Has the budget already gone for a toss?

Apr 30, 2012

In this issue:
» Why education stocks are not doing too well?
» Steel tycoon LN Mittal positive on India?
» 'Competition does not always lead to cheaper drugs'
» Realty firms diversify into unrelated businesses
» ...and more!

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The Union Budget 2012-2013 was one of the most lackluster ones. It was tepid. It did not dish out any major promises. There was no announcement on the much needed policy reforms. In fact it was as meek a budget as it could be. But two months on and the Budget is back to creating headlines. As usual for all the wrong reasons.

As reported by a leading daily, there are already whispers in the official circuit that the Finance Minister (FM) has got his subsidy math wrong. The FM had stated categorically during his budget speech that he was looking at restricting this year's subsidy bill to 2% of GDP. If we break down the values, the Budget has allocated Rs 750 bn towards food subsidy. But as per the Planning Commission, food subsidy would eat up at least Rs 1,000 bn if the Food Security Bill has to become a reality. And even this amount is an underestimate.

So the FM has two choices. One is to stick to his initial Budget target. If he does this, then he would need to raise the prices of things like diesel, kerosene and LPG gas to meet the needs of food subsidies. If he doesn't raise the prices of these goods then the food subsidy payout would fall short. If this happens, the Food Corporation will have to borrow more money from the government to buy food grains. This in turn would add to the fiscal burden in the form of higher interest costs.

Option two is to raise the subsidies. This again would throw the fiscal balance way off the target. Either ways the government looks set to miss the fiscal targets that it has set for itself in the Budget. The point is why come up with such targets and revise them throughout the year? It seems to have become a regular feature with the government. If one looks at the amount paid out as food subsidy last year, it was a good Rs 800 bn. The target was set at a level even below the actual payout. In light of higher food prices and fuel prices it was but natural that the FM was going to miss his targets. So why set them so low? The answer is simple. It makes the government look good. Albeit temporarily.

Do you think the government will be able to deliver on its subsidy and fiscal target promises this year? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Continuing our discussion on subsidies, the subsidy outgo for India has actually ballooned to a massive size. As shown in today's chart of the day, except for FY11, subsidy payout has just been rising every year since FY07. Subsidies have had a negative impact on the government's finances and have thrown the fiscal position off the balance. Higher fuel prices combines with higher food prices have led subsidies to grow at breakneck speed. At the same time the GDP growth (Gross Domestic Product) has not really kept in pace. Therefore the denominator in the subsidy as a percentage of GDP has grown at a slower pace as compared to the numerator. And as discussed above, in all likelihood, subsidy outgo for next year is already set to be higher than what it was in FY12.

Source: Financial Express
* Budget estimates

Educomp, Everonn and Aptech. It wasn't long back that investors were falling over each other to make these counters a part of their portfolio. In fact, they even went to the extent of paying earnings multiples of 60-99 times to be a part of the education growth story. But 3-4 years down the line and shine seems to have been completely taken off. So much so those even at multiples of 8-9 times, the very same stocks seem to be finding very few takers.

What possibly could have gone wrong? We think it has to do with the realization that not every macro story can be turned into a stock market success. There is no doubt that sector potential and future growth rates are important indicators. But what's even more important perhaps is the ability and the integrity of the management as well as the scalability of these businesses. And it is here that most businesses in the education space seem to be floundering. Besides, there were such high expectations built into the stock price back in 2008 that even with very good growth rates, it would have been difficult for shareholders to make money on the stock. Thus, if investors need to profit from the education story, it is important that they back the right management. And also take into account the scalability of the business. Last but not the least, the valuations too should not have excessive optimism built into them.

What does Indian born steel tycoon Mr L N Mittal have to say about the Indian economy? In his opinion, the India growth story is still intact. India has great potential for growth. And it will continue to grow at enviable rates. As per Mr Mittal, India is today where China was 20 years ago. However, he suggests that India should set the US as its benchmark and not China. The reason being that India has very different strengths compared to the latter.

We would be fools if we take his polite words at face value. In the correct context, what he really meant was this- 'Good bye and thank you very much'. Behind his polite pep talk lies the unfortunate truth that India must face. Arcelor-Mittal, the global steel giant has decided to focus investments in other markets that deliver quicker returns instead of India. Mr Mittal's native country ranks pretty low on his investment priority list. The credit certainly goes to the policy paralysis and the lethargic approval process. For instance, the Mittal group has encountered several problems in acquiring captive iron ore mines for green-field steel projects in Orissa, Jharkhand and Karnataka. Now, the facts are before us. India's problems are weighing heavily on its future prospects. Will the Indian establishment muster enough will and courage to deal with the issues? Let's just hope and pray.

Pricing of drugs and medicines in India continues to be a touchy topic. Way back in 2006, the government proposed bringing around 300+ drugs under price control. The rationale was that drugs need to be affordable to all sections of society. This was stiffly opposed by the pharmaceutical industry and has so far not seen the light of day. But the uncertainty over this issue continues. Following a Supreme Court directive to decide the pricing formula for 348 essential medicines, the Department of Pharmaceuticals came out with a proposal last year. It suggested regulating prices of these essential drugs and their combinations at the average price of three best-selling brands. The last part is now proving to be a bone of contention. For starters, several NGOs and the health ministry have rejected the model. This is on the grounds that the best-selling drugs are usually the costlier brands because they are most aggressively marketed. The department has further confused matters by stating that increasing competition does not necessarily lead to a reduction in prices. This statement contradicts the intention of the department to do away with the cost priced based mechanism of fixing prices of drugs. However, the other side of this argument cannot be ignored either. This being that drug prices in India are already one of the lowest in the world. Despite this, the government has not been able to ensure accessibility of medicines to all. Thus there is no guarantee that even if medicines become more affordable, all people will have access to them. Maybe this is one area where the government needs to give equal focus as well.

When you put money in a stock, what do you expect the management to do? Logically, all investors would expect their investments to be used prudentially for expansions. Additional funds are also raised most often in the name of expansion or modernization. But what if the management decides to route the funds elsewhere to pursue its speculative interests? Well there are plenty of such cases in the realty space. Ones that make no bones about venturing in varied fields like Bollywood movies, television programmes, music videos, cricket sponsorships and the like. Thankfully, the listed entities in realty space have so not shown such inclination. But several unlisted players are already testing new waters to try and cover up the losses in the construction space. Few have tasted any success or profits though. We are not against unlisted entities using their cash flows in the manner they deem fit. But investors need to be very careful about how the company is going to use capital. That and the return on capital need to be the prime criterions for selecting a stock.

In the meanwhile, after opening the day in the positive zone, the Indian stock markets continue to trade in the green. At the time of writing, BSE Sensex was up by 98 points (0.6%). Stocks in the realty sector and technology sector are witnessing maximum gains. The other major Asian stock markets have closed the day on a mixed note with Hong Kong and Taiwan closing in green while markets in China and Japan have closed the day in the red. European markets too have opened the day on a positive note.

 Today's Investing mantra
"It just seems logical that sticking to investing in only a small number of companies that you understand well, rather than moving down the list to your thirtieth or fiftieth favorite pick, would create a much greater potential to earn above-average investment returns." - Joel Greenblatt

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6 Responses to "Has the budget already gone for a toss?"

sampath m p

May 12, 2012

The government should implement the minimum wages act based on cost price index .once this is impented than subsidies in all forms should be abolished.in the present scenario subsidies help poor people, but the benefits of subsidiy goes to big industrialist due to low wages they pay which is well below minimum wages required.we can clearly conclude that subisdies are benefitting rich industrialist.its high time that the government implement minimum wages act and abolish all kinds of subsisdies.



May 2, 2012

Promises are made to be broken. Indian Government is well known for not keeping the promises and also for breaking the promises. Therefore it nothing new for Pranabda to give such rosy picture budget and then go about changing. Who will know about it until our great CAG one day will come up with a nice report giving TRP increases for our news channels.



Apr 30, 2012

Very well said Mr. Sthithaprajna. I feel last few articles of 5 Min. wrapup have improved quite a lot (New writer?). This one and one last week wherein we got a good glimpse of the global economic uncertainty were very well written!

Like (1)

umesh sharma

Apr 30, 2012

Why we have to talk about subsidy and petroleum products together.In fact the subsidies could be wound up if the customs duties are properly framed One does not understand why the rising prices of petroleum should be accompanied by pro-rata increase in duties which are to be borne by the citizens.Similarly if the Government observes some discipline in spending lower taxes would not hurt.Who wants development schemes which do not yield any benefit to the target group and fill the pockets of government officers.If there is a will there will always a way.One has to be sincere in addressing such tasks instead of crying fowl all the time

Like (1)


Apr 30, 2012

After going through your comments ,I am prompted to observe(with all humility fortified with abundant
ignorance) as under:

I am quoting an instance to validate my observations appropriately/effectively:

A PASSENGER WAITING ON THE PLATFORM ANXIOUSLY FOR THE ARRIVAL OF THE TRAIN, WAS THINKIG LOUD !! If the Indian Railways cannot keep up the punctuality of the trains, why make an utter farce of having schedules,Time-tables etc.??
“”My DEAR Sir,only if you have a time-table, can you really know how late the train is running??

I hasten to conclude !!!

Like (1)

Pradeep Kumar Nair P

Apr 30, 2012

Listed entities in Realty investing in non-core activities like Cricket
Brigade Group, DLF, Purvankara . How come their balance sheets reflect such poor quality but they have the money to buy teams and nurture!

Like (1)
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