>INDIA STRATEGY: Five strategic threads to weave the tapestry of FY13 budget

BUDGET EXPECTATIONS: Bold economic budget after a long gap?


Budget FY13 to be woven around the following five strategic threads (1) fiscal consolidation through subsidy rationalization – through raising diesel, kerosene and LPG prices and partial decontrol of urea prices (these may be the UPA government’s boldest economic decisions). Food subsidy however may be raised as government introduces food security bill (2) withdrawal of fiscal stimulus – through raising excise and service tax rates – across the board – by 200bps and widening service tax net (3) stimulating investments and jumpstarting capital formation (4) accelerating retail investment in equity markets – through lowering of short term capital gains tax on equities and increasing tax allowances for retail investment in equity mutual funds allowing channelization of personal savings from real assets to equities and (5) socialization of personal tax structure – through raising maximum income tax exemption limit and reintroducing personal tax surcharge on high tax bracket assesses and doubling corporate tax surcharge. This may probably be the last opportunity for Finance Minister to present an economic budget in the current term of UPA, as FY14 union budget (being last full-fledged budget before General Elections in 2014) will likely be guided by the imperatives of a popular democracy. Priority shift - from excessive focus on Aam Admi (Common Man) to capital formation… for now


We believe that allocations to welfarist programs like National Rural Employment Guarantee Scheme (NREGS) are unlikely to rise from FY12 levels, allowing the government to keep expenditure under control. However we expect to see government increasing its focus on plan expenditure on projects aimed at reviving capital formation (pertaining particularly to roads, railways and irrigation). With the gross fixed capital formation showing compression in Jul-Sep qtr, we expect several fiscal measures (through budgetary allocations, tax exemptions/benefits, easier financing etc.) to kickstart the capex cycle. As per our infrastructure analysts, the government may adopt following key measures: (i) Sun-set clause on tax incentives for infra projects likely to be extended by one more year; (ii) We expect government to announce fiscal incentives for new capex; (iii) Increased focus on Accelerated Power Development and Reform Program (APDRP); (iv) Setup of National Electricity Fund to provide interest subsidy to SEBs for investments in T&D sector for reducing the losses.


Implications for portfolio construction
Higher taxes & reined in expenditure on populist schemes should result in curtailing domestic consumption modestly. Terms of trade may shift from rural to urban India, albeit temporarily. We cut exposure to both consumer discretionary and staples in our model portfolio. Increased focus on capital formation through incentivizing infrastructure investments will benefit infrastructure stocks. Our Top Picks are: Axis Bank, ICICI Bank, SBI, Coal India, L&T, TCS, Bharti, DLF.


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