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Budget That Delivers On Its Low Expectations

Monday, March 19, 2012

The markets had broadly come to terms with the fact that the government is shackled by political and fiscal considerations and is not in a position to deliver major reformist budgets. In the backdrop of these modest expectations, the Union Budget FY2012-13 comes across as a job reasonably done. Somewhere, if after the UP elections there was some degree of concern that populism may hold sway, this budget dismisses those concerns by increasing tax revenues significantly and not indulging into any populist expenditure increases. Overall, the market has already taken this budget in its stride and from hereon is likely to look at the progression of monetary policy, inflation and interest rates, the decline in which is in my view a key positive for the GDP outlook and corporate earnings for the year ahead of us.

On the subsidy front also the under-estimation is appearing to be on the lower side than last year, while the disinvestment and spectrum auction target also look largely achievable. Fiscal consolidation will create more room for the RBI to reduce rates, thus improving the GDP growth outlook and especially benefitting interest sensitive sectors such as banks, infrastructure and real estate.

In case of the fuel-starved power sector, both the major announcements that were anticipated by us pertaining to waiver of customs duty on coal imports till FY2014 and extension of 80-IA benefits till FY2013 were made in the budget. Waiver of 5% import duty on coal is a substantial positive for many private sector power generators relying on imported coal. These measures come on the back of the recent directions to Coal India to sign FSAs with power companies – highlighting the government’s commitment to improve the fuel availability for this major sector.

In my view this budget will go down as a reasonable, pragmatic budget, which can neither be expected to have a game-changing positive impact, nor does it have any negative surprises. The markets will continue to find positive direction from the global environment which has changed materially for the better in the last couple of months, aided by the ECB’s liquidity infusion, due to which the Euro crisis looks to have subsided. Lower global growth has led to lower commodity prices, improving outlook for emerging markets like India. Thus, we are seeing healthy investment inflows and with inflation and interest rate outlook becoming relatively benign, I expect FY2013 to be a much better year for Indian equities, with the markets likely to scale new highs.

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