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The FM says it right

Jul 6, 2009

"A single Budget speech cannot solve all our problems," said the Finance Minister Mr. Pranab Mukherjee as he began his speech today. And what he delivered (or didn't) was exactly what he said at the start. His budget for 2009-10 is now being seen as a non-event given that the speech did not include much about the four key topics the markets were awaiting with bated breath - divestment, FDI, fuel policy and corporate taxes. But then, as the FM concluded his above statement, "...nor is the Union Budget the only instrument to do so," one would not be wrong in expecting that he(the FM) and his team will follow up this Budget with measures aimed to get India back on track to improved growth over the next few years.

But for now, the markets do not seem to be happy as seen from the 770 points crash that the BSE-Sensex has seen by the time of writing this. What has seemingly done them in is the FM's no-stance on the key topics as mentioned above, as also the grim forecasts of the fiscal deficit that is expected to touch 6.8% of GDP in FY10, as compared to 6.2% as per provisional accounts of FY09. This level of deficit is a matter of serious concern though the FM did not talk about any real measure to reduce the same going forward.

Coming to the specifics of the Budget, while there were a whole lot of doles and grants for social sectors (and deservedly so), the scale of the same with no real announcement of a major revenue collection exercise really caught us by surprise. The finance minister also pricked some nerves by not reducing the corporate tax rate and also hiking the minimum alternate tax (MAT) from 10% to 15%.

Among key sector policies, while the budget had no real message for oil pricing, there were some scattered announcements that dealt with the government's initiatives towards improving the quality of infrastructure in both urban and rural areas. Also, while healthcare received some attention, there were no real pronouncements on the education front.

The FM also made an attempt at giving some relief to the individual taxpayer by increasing the exemption limit in personal income tax from Rs 150,000 to Rs 160,000 for all categories of individual taxpayers except women and senior citizens. For women taxpayers, the exemption limit in personal income tax has been raised from Rs 180,000 to Rs 190,000. As for senior citizens, the limit stands raised to Rs 240,000, from Rs 225,000 earlier.

All in all, the FM focused a lot on the social sectors and the 'aam aadmi' while giving a cold shoulder to corporate India, and therefore the stockmarkets.

But we at Equitymaster aren't complaining at all!

There is no real change in our view on stocks post the Budget announcements today. While speculators and traders might feel the pinch of today's crash that seems more like a knee-jerk reaction, long term investors need not worry at all except for a caveat that the government's rising deficit might mean higher inflation and interest rate in the medium term.

We are firmly of the belief that stocks should be bought based on a dependable assessment of their intrinsic values. And today's budget does very little to change them from a long-term perspective. Thus, when intrinsic values of fundamentally sound companies do not change but their stock prices come off by 10%-12%, there is only thing that an investor should do.

And that is to take advantage of the irrationality that is prevalent. After all, as Warren Buffett would testify, great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause stocks to be misappraised.

So, by not delivering what the 'markets' wanted, the FM has delivered you - the long term investor - a chance to pick quality stocks at beaten down valuations. You won't let this opportunity go. Will you?

After all, as the FM said, "A single Budget speech cannot solve all our problems nor is the Union Budget the only instrument to do so." So why despair? Continue to invest carefully and with discipline and you would've done your work well.

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