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  • : Budget: What’s our view?
  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  JULY 8, 2004

    Budget: What’s our view?

    The much-awaited Budget 2005 is out. Barring few positive sector-based announcements, overall, the FM has taken measures that are likely to have long-term benefits on the economy. So, what is our post-budget strategy? Here is an attempt to simplify the Budget 2005 from the point of view of equities.

    1. What is the theme of the Budget 2005?

    “A change in the manner in which this country is run, a change in national priorities, and a change in the processes and focus of governance”. As compared to the last two to three years budget, the emphasis in this budget towards the agricultural sector and rural development is higher, which is in line with the CMP. Issues like improving the education and healthcare standards were also among top priorities.

    2. How would we rate the budget on a scale of 1 to 5?

    On a scale of 1 to 5, we would rate the budget as 3. From a broader economy perspective, the continuation of thrust in infrastructure development, addressing fundamental issues like poverty, education and healthcare are big positives. By hiking the FDI limits in sectors like telecom, civil aviation and insurance, the FM has indicated the UPA government’s openness to foreign capital (again in line with the CMP). This issue has been validated with such approvals.

    From an investor perspective, exemption of long-term capital gains tax is an indication that the FM wants investors to think long-term when it comes to equities. Though there were apprehensions among investors regarding the implementation of the Kelkar committee recommendations, the FM has stayed away from the same.

    However, higher defense spending, infrastructure support and so on without any clear reference to the revenue side raises apprehensions about the fiscal state of the economy in the future. Overall, it was a budget with no real bold moves.

    3. What are the areas that the Budget has failed to deal with?

    The budget has failed to address issues pertaining to aligning interest on government savings schemes to market rate of return. Though there is a mention about the same in the budget speech, the FM has failed to make a move this time. From the country’s fiscal perspective, it is important to deal with this issue.

    The liberal stance of the FM on direct and indirect taxes is combined with a relatively higher spending on defense expenses raises apprehension over the country’s fiscal status. Issues like reduction in minimum support prices (MSP) for food grains, accountability of subsidies and control of government expenditure seems to have been overlooked.

    4. What is the one big positive in the Budget 2005 proposals and why?

    As we mentioned earlier, unlike the previous budgets, this budget has emphasized a great deal on rural development. Though agriculture contributed to only 25% of the GDP, almost 68% of the population depends on agriculture as a source of income. This section of the populace was relatively overlooked in the past three years. Addressing such fundamental issues are likely to set a solid platform for the Indian economy from a long-term perspective.

    5. Budget has been a positive for which sectors?

    Telecom, textiles, tractors and infrastructure related industries have benefited the most from budget announcements.

  • Read our sectoral impact analysis

    6. Budget has been a negative for which sectors?

    We do not find a significant negative impact from a long-term perspective on any sector except for steel, copper and oil marketing companies. Besides tinkering with customs and excise duties, the 2% education cess on direct and indirect tax should increase the effective tax rate across sectors. Besides, the 20% tax on debt mutual funds could affect those firms that have large surplus cash reserves that are parked in mutual funds.

    From the stock market perspective, the imposition of the turnover tax is a negative, as the percentage (.15%) was higher than market expectations. It has been clarified by the FM that the turnover tax is on all sides. This could impact the near-term sentiment.

    7. Has this budget warranted a change in investment strategy as far as equities are concerned?

    We have maintained before the budget that the prospects of the Indian economy remain promising. Though valuations have been upgraded in the last one-year, looking at the earnings growth prospects, equities are attractive. Not only are equities good for retail investors as a standalone investment avenue, but also on a relative basis to fixed deposits, debt funds and small saving schemes. While our optimism has increased for some sectors like telecom, this budget has not impacted in any way our long-term outlook for the stock market. Though the market has reacted negatively to the budget today, we suggest investors to use this as a buying opportunity. But pick and choose.

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