While delivering on the broader expectations of the market, the Finance Minister has also laid the foundation for higher growth
Even as the Union Budget 2010-11 was largely in line with expectations, the markets rejoiced with the Sensex and Nifty closing higher by about a per cent each on Friday. Although a few experts suggest that the market’s rise was aided by the pessimism before the Budget as well as benign expectations, the Budget has provided a feel-good factor. In light of the circumstances, both locally and globally, the Budget appears balanced and constructive and largely in line with broader expectations regarding issues like accelerating economic growth, containing fiscal deficit and partial withdrawal of stimulus.
Stimulating growth
At a time when the Indian economy is on a recovery path, the Finance Minister has done his bit to provide an impetus to consumption while aiming for inclusive growth. The 18 per cent hike in plan expenditure, with significant increase in allocation for the agriculture and infrastructure sectors, is a move in this direction. Within infrastructure, significant allocations for sectors like road transportation (about Rs 20,000 crore), railways (Rs 16,800 crore) and power (over Rs 5,000 crore) have been made. These higher allocations towards creating infrastructure are expected to have a cascading effect on economic growth. Towards this end, the increase in tax deduction (through investment of Rs 20,000 per annum in infrastructure bonds) under Sec 80C to individuals will enhance availability of funds for the infrastructure sector. Thus, expect companies in the infrastructure and banking space to gain from these moves.
The Budget has also proposed to hike the income-tax exemption limits for individuals. The move, which is estimated to result in tax savings of Rs 50,000 for individuals earning Rs 800,000 per annum, was the biggest surprise the Budget delivered. It will leave more money in the hands of individuals and serve two purposes--- namely, ease the pressure in the current environment of high inflation (food bill, etc) as well as result in higher consumption. Analysts at Motilal Oswal believe that “personal tax concessions of Rs 25,000 crore through realignment of tax slabs coupled with expected improvement in economic growth to over 8 per cent will ensure continued buoyancy on consumption themes like autos, real estate and FMCG.”
Put together, the continued focus on infrastructure and agriculture sectors and social schemes should have a positive impact on demand leading to higher economic growth. Little wonder, the Finance Minister is expecting the country’s GDP to grow by 8.5 per cent in 2010-11, which he believes is likely to move into double-digits in coming years. Higher growth rates typically translate into better corporate earnings, which also got a boost from the surprising cut in surcharge on income tax from 10 per cent to 7.5 per cent. Though some of these gains will get offset (for some companies) considering that the minimum alternative tax rate on book profits has been hiked from 15 per cent to 18 per cent—this came as a negative surprise. The Budget, however, continued to provide support to weaker sections like exporters, which should help towards support growth.
| THE MAT EFFECT | |
| Current tax as% of PBT | |
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Curtailing deficit, but...
Even as the Finance Minister has attempted to give an impetus to growth and partially rollback the stimulus, he expects the government’s fiscal deficit to decline to 5.5 per cent of GDP (in line with most expectations) for 2010-11 from an estimated 6.9 per cent for 2009-10. Positively, the minister also stated that he is targeting to bring it down to 4.8 per cent in 2011-12 and further to 4.1 per cent by 2012-13. The lower borrowing programme of the government for 2010-11 (down by about 14 per cent as compared to 2009-10 estimates) also provides comfort and should help towards easing some of the pressure on interest rates. The same also indicates that fund availability should not be an issue of India Inc in 2010-11. Broadly, these moves should provide cushion to interest rates in an inflationary environment.
However, some of the gains on these counts will get offset by the increase in duties on petrol and diesel, which though will help shore up the government’s coffers. Likewise, the hike in excise duty by 200 basis points to 10 per cent was in line with the expectations of a partial rollback of stimulus. In select cases like for bigger cars and cigarettes, too, the Budget has announced a hike in duty rates. Edelweiss Securities estimates that the hike in duties (excise and on fuels) will generate revenues of Rs 43,500 crore in 2010-11 for the government. However, since most companies are seen passing on this hike to their end customers, its impact on corporate profitability is unlikely to be significant, at least directly.
...a few misses
While the Budget was never expected to contain major announcements, it did indicate the implementation date for Goods and Services Tax and Direct Tax Code as April 2011. In fact, the hike in income-tax exemption and status-quo on the service tax is seen as moving closer to the GST and DTC regime. That apart, the minister stated that the Kirit Parikh committee recommendations on fuel-pricing will be taken up by the concerned authorities.
These statements have helped towards enhancing clarity on these critical key issues. However, there was no mention of any possible hike in FDI in the insurance sector. Nor was the issue of extension of STPI (for IT/ITES sector) touched up on. Hopefully, these issues will be taken up as we progress into 2010-11.
| GAINERS & LOSERS | ||
| SECTOR | BUDGET IMPACT | Sector Stance |
| Automobiles | Neutral | Overweight |
| Banking & Financial | Positive | Overweight |
| Cement | Negative | Overweight |
| Construction & Infrastructure | Neutral | Overweight |
| Engineering & Power | Neutral | Neutral |
| FMCG/Retail | Negative | Positive |
| Information Technology | Neutral | Neutral |
| Media | Neutral | Neutral |
| Metals | Neutral | Neutral |
| Oil & Gas | Negative | Neutral |
| Pharmaceuticals | Marginally Positive | Neutral |
| Real Estate | Negative | Neutral |
| Telecom | Neutral | Overweight |
| Source: Motilal Oswal Securities | ||
Going ahead, the markets will see how these proposals get converted into action as well as how the India growth story progresses. In the near-term though, the markets will take cues from global events.
Following is the impact analysis of the Budget proposals on the 50 stocks that form the S&P CNX Nifty index. Read on.