Flat run ahead

Cautious undertone weighs the markets down, not the VoA

The vote-on-account announcements by the finance minister seems to have disappointed the markets. The Sensex was flat till Jaswant Singh started his speech at noon, and then shed 75 points by the end of the day.

For one, there was no clarity on the status of tax on income earned from equity mutual funds, export incentives like those under Sec 80HHC. There was no mention of subsidies for oil & gas companies, and no changes in the existing tax structure.

Besides, there was ambiguity in many other areas, since the minister continually used words like, "shall be examined".

But regardless of what the announcements had been, it looks like a flat-negative trend in stock prices is here to stay. One thing that points to that is the high volatility (currently 32 per cent on Nifty options), which simply reflects the high amount of resistance at higher levels.

Moreover, the many IPOs that are expected this year is expected to suck liquidity from the secondary markets. There is the uncertainty of the elections round the corner, and there is no major trigger that is expected to drive the markets ahead in a big way.

Finally, to look at the positive side of things, the Sensex had gained sharply by around 1400 points between end-November and mid-January. And even after the on-going correction, the markets are currently much higher than last year's levels.

The macro numbers

The interim budget numbers show that the Finance Minister has estimated a GDP growth rate of 13.2 per cent at current prices for FY03, while forecasting a growth rate of 12.7 per cent at current prices for FY04.

In his budget speech, however, he has assumed real GDP growth to be 7.5-8 per cent this year. If we take real GDP growth at 8 per cent, that would imply inflation of 5.2 per cent to take the growth in GDP at current prices to the estimated 13.2 per cent.

That doesn't square with the 4 to 4.5 per cent inflation rate that he is projecting, but perhaps that's inflation at the end of the fiscal and not the average rate.

If we assume a 4.5 per cent inflation rate for FY05, as some Finance Ministry officials have said, that would mean the real GDP growth rate projection for that year is 8.2 per cent. That's a tall order, given that this year's bounce back in agriculture would be absent next year.

Nevertheless, the 4.8 per cent fiscal deficit and the 3.6 per cent revenue deficit has been a big positive.

How was it achieved? Well, on the receipts side, in spite of the tax buoyancy, and after adjusting for the extra receipts under the State Debt swap scheme (Rs 46,602 crore), the revised total receipts estimates, at Rs 4,27,653 crore, are actually lower than the budgeted estimate of Rs 4,38,795 crore.

On the expenditure side, after adjusting for Rs 46,602 crore for repayment of liabilities to the National Small savings Fund, total expenditure is lower by Rs 11,144 crore than the budgetary estimates.

What about the estimates for FY05? Revenue receipts are projected to rise by 10.6 per cent, achievable given the current year's 13.5 per cent rise. Tax revenues projected to increase by 17.4 per cent, as against this year's 17.6 per cent rise.

On the expenditures side, revenue expenditure is projected at 4.9 per cent, compared to 6.8 per cent this year, while capital expenditure is projected to rise by a huge 18.4 per cent, as against a rise of 6.6 per cent this year. Defence expenditure is projected to increase by 33 per cent.

The reduction in market borrowings this year and the projection of a low borrowing figure for FY05 is very positive for the bond markets and should ensure that interest rates remain at low levels.

As for the budget projections for FY05, the crucial factor is corporate investment. If investment takes off, industrial growth could be in the double digits, leading to all-round tax buoyancy. But first, we need to get the elections out of the way.

With contributions from Mobis Philipose