With the growing investor appetite and surging indices on the Indian bourses, especially post Budget, one would imagine that the Indian investor has reasons galore to cheer about. The forward valuations and earnings estimates, however, do not suggest so. Not undermining the Finance Minister's commitment towards a stable tax structure and long-term infrastructure growth, we hereby evaluate whether the annual fiscal policy (budget) has delivered enough or has it metamorphosed into a passť ritual.
Path breaking reforms: Although much desired to achieve a sustainable 10% GDP growth, the coalition dynamics made it difficult for the Finance Minister to announce path-breaking reforms in the budget. This handicap raises concerns regarding possible upsides in the growth targets.
Privatisation/Divestment: There was no mention, whatsoever, of any move towards privatisation, although the same is much desired in sectors like aviation. Divestment in some PSU banking and energy companies also continues to remain under the government's 'consideration'.
FDI: There was a cursory mention on FDI with no indication of any fresh measures being taken up. With exception to FDI in single brand retailing no other fresh FDI route has been approved of late. This leaves us complaining of hot FII inflows far surpassing the FDI ones.
Infrastructure development: For the <>infrastructure sector, the budget has only given a roadmap for some of the earlier projects like the Golden Quadrilateral (90% to be completed by June 2006), without addressing the need for increasing the infrastructure spending as percentage of GDP. The only major new investment announced in the budget was the government's plan to get bids for five ultra mega power projects of 4,000 MW each, with an intention to award these projects before the end of CY06.
Fiscal correction: The government has been able to cut its fiscal deficit from the peak of 5.4% in FY02 to 4.4% of GDP in FY05 and maintain it at 4.5% in FY06. The same has been projected at a lower 4% for FY07E (nearing close to the FRBM target of 3%).
The decline in revenue deficit (from 2.7% in FY06E to 2.6% in FY07E), on the other hand, can be explained largely by a decrease in interest cost, due to a fall in interest rates and a relatively lower external debt burden. For a structural reduction in the deficit, the government will need to initiate expenditure reforms.
Tax revenue mobilisation: Last but not the least, our tax to GDP ratio (11.2% in FY07E as against 9.2% in FY06E) is certainly something to cheer about. Although much smaller as compared to that of the developed nations, an average growth of 20% over three consecutive fiscals (19% YoY in FY05, 21% YoY in FY06E, 20% YoY in FY07E) has clearly steered the economy to a new growth trajectory. Also, it has given the FM the confidence to reassure us of 7% GDP growth vis-a-vis the 8% 10th plan target.
Nevertheless, one should keep in mind that the improvement in tax to GDP could be cyclical, reflecting a leveraged, consumption-driven growth cycle supported by global liquidity and low real interest rates.
To sum it up...
While the Budget was no bad news for the 'Aam Aadmi', the good news was restricted to a few cuts in indirect taxes, largely intended to give a boost to select corporates. Investors therefore need to weigh the positives and negatives in the macro aspect before taking their stand. While investing for the long term with careful research holds good even in today's scenario, it would be unadvisable to follow the herd mentality and get carried away with the market ecstasy.