A Thumb Down Budget

Budget expectations have become like T20 match for the investors where they want action and excitement in every speech. Not many have patience to wait for five years (like five day matches) of government action. The end result is that expectations soar too high and when these are not met, the stock market reacts in a knee-jerk fashion – this time it tanked worst in its history on the Budget day. For the record, Sensex lost 869.65 points which is 5.83 per cent decline over previous close level. The previous worst case in terms of points was on February 27, 2007 when the Sensex had lost 540.74 points, while in percentage terms it was on February 27, 1993, when it had lost 5.71 per cent.

There are many questions that come to mind considering the extreme reactions on the stock market. Is it the case that the stock market over-reacted to the budget? Is it that Pranab Mukherjee has become too old to understand the pulse of the stock market just as he fails to understand GenX? Or is he smart enough to lay the road map for the next five years of fiscal discipline which the stock market failed to understand? The answer could be a mix of all three.

Let us start with Mukherjee budget speech where he says that “…a single Budget cannot solve all our problems, nor is the Union Budget the only instrument to do so.” By making this statement he has conveyed two messages. First, don’t expect everything in one budget as there are four more budgets that can meet the expectations and hence hold your horses. Second, there are other ways (other than the budget) through which the government can carry out the much-needed reforms. In a way, this is a right approach as we have seen during the previous term of the UPA government when the government did not wait for the budget day to come out with the fiscal stimulus packages. But somewhere Mukherjee failed to pack-age the budget well and that created havoc with the investors’ sentiments. Even India Inc did not rate the budget high, with average ratings in the region of 6-6.5 on a scale of 10. One of the biggest hopes everyone had was that, in the absence of the Left’s influence, there would be some bold announcements from the FM, but this did not materialize. To some extent, one should also blame the media and the experts who created the hype due to which everyone thought that this could be the budget which could see the stock indices soaring, with some even suggesting that there could be upper circuit filter on the bourses.[PAGE BREAK]

Before we go through the budget positives and negatives let us try to understand the fundamental issue about the budget. The budget speech was divided into two parts, where the first part (Part A) normally outlines the allocations for the weaker sections of the society and the second part (Part B) spells out the tax reforms. We at Dalal Street Investment Journal earnestly feel that the FM should not dwell on Part A in his speech as Part A, as we understand, is a vision statement and should come from Prime Minister about what he intends to do in the next one year in the same way as CEO of a company expounds his vision statement to analysts and fund managers. The FM is like a CFO of a company and he should touch upon the revenue and expenditure side of the Indian government and how he proposes to raise the same in the coming year. Also, the budget expectations outlined by various institutions and forums are a very futile exercise and one that unnecessarily raises expectation of the investors. Everyone wants sops for their own industry and everyone wants to pay lower taxes. This is wishful thinking as the government needs to raise revenue for various socio-economic purposes and hence cannot dole out sops to each and every industry. Also, one should remember that India’s tax regime is quite benign as compared to other countries and hence one should not expect drastic cut in the tax slabs even in the future budgets. One should be happy that despite the growing fiscal deficit, the FM has not raised the overall tax rates, and this could be the biggest relief for the common man. There are quite a few other positives too in the budget. Now, let us understand these in detail.

Positives:
The biggest positive of the budget is that it has not rolled back any of the incentives given through the fiscal stimulus packages. This is a big relief as taking away sops would have impacted the economy badly. Even the monsoon is playing truant and not giving comfort level to India Inc as rainfall has been sporadic across the country making India Inc. nervous. Another positive from the budget is that the government continues to focus on the aam aadmi, especially in the rural areas. One of the factors that helped India manage the global slowdown was the robust growth in the rural economy. The FM has increased the allocation to National Rural Employment Guarantee Scheme (NREGS) by 144 per cent as compared to last year estimates, which means that the rural populace would have more income to spend on the basic things (FMCG goods) and mobile telephones, thereby driving the volume growth in these sectors. The government has also given a clear signal that GST would be implemented by April 1, 2010. This is big step in terms of reforms as this would reduce the anomaly in the indirect tax structure. Another positive from the budget is that the Direct Tax Code would be tabled in the parliament in the coming winter session and if this goes through, one can expect better direct tax structure with no levies and surcharges. Also, this would ensure much better compliance.

The Fringe Benefit Tax (FBT) has been a millstone around the neck of India Inc from the year it was introduced because it increased the workload for India Inc. FBT has been abolished which would mean that there is less paperwork and less tax liability. This has come as a big relief to India Inc. On the individual front, the government [PAGE BREAK]

has increased the threshold limit for income tax exemption by Rs 10,000, while in the case of senior citizens, the same has been increased by Rs 15,000. Also, the government has done away with the surcharge on personal income tax, thereby foregoing Rs 5000-6000 crore. This money should help individuals to spend more money on consumption, thereby driving economic growth. The FM has also expressed the resolve to achieve a nine per cent growth rate in the economy and stated that more money would be spent on infrastructure development to drive the growth. On the stock market front, the FM has said that there should be more retail investors in the listed companies and for this the government proposes to raise the minimum threshold limit of the general public.

But no budget can have all positives and no negatives. This time, unfortunately, the budget had more negatives that spooked the investors’ sentiment. Here are quite a few of them:

Negatives:
India Inc and investors thought that since this time the Left is not a part of the UPA, the government would push reforms in a big way. But since this did not happen, the budget came as a big disappointment. Also, the FM has promised many reforms like price mechanism for fuel policy, revision in fertilizer subsidy, and so on. But nowhere did the FM put any time frame spelling out when the same would be done. Also, no major announcement on the divestment policy came as big dampener for the market. But the biggest concern for the market is the fiscal deficit which is expected to be 6.8 per cent of the GDP. With the kind of slippages seen in the last couple of years on the fiscal deficit front, one would not be surprised if the same goes beyond 6.8 per cent by the time we close this financial year. Also, the government has not given any clear-cut signal on how it intends to finance the deficit.

Another problem that the government has to tackle in future is the subsidy burden which is expected to cross Rs 100,000 crore. This is a huge amount and needs to given priority in terms of scaling it down to a decent level this year. Also, the government has given many sops to aam aadmi without looking at the revenues and this could create problems for the government as it would be very difficult to withdraw these sops at a future date.

The most sought after commodity in the country is gold and with increase in the customs duty on gold, it would put the yellow metal out of reach of the investors and common man. India has seen decline in the consumption of gold in the last one year due to surge in the prices of the gold and, now with a higher customs duty, it would become costlier. Also, one is not sure how much money the government would be able to raise through the same as import of gold has taken a huge beating in the last one year. The government could have waited for one more year for the gold demand to revive before raising the customs duty. There are couple of other negatives too, but these are not significant enough to merit discussion.

Overall, our conclusion is that the market would very soon forget that there was a budget at all! Very soon the June quarterly numbers would start rolling out and the stock market would again start behaving depending on the fundamental factors. For us, this budget is history and one should look forward to the June quarterly numbers which are expected to be healthy. In the past, we have reiterated that the Indian stock market is in for a bull run and we feel that any major correction makes it much more healthier and attractive to re-enter.