Waiting in the wings

MFs and high networth individuals are sitting on cash

The Street appears to have tempered its expectations from the Budget going by the drop in the turnover in the last two weeks "" from Rs 6,371 crore on the National Stock Exchange at the start of February to less than Rs 4,000 crore earlier this week, although it has perked up somewhat since then.

However, after touching its lifetime high of 6619.97, the Sensex has managed to stay thereabouts, implying that investors aren't exactly fleeing the market.

Much of that is because the curtain raiser "" FDI in telecom at 74 per cent, National Electricity Act passed, liberalisation of FDI in real estate "" has, without doubt, been very good.

Foreign institutional investors have continued to be net buyers in the cash market in the run-up to the Budget. They have, however, been net sellers in recent weeks in the futures segment, although to a far lower extent than their net purchases in the cash market.

Mutual funds have raised plenty of money recently, but the data do not suggest that they have started buying. Reports indicate that high networth investors too are sitting on cash.

Much publicity has been given recently to the fact that the market has fallen after budgets (except for a few exceptional years) in the last decade, and both MFs and HNIs hope to utilise that opportunity post-Budget to utilise their cash.

The Street's wish list reflects that hopes have been blended with some degree of realism. Spends on infrastructure (cement stocks are firm) it is hoped, will continue.

It expects a cut in the corporate tax rate, though it is practical enough to know that the cut could be accompanied by a cut in depreciation rates, leaving most companies where they are.

Peak customs duties are expected to be brought down to 15 per cent while excise duties could be lowered from 24 per cent to 20 per cent, for goods that attract this rate.

The markets are almost sure that the service tax will be raised to 12 per cent from 10 per cent. It also has a gut-feel that the finance minister can afford to raise the Securities Transaction Tax and get away with it even without lowering the short-term capital gains tax.

Automobiles

Passenger cars currently attract an excise duty of 16 per cent and an additional excise duty (AED) of 8 per cent and the markets are hoping that the AED, at least, will be lowered to 4 per cent. A 12.5 per cent VAT could also be announced.

The import duties on steel and aluminium (key raw materials for auto) are at 5 per cent and 15, respectively and the markets don't see any further cuts. Excise duties on tyres too are not likely to be changed.

Consumer staples

The market expects a VAT of 12.5 per cent across a range of products compared with a range of duties between 10 and 20 per cent at present. That should narrow the price gap for products in the organised and unorganised sectors.

A 4 per cent VAT could be announced for tea. For LAB, a key ingredient for soaps and detergents, the import duties could be brought down from 20 per cent. An increase in the abatement rates for some products such as toiletries with alcohol content, the market feels is possible.

Cigarettes, it feels, will definitely see higher excise duties, of perhaps 8-10 per cent.

Pharma

The industry is pressing for the extension of the 150 per cent weighted deduction on expenditure incurred for research and development purposes.

This scheme was introduced by the government in 1997 and is set to expire in March '05. Companies are also anticipating that the budget would reduce the excise duty on drugs from 16 per cent to 8 per cent, as well as exempt export production facilities from service tax.

Earlier, the government had conceded to the industry's demands and hiked the abatement limit of excise duty on retail drug prices to 40 per cent. Implying, excise duty on drugs would be levied at 60 per cent of the declared retail price.

Steel and other metals

The steel industry is hoping that the finance minister cuts customs duty on coking coal with ash content of 12 per cent or more from 15 per cent to 10 per cent.

International coking coal prices have risen about 80 per cent over the last 12-15 months and such a move is expected to help companies better manage this cost overhead.

Also the non-ferrous industry is looking at a reduction in customs duty on copper from 15 per cent to 10 per cent. Such a move is expected to help domestic players with large smelter capacities to get better treatment and refining (TC/RC) rates.

With contributions from Shobhana Subramanian and Amriteshwar Mathur