Feb 28, 2011|
FM stays on board the 'long term' ship!
The Union Budget is without doubt the most watched parliamentary event in the country. Have you ever wondered why? Of course, it gives us an idea of our consumption and investment patterns for the forthcoming fiscal. But besides that, it gives us some sort of sadistic pleasure. The pleasure of finding the most powerful CFO in the country in a tangle!
Every year, the Finance Minister (FM) has to juggle between the short-term political compulsions of his party and the long term prospects of the country's economy.
Needless to say, the FM had to do the juggling act this year as well. 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.
The biggest concern on the eve of the budget was how the FM would choose to handle the two 'Is' of inflation and investment. Let us now try and answer the specific steps that he has outlined in each of these areas.
Inflation: As well known, inflation has emerged as the biggest bugbear for the Indian economy in recent times. And two of the biggest factors responsible for the same had been fiscal recklessness and supply side bottlenecks. Thankfully, both these issues have been given the consideration they deserve.
The biggest positive perhaps has been the target that the Government has set for the fiscal deficit for FY12. The same is expected to come down to an impressive 4.6% of GDP as opposed to 5.1% in FY11. Although the target does look ambitious, this itself can bring about a significant downward pressure on interest rates if achieved.
We also liked the FM's quite lengthy discourse on improving supply side bottlenecks and also the frequent mention of the use of technology for making subsidies more effective. Thus, with these measures in place and absent any external shocks, inflation does look like getting moderated.
Investment: Apart from the planned reduction in fiscal deficit, another huge positive from the budget has been the FM's efforts towards procuring more funds for investment, especially into infrastructure.
He has increased the FII limit of investment in corporate bonds by a significant US$ 20 bn. Besides, the withholding tax that corporates have to pay on interest payments will now attract a lower tax rate of 5% as opposed to 20%. Both these moves are likely to spur foreign investments into the infrastructure sector.
Indeed, the FM knows it quite too well that in order for the economy to keep growing at 8%-9% in the near to medium term, the consumption story has to be kept intact. Thus, greater allocation towards social sector schemes like NREGA and also more sops to farmers has been provided for.
Also, on the indirect and direct taxes front, while he has chosen to provide some benefits on the direct taxation front, he has also been sensitive towards the needs of the corporate sector and has not resorted to any significant hikes in excise or corporate tax rates.
As far as the impact of the budget on the Indian stock 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.
To conclude, we would like to add that India seemed to have firmly established itself on a GDP growth path of 7%-8%. It is certainly not outside the realms of its polity to target a still higher growth rate. But for that to happen, a whole new mindset is required. And if Mr Pranab Mukherjee's past few budgets are anything to go by, we really like the sound of it. It is over to the actual implementation of all the measures now.
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407