Little to cheer about

Corporate India hasn't gained much from the Budget, it hasn't lost either.

The mood in the market wasn't great to begin with. But the depressed sentiment, following the finance minister's Budget proposals for 2008-09, indicates that the markets will possibly consolidate for some more time before breaking out into a strong upmove.

Investors have reasons to be disappointed : even if he was under pressure to deliver an election budget, the finance minister could have initiated some big reforms.

Moreover, the fiscal situation would not be what it appears if all the offline expenditure were taken into account, much of the correction could be illusory.

The Rs 60,000 crore waiver for loans to farmers will be a big negative for banks and will hurt PSU bank stocks, if these banks are not compensated by the government.

The biggest negative as far as the markets are concerned has been the change in the treatment of the securities transaction tax, which will now be treated as an expense rather than a set-off against the tax liability, thereby increasing the tax payout.

That together with the increase in the short term capital gains tax from 10 per cent to 15 per cent, has depressed the sentiment. So much so that even the good news in terms of a 2 per cent cut in excise duties, is not being viewed as a move that will spur consumption but one that is needed to keep inflation in check.

As far as the corporate sector is concerned, the budget has no negative proposals; it is overall marginally positive with some sectors such as pharmaceuticals and automobiles getting a boost from duty cuts.

Also, the service tax has not been increased. Moreover, the finance minister has put more money into consumers' pockets with higher income tax exemptions.

This money could at the very least, help maintain the level of spending in an inflationary environment. So, even if demand doesn't pick up dramatically, it should not slacken. With agriculture growing at just 2.6 per cent in 2007-08, rural spending is likely to be low key.

To that extent, earnings for corporate India are unlikely to increase at the pace they were in the last few years but they are also unlikely to come off significantly, unless inflation goes up further because of higher oil and commodity prices.

While macroeconomic numbers already indicate some slowdown in the economy, fundamentals for companies appear to be fairly robust. However, higher inflation, especially in food prices, could mean lower spending power and therefore slow down the pace of growth further.

Moreoever, interest rates have still not come off enough to spur buying of goods such as two wheelers. There are also certain sector-specific issues such as those for information technology where the signs of a slight slowdown are evident. What can give the domestic economy a boost in more spending by the government, which means more money in the economy.

Meanwhile, while the budget has disappointed the market, the bigger worry is the global situation and the impending recession in the US. A worsening situation overseas could mean that the sentiment could remain weak for some more time.