Mar 17, 2012

Budget Report

The finance minister has opted for a soft approach in his budget speech in parliament on Friday. While the spending on infrastructure and other essentials should be welcomed, the lack of the much needed reforms is worrisome.

The fiscal deficit (the excess amount that the Govt spends over what it generates) is set to touch 5.9% of GDP this year and Mr. Mukherjee’s target for next year is 5.1%. This is the biggest cause for worry in this budget speech. Most economists agree that a fiscal deficit of below 3% is acceptable. That we are over-shooting that level by almost double this year and, slated to do so next year also, does not augur well for the economy. Government borrowing will shoot up (to meet the under recoveries)  and it will add to the inflationary pressures as well as keep the interest rates for the economy  uncomfortably high. I expect debt investments will continue to do well in the coming year. I also expect the high rates on home loans, personal loans and auto loans to continue.

The equity market reacted negatively to the budget. The markets were hoping for some big reforms especially the introduction of the Direct Tax Code (or DTC). The lack of any new policy initiatives and also the raising of the Central Excise Duty by 20% will not be taken happily by the market. The fiscal deficit situation could also weigh in on the market. I expect the market will react negatively in the short term before global factors once again will take over sentiments.

The Rupee continued to hover in the 49-51 range to the dollar. We continue to see Foreign Institutional Investors (FII’s) bring money to the market. However, their reaction to the budget needs to be closely watched. I expect the dollar to trade in the same range with a slightly negative bias.

The increase in the import duty of Gold is a welcome move. Gold is still seen as an investment by most Indians and we’ve been importing record quantities every year. The high price of Gold has begun to affect the current account deficit (balance of imports vs exports) and is adding to the inflation. Gold is a dead asset, as in it does not actually add value in any way to the economy. The move to raise the prices of Gold should be welcomed and investors should look at other more productive avenues for their investments.

The move to increase the income tax slabs is a positive. However, this exercise needs to be inflation linked if it is to have any relevance. There are already moves to link the slabs to the inflation index. The Rajiv Gandhi Equity scheme also seems promising. It is directed at bringing more middle-class participation in the equity markets by offering them more tax incentives.

Over-all I feel that this was a chance missed by Mr. Mukherjee. I understand the political compulsions with the drubbing received in the last elections and Ms Banerjee’s ire over the railway budget. It was the compulsions of coalition politics. But, India needs some big reforms of the type introduced in 1991to take it on the next trajectory of growth. Those kind of reforms and foresight were lacking in this budget speech. The next budget will be the last one delivered by this Govt. We can expect it to be a populist budget which will further strain the Govt’s finances. This was probably the last chance for this Govt to implement the much needed reforms. 

Mar 3, 2012

Market Update 3/3/2012

The markets consolidated this past week in the range of 5320- 5450 on the Nifty. 5320 is an important support for the Nifty. Should the markets break-down below this point then we could see a period of weakness ahead.

The European debt crisis seems to have stabilized for now. The 130 billion euro bail-out package for Greece has been well received by the markets. Also the European Long Term Refinancing Operations (LTRO) has ensured that the European Central Bank (ECB) is flush with funds to over-ride any immediate threats arising from the debt crisis. The euro has risen as a result of increased investor confidence in the currency.

Domestically the stock sale of ONGC nearly flopped and was saved only because of last minute buying by public entities SBI and LIC. This indicates that investors are still wary of investing in the markets. The Government’s disinvestment plans will have to be re-worked and this could have a big impact on the fiscal deficit.

The election results of UP need to be closely watched. A strong showing by the UPA and its allies should augur well for the markets. The results are coming out on the 8th of March.

It is also budget season. The 3rd week of March is action packed. 14 March is the railway budget. We expect that rail fares will increase and that a slew of new rail infra projects will be announced. Companies in that space should do well in the run-up to the rail- budget. Thursday, 15th of March is RBI policy review day. And 16th of March is the union budget.

Inflation seems to have stabilized, though most analysts argue that this is because of the high base effect of last year. GDP data that was announced last week was also weak. The government has asked the RBI to reduce rates. However, the high prices of crude could influence the RBI and it might resist from bringing down rates too quickly. I expect another CRR rate cut and nothing more from the RBI.

The Rupee seems to have stabilized at 49 to the dollar. The dollar has weakened on account of increased investor confidence in the euro. The dollar- rupee rate is expected to remain around these levels.

Gold was very weak last week on account of a stronger euro. We could see further weakness.

I’ll be happy to hear your comments/ suggestions.