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One up on Dalal street - Views on News from Equitymaster
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  • Mar 1, 2003

    One up on Dalal street

    The much-awaited budget has come and gone. Amidst all the fanfare, the Finance Minister has managed to please the voting public through his generous announcement on the personal taxation front. Though some hard measures like reduction in administered interest rates and rise in fertiliser subsidy were taken, the question that arises in oneís mind is whether such measures are enough, from a long-term perspective?

    What has the budget done in simple terms? For one, the Finance Minister has made a concerted effort to put more money in the hands of the public by removing surcharge on income tax and increasing the standard deduction. Secondly, he has attempted to address three core issues that the economy is faced with viz. health, education and affordable housing. While housing has managed to gain attention in previous budgets, the former two have been neglected for quite some time. This is a step in the right direction and the move has been capped by including education and health as one of top five priorities in the agenda. Though economic benefits from such measures accrue over the long-term, atleast priorities are clear.

    As far as benefits to India Inc are concerned, the continuation in governmentís thrust on infrastructure including the likes of airports and ports is a big boost to demand. Irrigation has also been due consideration, given the heavy reliant of the agricultural sector on monsoon. As government spending on infrastructure increases, it has both direct and indirect benefits like employment, accessibility to markets and so on. Also, the reduction in customs and excise duty, on one hand, will pave for Indian companies access to raw materials/capital goods at a lower costs. On the other, this also means that threat from foreign competition increases manifold. The heat will be felt more by textiles and small-scale industries in the initial stage. That is probably why a comprehensive package for textiles was announced. Also, the move to give cheap loans to SSIs would go a long way in giving strength to entrepreneurial spirit.

    From the stock market perspective, the scrapping of the dividend tax at the receiverís end and removal of long-term capital gains for equities invested after March 1st, 2003 will aid sentiment in the short-term. But we expect the aforesaid macro measures to translate into increased demand over a three to five year horizon. This in turn will start reflecting in better corporate profitability. Looking at the overall picture, Budget 2003-04 has been populist in nature with minor tinkering of politically sensitive issues. Not much has been done to address the concern of bloating government expenditure, which could further depress the fiscal state of the economy. Keeping these factors in mind, the FM has played it safe in his first budget.

    Having said that, markets are more concerned about the US-Iraq imbroglio than budget measures at the current juncture. And rightly so! The repercussions of a war could have a far-reaching impact on the already tainted balance sheet of the country. Though the Finance Minister has increased budget estimates for oil outgo, a war could alter the equation dramatically. Petroleum subsidy is expected to touch 2.6% of total budgeted expenditure in FY04 as compared to 2.2% in FY03 (in absolute terms, the rise in as high as Rs 19 bn). Until clarity emerges on the war front, nervousness may continue to dampen investor sentiment.



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