A 'do no harm' Budget - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

A 'do no harm' Budget 

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In this issue:
» A peek at key budget proposals
» How have stock markets reacted to past budgets
» Words of wisdom from Buffett's 2010 letter to shareholders
» Rural economy driving India's food inflation
» ...and more!

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"I seek the blessings of Lord Indra to bestow on us timely and bountiful monsoons, I would pray to Goddess Lakshmi as well. I think it is a good strategy to diversify one's risks." These were some initial words of Pranab Mukherjee as he started out his Union Budget speech today. At first, this gave an impression that he was about to leave the country bhagwaan bharose (on the mercy of God). But that did not turn out to be the case.

Given that his government has its back against the wall, the FM had to do the juggling act this year as well. And in our books though, he seemed to have passed the test with some very good grades!

If the evidence so far is anything to go by, we are happy that the FM has chosen to stay the course of fiscal prudence and try and make the economy even more resilient from a long-term perspective.

As far as the impact of the budget on the markets and earnings prospects of India Inc. is concerned, we believe that the FM has indeed provided the ideal road map. By announcing to rein in the fiscal deficit and thereby reducing the inflation, he has sent a strong message that he is all for the long term India growth story and does not wish to pursue populist measures just for the sake of it.

How would you rate the Budget? Share your view or post your comments on our Facebook page.

Carrying on with the discussion on today's budget announcement, the initial response has been lukewarm amongst taxpayers and investors alike. Not fit to be called reform oriented ones, the proposals did make some headway towards tighter expense planning. Amongst others, the budget laid out an ambitious fiscal consolidation target. Here are some of the pointers to the key budget proposals and their possible impact on the economy:
  • Allowing KYC complaint FIIs to participate in Indian stock markets through mutual funds. This step could broad base the investor community for the sector. However given the fickle nature of FII investments, the move could make short term investments in mutual funds as risky as that in stocks. Having said that, the move is certainly a positive with the view of attracting long term foreign money into Indian equities.

  • Reduce fiscal deficit from 5.1% of GDP in FY11 to 4.6% in FY12 while keeping central government debt at 44.2% of GDP in FY12 as against 52.5% in FY11. What we are enthused about here is that the government has finally brought all subsidy related liabilities into its balance sheet. The same would at least paint a more transparent picture of the state finances.

  • Lower effective interest rates (1% discount) extended on housing units priced up to Rs 2.5 m as against Rs 2 m this fiscal. The same as cited in our budget wishlist could address the problem of high cost for low income housing projects as well as offer a solution to builders to increase sales.

  • Higher basic exemption limit (raised from Rs 160,000 to Rs 180,000) and lower tax incidences on senior citizens are geared towards enhancing the savings rate in the economy.

  • Higher allocation and fiscal benefits for infrastructure bonds in addition to foreign investor participation could lay the foundation of the 12th 5-year plan (2012-17) on a sounder footing.

  • Reduction of surcharge on domestic companies from 7.5% to 5% and lower rate of dividends from overseas are seen as attempts to encourage capital investments.

02:38  Chart of the day
So the Union Budget 2011 is past us. And the markets are higher in response at the time of writing. Today's is a knee jerk reaction to the Budget announcement. But how would the markets behave in the short term, i.e., over the next one month? Surely we are no great predictors of the short term movement of the stock markets (probably a broker or a fortune-teller might claim to perfect that!). But if the past is to go by, the markets can move up over the next month…or they could move down as well! As today's chart shows, the Sensex's performance one-month after the budget, the record is split 50:50 for the past eight Budgets (2003 to 2010).

Source: LiveMint

Anyways, in response to the 'do no harm' Budget, the Indian stock markets had a good outing today. The BSE-Sensex was trading with gains of around 120 points (0.7%) at the time of writing this. Today's gains were largely led by stocks from the FMCG and realty sectors.

Among other key Asian markets, while Hong Kong and China closed with gains of 0.9% and 1.4% respectively, Singapore and South Korea closed down by 0.5% and 1.2% respectively.

Few things are more insightful in the investment world than Warren Buffett's annual letter to shareholders. The latest one, for 2010, got released last Saturday. And in that, he has reiterated his positive views on the US.

As Buffett has written, "We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America's best days lie ahead."

"America's best days lie ahead," is an important statement for a country that's staring at very tough times. With unemployment at nearly all time high, savings rate not picking up fast, government debt running at extraordinary high levels, America's economic future remains under threat for sure.

We won't go over the rest of the letter. It is a must read for all investors, and you must do so as well. But one lesson that stands out from what Buffett has written is this – If you are always scared that the world will be doomed, you will never take the risks that might result in great rewards. Just don't be complacent though.

As Buffett writes, "No matter how serene today may be, tomorrow is always uncertain."

Rural India has been the focus for most companies as they would be driving India's consumption led growth story. However, if they consume then prices of articles go up. And this is exactly what is to be blamed for the higher food prices if RBI Governor, Dr. Subbarao is to be believed. Amazingly, a country that has been harping on food security for all, blames higher food prices if people start eating the food that has been promised to them. Isn't it ironic?

Dr. Subbarao has stated that food inflation has been a result of supply side constraints. However, it has also been stoked by higher consumption seen from the rural side. Food inflation has remained consistently in double digits for the entire 2010 and is still showing no signs of easing. The RBI has raised interest rates by nearly six times to control inflation. While broader inflation numbers have started to ease off, food inflation still remains quite high.

04:56  Today's investing mantra
"The challenge, of course, is the calculation of intrinsic value. Present that task to Charlie and me separately, and you will get two different answers. Precision just isn't possible." - Warren Buffett
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11 Responses to "A 'do no harm' Budget"

Manoj Kumar

Mar 3, 2011

In my opinion it is just an average budget neither it pursued reforms aggressively nor it was able to be a protectionist budget. As for covering up of fiscal deficit, the finance minister wouldn't be getting the chance of 3G spectrum auction type of chance again this fiscal, then how he is going to manage the deficit is one part and what about the rising fuel cost which already stands above $100 per barrel, what is he going to do about it. He has given incentive for developing green technology for vehicles but forgot to do the same for energy production.


Shome suvra chakraborty

Mar 1, 2011

Hope the budget is implemented according to it states.The greenfield industrialization to reduce unemployment, more FDI to reduce the supply side constraints, reduction of primary deficit as it is given priority in the budget, infrastructure development(support is given for both infrastructure and social infrastructure development in the budget), increasing FII limit in corporate bonds for long term financing, allowing FII in domestic mutual fund to boost the stock market,increasing agricultural productivity, are the necessities of the time, most of which is covered in the budget.



Feb 28, 2011

This seems more like a lack lustre budget and am a bit disappointed that even Equity master is praising this. There is nothing for common man. Moreover, he needs 5 pronged 10 pronged approach to get black money back.
It is a pity to see corruption (CWG, 2G scan, food inflation) taking front end and there is nothing being done.


Sri Skanda Mukunth

Feb 28, 2011

There are definitely some welcome aspects in this budget - agreed. But, did I miss to read a focus on Supply Chain infrastructure from the farm to consumer to ease the flood inflation? I cannot agree more with my friend 'ferns' above who said "When we have such slops as food ministers and we see on the T.V. foograins rotting outside the godowns, one's blood boils"... I have seen it happen in reality... this is not only in terms of food crops, but its for all the commodities from farm to consumer. For eg: I'm seeing Teak Wood being bought for neglible prices (from farmers) and being sold at exorbitant rates (at the traders) just a few miles away.

Did I miss on a healcare reform for aam admi? Did I miss a ease on direct benefits for aam admi?


Anthony Vaz

Feb 28, 2011

A very very good budget, after all!!



Feb 28, 2011

we have the best economist at the helm of the nation.fantastic budget.
Steps towards fiscal prudence is what will bring prosperity in long term.



Feb 28, 2011

I like 5minwrap up..it gives a great insight about the happenings throughout the day..!!great initiative!!

Like (1)

Rsdheshyam Sharma

Feb 28, 2011

"Dr. Subbarao has stated that food inflation has been a result of supply side constraints. However, it has also been stoked by higher consumption seen from the rural side. Food inflation has remained consistently in double digits for the entire 2010 and is still showing no signs of easing. The RBI has raised interest rates by nearly six times to control inflation. While broader inflation numbers have started to ease off, food inflation still remains quite high."

We will never be able to control food inflation unless we rein our galloping population.
The green revolution and the white revolution increased the production of food grains and milk so that we did not have to import these products for the last few years.
However, now our population has caught up with the increase in production and we shall soon have famines staring at us.
Further, the governments policy of taking land from the farmers and handing them to industry is shrinking the area under cultivation.
As much as I would like to "feel good", I am sorry but India has tough times ahead with a corrupt government not willing to take corrective measures.

Like (1)


Feb 28, 2011

Given the Economic situation as it is today, this is probably the best the F.M. could have done. He has mentioned during the presentation that allocation will bve made for A/C godowns, to stock grains. But the fact is that the Agr. Minister does not care a hoot about the foodgrains hike in prices or its non avalability. A recent eg. when the prices of onions went up,and when he was asked, his pat reply was nothing can be done . When we have such slops as food ministers and we see on the T.V. foograins rotting outside the godowns, one's blood boils.With such kind of ministers what growth can we epect? And the sufferers are the common man.Given this situation we are in the FM. has walked a thin rope and done a balancing act.

Like (1)


Feb 28, 2011

"The challenge, of course, is the calculation of intrinsic value. Present that task to Charlie and me separately, and you will get two different answers. Precision just isn't possible." Warren Buffett

How true! The intrinsic value of equity, margins, profits vary from person to person. For one, even 2% ROI is enough, for another it should be atleast 10%. How individuals relate to markets is surely a matter of one's perception, otherwise people would not be opertaing at different market levels, whether NIFTY is 5000 or 6000, profit makers will make profits, and loosers will sustain losses.

The budget presented today by the FM has provoked sudden reactions in the market indicating how emotional or rational one can be. NIFTY/SENSEX suddenly shot up and, in the same breath, shot down to the levels it was trading when the budget speech began. The market saw one hour of hectic rise and decline (bullish and bearish trend). What happens tomorrow is any body's guess. Not even the stars can foretell... It will be the subject matter of debate only at the close the markets tomorrow..

Like (1)
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