Union Budget 2012-13: First Reaction From DSIJ Core Research Unit

We have maintained for quite some time that the Union Budget 2012-13, although a major event in the back drop of a slowing macro economic growth on the domestic as well as international front would eventually become lesser of a big ticket event for the markets.

Rightly so, the budget announced today by Finance Minister Pranab Mukherjee proved to be a no brainer as it neither addressed the core needs of bringing reforms back on track or reduce the pressure that the Indian economy has been reeling under for quite sometime.

As this budget which was being touted as the last ditch opportunity for the UPA to make some headway, it was required that the government announce some fast paced reforms which would help put the economy back on the growth trajectory.

The Finance Minister has failed to provide any headway in this regard. Be it the Goods and Service Tax (GST) or the Direct Tax Code (DTC), there has been no clear roadmap provided. In case of GST the FM merely said that a deliberation on the draft model legislation is underway in concert with state authorities and that it would be implemented by August 2012. There seems to be no clarity on the DTC bill yet as the FM has failed to provide any timeline on its implementation.

The much coveted multi-brand retail FDI allowance which would help improve the overall supply chain and reduce pilferage activities also continues to dither under the realms of the government as the FM failed to provide any roadmap here too. The proposal to allow FDI in aviation also failed to see any concrete action yet.

From the capital markets point of view, the only positive that one could take away from the budget is the implementation of the Rajiv Gandhi Equity Saving Scheme which proposes to allow income tax deduction of 50 per cent to new retail investors, who invest up to Rs 50000 directly in equities and whose annual income is below Rs 10 lakh. However, in our view the lock in period of 3 years would fail to attract investors’fancy at a time when the sentiments are not so good. Further the Rs 10 lakh income limit will also prove to be a downer.

Another positive, was the proposal to allocate an amount of Rs 15888 crore towards PSU banks recapitalization and create a holding company to raise resources to meet the capital requirements of PSU Banks. Finally, the proposal to reduce STT on cash delivery transactions by 20 per cent from 0.125 per cent to 0.1 per cent can also be taken as a positive move. However, yet again in the back drop of times where volumes in the equity markets have taken a huge beating this proposal will fail to bring much cheer.

In conclusion, as said earlier this budget is a complete non event budget. It has not only failed to deliver on the reforms front but also the marginal increase in tax bracket has led to its failure on the populist front. The biggest question which arises now is that over the FY13 fiscal deficit target of 5.1 per cent. It raises serious concerns in our mind as the last time when FM projected a fiscal deficit at 4.6 per cent it came in at a dismal 5.9 per cent. With no measures taken to reduce the subsidy burden and spur up the revenue receipts, the government is going to face a daunting task to reign in the fiscal deficit targets for FY13 under the 5.1 per cent level.

We expect the markets to move as per the fundamentals and international factors from hereon. We shall update readers with our sectoral analysis shortly in the coming few hours.