Brokerages expect Budget to focus on inflation

Top brokerage houses feel that Finance Minister Palaniappan Chidambaram will focus on inflation control, infrastructure, agriculture and continued emphasis on social initiatives like education and public health in the Budget, but they see limited scope for structural reforms, be it privatisation of public sector enterprises or foreign direct investment.

On the stock markets front, the brokerage houses fear there could be more burden following reports of alleged misuse of lower short-term capital gains tax, feel brokerage houses.

ICICI Securities expects Chidambarm to spring a surprise by announcing the government's meeting of the fiscal deficit target of 3 per cent under the Fiscal Responsibility and Budget Management Act, a year ahead of the target, besides laying a road map for the introduction of common goods & service tax (GST).

Man Financial, a leading institutional brokerage house, has stuck its neck out in predicting that the Finance Minister will reintroduce the `Resurgent India Bonds' to attract non-resident Indians to invest in India on a long term basis to finance the infrastructure developments. It also expects the budget to withdraw dividend distribution tax on debt mutual fund to make the debt markets more attractive for retail investors.

"We believe that 2008 Budget measures would centre on the three key macro themes: inflation control, infrastructure, and enhancing social objective On an overall basis, we expect the Budget to take a few more steps in the right direction. However, we believe that many of the critical macro challenges for

the country need to be addressed outside the Budget and in this context the Budget per se has limited scope for pushing forward structural reforms," said Chetan Anya and Mihir Sheth of Morgan Stanley.

The Morgan Stanley analysts said they expect Centre's headline deficit is likely to reduce further to 3.3 per cent of GDP during the 12 months ended March 2007, well within the target implied by the Fiscal Responsibility and Budget Management Act.

On policy reform, "we see little likelihood of any major push for privatisation and foreign direct investment (particularly multi-product retail business and insurance sector)," they said.

Kotak, in its pre-budget report, expects Chidambaram to maintain a balance growth approach, through continued focus on social initiatives like education and public health. Inflation control also helps restrict the gap between haves and have-nots. On stock market impact, Kotak analysts said: "We believe the focus of the markets will be more on sectors, which are positively impacted by the Budget proposals and these may out-perform others. However, we believe that the buoyant markets may have to shoulder additional burden. Voices have been raised against the alleged misuse of the lower tax rates on short term capital gains. Changes in tax rates for short term capital gains, if any, may impact markets negatively.

Angel Broking expects nothing less than a dream budget from Chidambaram. "With the fiscal deficit at its record low, we expect that government spending will increase in key areas, like power, construction, transportation, telecommunications, roads, ports and other forms of physical infrastructure," said Dinesh Thakkar, chairman and managing director of Angel Broking."Key budget items will include infrastructure investments to make the growth sustainable; addressing issues relating to inequity and growth in the agriculture sector; taking measures to counter near-term issues such as inflation; increasing spend on health and education," said analysts of Edelweiss Securities.

ASK-Raymond James said: "We feel inflation would take center stage while presenting this year's budget including further cuts in custom duties on various items like crude oil, edible oils to tame inflation which continues to move up."