Union Budget & Your Investments

Feb 26, 2010

In this issue:
» The Union Budget 2010 takes the right steps
» The impact of the budget on the power, auto and banking sectors
» The salaried class gets a break at last
» What returns should the investor expect going ahead
» ...and more!!

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'Markets cheer Budget 2010', screamed one headline. 'Sensex salutes Union Budget', said the other. Clearly, bouquets far outweighed the brickbats in response to the Union Budget 2010 that was tabled in the parliament today. Count us amongst the one offering the bouquets! Of course, it would be too premature to pass any judgment right now. But the budget clearly showed that the Government is in no mood anymore to drive down the wrong path. Most of all, in the field of fiscal prudence. And it also showed that the previous two years were an aberration. An aberration that had arisen as a result of political compulsions and a severe global economic turmoil. Absent any of these factors, the Government seemed quite intent to take the right steps. Steps that will put the economy on a structurally higher growth path and at the same time strive for financial inclusion.

And clearly, markets seem to have liked this positive gesture by the government. Most of us would remember that during the last budget, it was the ballooning of the fiscal deficit that had perhaps caused the maximum heart burn for the investors, resulting into the markets going into a tailspin on the budget day and the Sensex shedding a massive 870 points. But things were starkly different today. The FM promised that the Government would strive to shave off fiscal deficit by nearly 3% as a percent of GDP by FY13, thus helping lift investor spirits.

Fiscal deficit is not entirely bad in itself. But increasingly in India, more of it has been finding its way into wasteful expenditures that do nothing to improve the long term productivity and economic health of the country. Thus, with the same expected to come down, markets heaved a sigh of relief that money would now be spent towards more productive purposes, thus boosting economic growth. In a nutshell, while the Finance Minister did nothing that could take away from the near term India growth story, it took further measures like showing a firm resolve to rein in the fiscal deficit that could do wonders to the long term India growth story and put us on a higher growth path. Was it a responsible budget? Tell us what you think.

 Chart of the day

All estimates at current market prices
Source: Union Budget 2010-2011

Talking about fiscal deficit, the budget showed the government's commitment to revert back to the path of fiscal prudence in the coming years. The chart of the day shows the government's fiscal targets in the medium term. Fiscal deficit has reduced from 7.8% of GDP (including oil and fertiliser bonds) in FY09 to a target level of 5.5% in FY11E. This is due to disinvestment in public sector companies and reforms in government expenditure chiefly subsidies. In fact, the targets for FY12E and FY13E are improvements over the suggested roadmap by the 13th Finance Commission.

The budget was certainly not only about the fiscal deficit. The Finance Minister also chose to take away a lot less money from salaried professionals by way of taxes thus boosting their disposable income and further strengthening the Indian consumption story. Also, availability of credit, so very essential for big ticket purchases like auto and homes, is all set to improve what with the Government deciding to give away more banking and NBFC licenses and also strengthening the capital base of public sector banks.

It should be borne in mind that all these measures were over and above the ones that the Government has now started taking on a regular basis and the ones so very essential for the sustenance of the Indian growth story like focus on infrastructure, employment guarantee schemes, greater emphasis on education and health and the like.

What does all this mean for the investor? If one is looking to invest in the markets from a 3-5 year perspective, there is a strong chance that the returns in the region of 12%-15% annually that the investors have come to expect from Indian stock markets from a long term perspective, could well be surpassed. Of course, one will have to stick to companies favorably positioned to ride the India growth story run by a competent management team and available at reasonable valuations. The FM seems to have done his bit. Now, it is your turn to take advantage of it.

The power sector received a lot of attention in the budget. Plan allocation for power sector (excluding RGGVY) has been doubled to Rs 51 bn in FY11. That will aid new generation capacities that had been stalled for want of funds. Competitive bidding for allocating coal blocks will help bring about a level playing field in the sector as more and more generation companies are looking to have their own supplies of coal. Higher outlay for renewable energy will help power companies given the mandatory requirements to source a part of their power distribution requirements from clean fuel sources. However, the hike in the standard rate of excise duty to 10% to make equipments a bit more expensive that will impact the overall project costs for power companies.

Banking was another such sector that received its due importance in the Budget. The RBI will give additional branch licenses to private sector banks and NBFCs that meet the central bank's eligibility criteria. An additional sum of Rs 165 bn will be offered to the under-capitalized public sector banks to ensure that all PSU banks are able to attain a minimum 8% Tier-I capital by FY11. Banks' target for agricultural credit for the year FY11 has been enhanced to Rs 3,750 bn. By ensuring that the banks are adequately capitalized and have enough scope to grow their franchise and loan book, the budget ensured that banks play a major role in the economy's growth in the coming fiscals.

FY10 turned out to be the year when the Indian auto sector made a grand comeback. The Union Budget for the year 2010-11 did little to disrupt the growth story in the auto sector. Except for the 2% excise duty hike in passenger vehicles, it chose to keep most of the other duties intact and hence, did not roll back any of the stimulus measures. Also, higher allocation towards defence and infrastructure augurs well for the long-term growth story. On the direct tax front, while increase in weighted deduction on R&D expense to 200% was a positive, increase in MAT rates is likely to take some sheen away from it. All in all, a favorable budget for the auto sector.

The Union Budget 2010 brought some cheers to the Indian stock market, which had been reeling under fear for the past few days with respect to the government's stimulus withdrawal. The BSE Sensex and NSE Nifty closed with gains of around 175 points (1.1%) and 65 points (1.4%) respectively. Among other key Asian markets, while China closed marginally in the red, Hong Kong (up 1%) and Japan (up 0.2%) were among the gainers. European markets have opened today on a positive note.

 Today's investing mantra
"Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom." - Benjamin Graham

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29 Responses to "Union Budget & Your Investments"

Prem Singh Dhankar

Mar 13, 2010

Good readings.


Prem Khamesra

Mar 1, 2010

I read your commentary with a great deal of respect.
But this time I am in serious disagreement. The budget document presented by Pranab Mukherjee is nothing but the political packaging of a hopeless case.The Revenue Deficit is out of hands. The situation of the Government is like that household whose expenditure is far in excess of its income (Worsening Revenue Deficit) and to meet this gap it not only keeps amassing debts (High Fiscal Deficit) but also resorts to selling family silver (disinvestment). This Finance Minister or for that reason, none of his predecessors, have done anything to address the real issue i.e. to bring the Revenue Deficit to not only zero but to a Revenue Surplus. This can be done only by controlling the ever burgeoning Revenue expenditure and finding innovative ways to raise Government Revenues. Since cutting down absolute Revenue Expenditure is a near impossibility, the best the Government can do is to put a total freeze on any increase in the Revenue Expenditure on the one hand and enabling quick expansion of economy so that its Revenues may rise from the beneficial effect of such expansion. The present budget, alike all its predecessors, fails on each of these counts and therefore does not merit any cheering or accolades.

Like (1)

Santanu Sen

Mar 1, 2010

Perhaps for the first time The GOI has acted like corporate by providing the Guidence.Mantra is very clear;-Minimise the wastage of resources & optimise the usage towards the real subtantive growth. Mere discussion on Poor/Poverty never does any good. We have to generate wealth ...National Assets...Double Digit Growth Rate.As we are in Democracy,rest of the DREAM shall automatically shape into reality. But u, d politician cum fund manager, please be HONEST while speaking out to our ears for once at the time of Budget.Otherwise Democracy being misled by the opprtunist shall ruin the Great Grand MARKET like INDIA.NONE WILL XCUSE U.

Like (1)

mohan nainani

Feb 28, 2010

Your english is superb, and the closing paragraph quoted by you of " Benjamine Graham" is simply beautiful.
Market is nowadays always "volatile" and with the FII's and local investors conducting intraday transactions, the NRI's stands no chance. I always compare the attack on the stock market by local residents/FII's is with a AK47, while the NRI's can attack only with a .303 rifle
what a "unfair fight in the market "

Like (1)

Atul Prakash

Feb 27, 2010

The Union Budget outlines the trajectory our country shall go in continuing to grow independently.

For once the whole world watches India & China take giant strides in rescuing the world's fractured economies. It is thanks to the our relative isolation in the world, that the potential of the Indian Economy is hardly Known in published Index Movement Reports which gigantic Media Company's throw out each day in the western hemisphere.

Perhaps, the coffers of the Indian Exchequer having being looted for the past five hundred years, may see a reverse flow of money into India from abroad

The West is wary of India offering more returns on money invested in India as compared to miniscule returns offered in their own fractured economies. They certainly don't like it. It's dangerous for the richer to see a poor country doing well. They are after all used to all the good things in life and find it hard to do without them. Greed for a slice of this money is prompting investors of the world to try to park some investments in India.

Should the Govt. be sincere in promoting universal Income Tax as a duty of all citizenry, execution of Long Term Good Quality Infrastructure Projects in Communication, Housing Services, interconnectivity of roads, distribution of food, availability of practically oriented education, welfare for the infirm & older citizens, as well as the STRONG RULE OF LAW to uphold the judgement of the Courts,then..... and only then would the entire country become a cohesive unit in fighting to propel India towards Classic Economic Prosperity currently enjoyed by the West.

All we need is young entrepreneurs to seize on opportunities provided in the current Union Budget and use it to establish themselves. I hail the Union Budget as Excellent !

Like (1)


Feb 27, 2010

What FM has done is mere window dressing. All the schemes are good, but only on paper. It is the implementation of the schemes that needs to be addressed urgently. The govt. record on this count is pathetic. Not a single govt. project is completed on time and within budget. This wasteful expenditure must be stopped. Only then the budget will have some credence. Otherwise, it will remain a mere window dressing yearly exercise, where some economists and analysts enjoy their day of glory on the TV channels. The common man continues to bleed, and the corrupt politicians and beurocrats keep filling their coffers with "blood money".
The increase in excise on Petrol and diesel is surprising and comes at a time when the govt. is talking about containing inflation. The OMCs continue to suffer heavy losses and govt. wants more tax revenue. It is like shooting a corpus.

Like (1)


Feb 27, 2010

Sometimes I feel so called experts talk more and understand less, they talk
through media, they write articles in News papers for earning some easy money,

A great portion of Fiscal Deficit, Government want to reduce through Disinvestment.
This is very similar to a fact when a farmer wants to sell his lands to give marriage to his

All these Government Companies including SAIL, Indian Railways,NTPC etc were
formed with immense amount of government aids and help and by using lands
at through away prices or at no price. If we start counting these Government support
and lands at today's market price, hardly any company can prove their worthiness

These companies use to run most inefficiently and people of India have to utilize
their services at very high cost. Government of Korea offer totally free high speed internet
service to its people, can India think of that? No because India has to reduce
its Fiscal Deficit, an yardstick to measure how inefficient a government is?

Most of the government companies have to pay each year lot of money as donation
to several Trusts run by powerful political persons or their kins & friends.

If Indian Government want to help Aamadmi / commonman they should reduce or
abolish Excise duties and sales & service taxes on commodities purchased by
common man for their daily use like soaps, toothpaste, medicine, foodarticles,clothes
etc.A poor or lower middle class Indian who is not paying Income tax, has to pay
these to help running the Government.Poorest of poormen can not also escape clutch
of the Indian Government.

Like (1)

Jagadeshwer Rao

Feb 27, 2010

Pranab Mukherjee has certainly presented a Union Budget which is positive in tone and intends to tackle the major problem, i.e., fiscal deficit, in the coming years. But going by the intent and results achieved in the past, there was a sea of difference between intent announcements and actual achievements. My take is as our country has 120 cr population and significant % of population is still living under BPL, our Govt. would have atleast learned from China. It would do a lot better if we emulate China while inviting FDIs to set up huge manufacturing facilities in our country that could certainly shore up employment potential. Hope someone from the Union Budget team would listen to this!

Like (1)

A. Ranganathan

Feb 26, 2010

An excellent write up about the Union Budget. Yours is one of the first couple of articles I have read overnight and it has helped me to focus better on the contents of the Budget.
It is just incomprehensible to me why the Opposition are crying foul about the Budget. OPPOSITION FOR OPPOSITION SAKE, I wonder!

Like (1)


Feb 26, 2010

Graham's quotation is,unfortunately,espacially relevant to
Indian markets where,over the past few weeks,greed and
speculation has resulted in a huge devaluation of
private initiative in midcap IT esp. education sector and
in affordable housing where the larger demand has
inevitably resulted in converting debt to equity.The
Union Budget is a positive beginning.The market should
take up the challenge of keeping inflation down by
putting money to work for growth not speculation.

Like (1)
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