Tuesday, March 20, 2012

>INDIA BUDGET: Tame, at a Tough Time

 Playing too safe —This budget takes few chances: Economically, Politically and sentiment-wise. It could well be the most measured approach, but with no meaningful longer-term structural reform, only modest attempts at fiscal reform and few handouts to businesses, this budget is unlikely to change the underlying economic momentum/mood. That could be a little negative for the market – given its 15%+ move in 2012 – partly anticipating an economic and Government policy-making revival.

 Budget Maths: more realistic but not entirely — The Budget targets a fiscal deficit of 5.1% (against market hopes of sub 5%). The maths is more reasonable than last year, but we expect slippage of about 40bps due to fuel subsidies and growth risks. The bond market for now is clearly not impressed or believing, with yields rising in reaction.

 Reforms and Tax increases are both small — The Government has signaled some reform; subsidies (2% of GDP), incentives for retail equity investors, corporate debt market opened for foreigners; and softly reiterated old promises - FDI in Retail/Aviation, implementation of DTC and GST. It has also expectedly raised Excise and Service taxes (from 10% to 12%) and tightened the screws on loopholes and evasion. All of this is in the right direction, but these are cautious and small steps, and none of them are likely to meaningfully alter either the longer-term landscape or the near-term prospects.

 Investment over Consumption this time— The budget’s thrust is on investment; Infrastructure, utilities, Power and Coal imports – all of which benefit from breaks (also Cement). It is consumption which sees higher taxes that could face some risks (Autos), while Energy stocks will likely see the biggest earnings downgrades. We expect overall market earnings to fall marginally by 1-2% if growth largely holds.

 Steadying the Ship, but stoking the rally? — No. This budget seeks to tread the middle ground on fiscal consolidation and sustaining growth. It could well be the most appropriate course of action, but this is not what would drive markets over the near term.

To read full report: INDIA BUDGET