Concentrate On Crude

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Finance Minister Pranab Mukherjee had to tackle the problem of ‘twin deficits’ (fiscal and current account deficits) which are crucial for macro-economic stability. He had to strike the right trade-off between economic growth and inflation. And, he had to give prior-ity to address the problems of the ‘aam admi’ while infusing confidence among investors. Also, with elections in five state assemblies just round the corner, he had to take a ‘politically correct’ position. He succeeded in doing a fine balancing act.
The FM contained the fiscal deficit for 2010-11 at 5.1 per cent against the budget target of 5.5 per cent. Bringing the fiscal deficit down from 6.5 per cent in 2009 to 5.1 now is remarkable fiscal consolidation - the best effort since liberalisation.
The fiscal deficit projection for 2011-12 is 4.6 per cent. The proposal to allow foreign investors to invest in Indian mutual funds is a welcome move. However, it would be premature to expect a flood of capital flows to Indian markets soon but this proposal opens up the prospects for successfully tapping the huge potential in the Middle East.
The reduction in surcharge on corporate tax by 0.25 per cent will give relief of Rs 2,729 crore to the corporate sector. Raising MAT from 18 to 18.5 per cent will impose a burden of Rs 805 crore on the companies. Bringing SEZs under MAT is a big negative for the sector. It was widely expected that the government will roll back the excise relief granted under the fiscal stimulus package and raise excise by 2 per cent. The fact that this did not happen was welcomed by the industry and the markets.
Hiking FII limit in corporate bonds to USD 40 billion, allowing Rs 30,000 crore of infrastructure bonds and disinvestment target of Rs 40,000 crore are welcome moves. Considering India’s macro-economic fundamentals, the growth rate target of 9 per cent for 2011-12 appears achievable.
This can translate into an earnings growth of around 18 per cent for the corporate sector. The Sensex is presently trading around 14 times’ forward earnings. Considering the long-term prospects for the Indian economy and the huge potential for growth and earnings differential between India and the developed world in the years to come, these are attractive valuations. But it is also true that the India story has been slightly impacted by the series of scams of recent times. But investors should keep in mind that only the short-term sentiments have been impacted.We are bullish on the banking sector since it is a play on the economy. FMCG will do well as a defensive sector. The long-term prospects of the auto sector will be good. The pharma sector has great prospects as well. Cement and infra can be good contrarian buys for the long term, considering the attractive valuations.
Going forward, the trigger for the markets will come from crude. If the popular movement becomes a contagion and spreads to the Middle East, crude can have devastating con-sequences. On the contrary, if the Libyan crisis is resolved soon and crude declines to reasonable levels, there can be a rally in the markets. Therefore investors should closely watch the crude prices.