in fairly light, into the event. If it is a complete damp squib, and let’s discuss what would qualify as one, the Nifty could certainly retreat to 3800 kind of levels but that would hardly be a dire scenario. If it has some positive tones but not a lot, the Nifty may not even break 4000. That is, on the budget impact alone. And if it is a complete dream budget, it will certainly rush back to 4600-4700 levels, it's recent peak, and then wait to see what is going on in the global equity environment. Only a terribly insipid budget will break it below 4000 or an outstanding one take it beyond 4700. After that the environment takes over. If global markets rally on, the S&P goes to 1100, the Nifty will head to 5000 plus. If global markets correct, something which can certainly not be ruled out and the S&P falls to below 800, then the Nifty too perhaps heads to 3600-3700.



ISSUES:

STT:

Lower STT may benefit traders and arbitrageurs but any move to phase out STT and reintroduce capital gains tax will go down as a big negative. If no change happens, the markets will be fine. Any disappointment from traders will be very short-lived. Unless LTCG comes back, this is not such a make or break item.

DISINVESTMENTS:

Let’s call it that without confusing it with privatization. Given that this has been on the backburner for the last five years, the FM may want to start small and then scale up. So the first step may well be to sell small 5-10% stakes in large listed PSU companies and raise some money. This will help raising some money for the fisc but it is a drop in the ocean of our deficit, so macro watchers should not get too excited. It's not as if divestment will bring down our combined fiscal deficit from 12% to 8%. No way. And frankly, these partial stake sales have little positive implication for the stock market.

FDI:

Some caution is warranted. Yes, there is no issue with doing 49% in Insurance and hope he does that at least but don't expect much more than that.

Apart from India’s strong potential, increased FDI inflow into the country can also be attributed to easing of the FDI cap on sectors like Telecom, Aviation and Insurance. As a result, our FDI inflows have increased from US $ 3-5bn a few years back to the current US $16-18bn. FDI has the potential to lend competitive edge especially to the Industrial sector. Thus, we expect FDI to be encouraged and actively sought after by the government to keep the investment rate high in the country.

TAXES:

The FM cannot be silent on this, but I hope he speaks of a phased reduction aided by higher capital receipts and lower subsidies rather than making it sound as the immediate and top priority. The intent and resolve is important, not immediate steps to rein it in at the cost of growth. Growth is the priority, managing the deficit a compulsion that cannot be ignored, if that note is struck even fiscal hawks may grudgingly agree and rating agencies baying for blood, kept at bay.

India’s Tax Revenue collections have been on a marked uptrend registering around 24% CAGR growth in the last five years, primarily aided by the strong GDP growth. Greater Tax compliance on account of simplification of tax procedures and reduction in taxes have also contributed their bit. With this, India’s Tax-to-GDP ratio would be around13% for FY2008E (< 9% in FY2004). However, we believe that India still has a long way to go in terms of Tax compliance (repeatedly emphasised by the FM). Pertinently, most other developing and developed countries are way ahead of India with a Tax-to-GDP of 25-50% and Tax Rates ranging from 40-25%. In the upcoming Budget, while we do not expect a reduction in the Income or Corporate Tax Rates, some tinkering with the Basic Exemption Limits and Surcharge Rates cannot be ruled out. This is in wake of India heading for Elections next year and the FM would want to play it safe.

GDP:

Fiscal 2008 marked the beginning of the Eleventh Five-Year Plan (FY2008 – FY2012). The FM unveiled the Eleventh Plan in the last Union Budget, with the UPA Government introducing its objective of “Faster and More Inclusive Growth” to catapult the Indian economy onto higher growth trajectory of 10% by FY2012.

We expect the FM to laud the current strong state of the economy, indicate the challenges that lie ahead for India including the global uncertainties and slowing of the global growth engine, and re-iterate that India would continue to clock 8.5-9% GDP growth



SECTORIAL:

Automobile & Auto Ancillaries:

The Automobile Sector was left totally untouched by the Finance Minister (FM) in the last Budget. Expectations were running high for an Excise Duty cut for the Automobile segment, at least for four-wheelers. But, it did not come through in the last Budget. The same wish comes up this year as well. The Automobile Sector has been facing challenging times in FY2008 post registering high growth in FY2007. The Auto companies are reeling under the pressure of high input costs and Interest rates (albeit on a high investment base), which are impacting volumes. Against this scenario, favourable changes in the duty structure could give the much required impetus to the industry.

Budget Expectations

• Reduction in Excise Duty to 16% from the current 24% on all categories of Passenger Vehicles including MUVs.

• Reduction of Excise Duty on Two wheelers to 12-8% from the current 16%.

• Extension of the weighted deduction of 150% on the expenses incurred on scientific research for a further period of at least 10 years even after 2012.

• Reduction in Excise, Import and Custom duty structure on raw material and Auto components.


Banking:

In the last few months, the IIP numbers have been showing a downward trend in a number of sectors. High interest rates have had a marked impact on Consumer Goods even as other segments of the economy are also beginning to feel the effects of slowdown in credit off-take. Credit growth has slowed down to 23% yoy from 28% yoy in February 2007. Bank managements have indicated that although there is a strong pipeline of infrastructure and other capex financing proposals, actual disbursals are likely to accelerate only once interest rates start moving down.

The government acknowledges the tremendous capital requirements especially for infrastructure. Against this backdrop, one of the significant Budget expectations from the Banking industry is reintroduction of tax concession on interest earned on infrastructure loans (u/s 10(23G) of the Income Tax Act, 1961). Long-standing issues such as enhancement of FDI limit in PSU banks may however, remain unaddressed in this Budget as well.

Budget Expectations

• Re-introduction of tax concession on interest earned on infrastructure loans u/s 10(23G) of Income Tax Act, 1961.

• Sops to enable infrastructure finance companies like IIFC, IDFC and PFC to raise funds at cheaper rates, for instance through tax-exempt bonds.

• Hike in FDI/ FII limit for public sector banks from 20% to 26%.

• Allowance of NPA provisions made as per RBI’s provisioning norms as deduction for tax computation.

• Contribution by a bank to a pension fund for employees not to be considered as a fringe benefit for FBT liability


INFRASTRUCTURE:

We believe that higher allocation for the Infrastructure Sector in Budget FY2008-09 will have a Positive impact on the Sector. Various infrastructure schemes such as NHDP and PMGSY (for roads), AIBP (for irrigation), JNUURM (for urban infra), etc., are expected to get more backing this year with the economy doing well and consensus about larger allocation to infrastructure from the current 4-5% of GDP to 8-9%. Total infrastructure investments planned for the next five years of US $475bn requires huge FDI and FII inflows. In line with this, the government's recent announcement of permitting FDI up to 74% equity for road and bridge construction, as a part of infrastructure, is a positive step for the Sector.

Budget Expectations

• Increase in the allocation of projects under the PPP model along with the size of projects increasing year-on-year, the current viability gap funding (VGF) limit needs to be increased from the current 20% to 30% in the Budget.

• Though 100% FDI is permitted under the automatic route in various infrastructure sectors, existing Regulatory guidelines require SPVs established for infrastructure development to obtain prior approval of the RBI to raise external commercial borrowings (ECBs) to finance Rupee expenditure cost of such projects. There is a demand for this restriction to be removed.

• Increase the maximum limit u/s 80C in Infrastructure bonds from the current Rs1lakh to Rs2lakh. Increase the maximum investment limit of Rs50lakh per person per year u/s 54EC (long-term capital gains) in NABARD and REC.

• Service Tax to be withdrawn for Input services for the Infrastructure Sector.

Oil & Gas:

The last Budget announcements for the Oil & Gas Sector were more or less in line with expectations, which included reduction in Excise Duty on petroleum products and awarding Infrastructure status to cross-country natural gas distribution pipelines. Overall, we expect the Budget to be Neutral to Positive for the Sector.

Budget Expectations

• Reduction in Excise Duty on petroleum products (current Excise Duty on Petrol – 6%+ Rs13.26/litre and Diesel – 6%+ Rs3.32/litre).

• Rationalisation and reduction in Sales Tax on Petrol and Diesel (current Sales Tax on Petrol – 18-31% and Diesel – 8-28%).

• Infrastructure status to Exploration and Production (E&P) companies.

• Tax concessions for new city gas distribution (CGD) projects.

Impact

• Reduction in Excise Duty and Sales Tax will benefit the bleeding oil marketing companies (OMCs), which are burdened with under-recoveries for selling retail fuels at below cost price.

• Infrastructure status will encourage further investments in the E&P Sector, with larger participation from the overseas players.

• Tax concessions for newer CGD projects will help boost investments and expand the gas grid as CGD is a capital intensive business.



Try not to work yourself into frenzy with budget expectations, in fact try to temper them.




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IDFC - Latest Price Update
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