The Union Budget- Below expectations

Mr Pranab Mukherjee the Finance Minister of the UPA government, which shot in to power with a bang a few weeks back, gave a surprisingly lack luster budget.

Most observers were taken by surprise on the lack of any specific direction to the economy – and that too in the times when it faces challenges of economic slowdown. While the finance minister gave a ‘side’ remark about reforms, disinvestment and infrastructure development, no concrete measures were indicated. In fact the government even did not spell out how much it targeted out of disinvestment of PSUs.

Macro view
On the macro front, the first and foremost point which may ‘surprise’ an observer is that the government is targeting a 9% GDP growth rate while the previous years’ GDP growth rate was merely 6.5%. It shows a lack of perception as the possibility of even a 7.5% GDP growth rate as mentioned in the Economic Survey, is hard to achieve without a recovery in the US. How the FM came up with a 9% target figure is something to wonder!

Moreover, this targeted GDP growth rate is indicated along with a fiscal deficit of 6.8%. With such a huge fiscal deficit and its impact on the already rising inflation (CPI), targeting 9% GDP may obviously lead to a ‘bubble’ somewhere.

The rapidly falling exports and imports – (higher world trade is a prerequisite for GDP growth) is a major cause of concern and the government failed to address this problem in an aggressive manner. Only some ‘cosmetic’ benefits were extended to the export oriented sectors.

For Corporates
Some of the few positive points of the budget were the abolishing of the FBT (Fringe Benefit Tax) and the CTT (Commodities Transaction tax). The abolishing of the FBT should be a relief to the corporate sector and a lot of time and effort will be freed up and put to use in more productive areas. While CTT was abolished, there was an expectation of the reduction in STT which failed to come in.

The increase in the rate of MAT from 10% to 15% is also a major negative. Increasing tax rates, even for MAT, was a step which could have been avoided at this juncture.

Excise duties on goods attracting 4% duty have been increased, except in some few cases, from 4% to 8%. This too may be treated as negative.

For the individual, the budget raised the IT exemption limit by Rs 10000/- (Rs 15000/- for Senior Citizens) which was much less than expected. Surcharge removal on personal income tax would benefit taxpayers in the higher tax bracket.

As for the investors, the lack of any major direction in the budget, saw the sentiments dampen. The expectation of reduction in STT and other sector specific announcements – in sectors like infrastraucture, Power and IT & education – had been built up but as these did not materialize, there was a heavy sell off in the stock markets. The markets fell by more than 800 points.

In the following table we have segregated the impact of the various budget provisions.

Conclusion:
Overall we may say that both the budgets of 2009-10 (Interim and the current one), failed to give a direction to the economy in its trying times. However , we strongly expect that some ‘reforms’ oriented announcements will be made in the coming weeks which will at least provide investors – both domestic and foreign – an idea of the future course which the government is likely to take to regain the GDP growth. Disinvestment in PSUs may be the initial step along with some more fiscal announcements.

We may expect the unwinding of the poisitions to continue during the week and target levels of sub-4000. Price downmoves between 3800-4000 Nifty may be the correct time for investors to re-enter the stock markets and build up their portfolios.

In the next few days we shall come out with our list of stocks which investors can pick up in the correction.

CA Rajiv D Khatlawala
Head of Research
JHAVERI Securities Ltd