>India Budget: Realistic and Progressive (MORGAN STANLEY)

In the Right Direction: The market’s rally post the budget reflects a realistic and progressive F2011 budget.
The government is achieving fiscal consolidation program which is positive for earnings growth and market performance. The key risk factors in what seems to be a very strong growth environment are a combination of rising inflation and fragile risk appetite. We remain positive on Indian equities and are buyers of dips. Going forward, we expect to see policy action on rates to pre-empt demand side inflation.

a) Yield curve flattening is likely more certain – the government's market net borrowing is estimated to fall
13% in F2011 – this is positive for banks, especially public sector banks. Indeed, given the conservative
estimates on the budget the likelihood is that the borrowing program is lower than expected.

b) Consumption will likely stay strong – the increase in excise taxes is offset by reduction in personal taxes.

c) The balance of government spending is shifting from ‘non-plan’ to ‘plan’ expenditure with benefits to
infrastructure and rural spending. We are positive on industrials particularly for the second half of 2010.

d) Overall, change to earnings is insignificant – the cut in corporate tax surcharge is neutralized by the change in MAT, in our view. Costs are slightly higher on the back of increased fuel costs and excise duty. On the other hand, we think that stronger growth and improving pricing power represent upside risks to earnings estimates.

e) Tax reforms are on track for implementation in F2012. A new company law, the food security bill and possible energy sector reforms are likely in the coming months. Divestment target of Rs400 billion should be reassuring to the market as a signal for further reform on top of Rs250 billion to be achieved in F2010.