In one of the pre-budget articles (post the Economic Survey), we had written the importance of the government to focus on 'Economic Growth', but without overlooking the 'Development' angle to the country's economic progress. The proposals in the Budget 2005-06 are aimed at boosting economic growth but also adequately emphasize the need to improve the standard of living of the 'Aam Admi' (the common man).
"Growth, stability and equity are mutually reinforcing objectives. The NCMP leans towards decisive intervention by the State in favour of the poor. Given the resilience of the Indian economy, it is possible to mobilize the resources and launch a direct assault on poverty and unemployment. That is the only way to bring immediate relief to the aam admi"
We would rate the Budget proposal of the FM, on a scale of 1 to 5 (5 being the highest), at 4.
First of all, without trying to protect India Inc. and tolerate inefficiency, he has lowered customs duty, which consequently increases the scope for competition. The only way out therefore, for corporates is to improve efficiency by attaining scale in operations. At the same time, by lowering tax rate and allowing significant leeway on the capital good side, the encouragement to invest has been maintained.
The problem with the Indian tax structure is that it is complex and breeds red tapism. The urge to implement VAT is a step in the right direction and corporates cannot complain any more of mismatch in tax rates (between inputs and outputs).
Yes, the focus on improving the standard of living in urban (7 cities have been allocated increased assistance) and in rural areas has to be commended for its intent. But as the FM says, outlays need to translate into outcomes. So, let's appreciate the direction of the policy and be realistic on the implementation side.
Sectoral Impact – On the positive side…
It is very difficult to single-out one sector that has benefited the most from the budget proposals. Given the positive news on the personal income tax side, we are optimistic on those sectors that hinge on increased disposable income with the consumer (like paints, housing, auto and consumer durables). Increased thrust on rural sector will benefit FMCG and fertiliser players over the next three to five years. At the same time, sectors like engineering and power have nothing significant to cheer about.
Click here to get our view on budget measures and their impact on key sectors
Sectoral Impact – On the negative side…
The lowering of customs duty lowers the cushion available for standalone refineries and metal companies. The hike in excise duty as far as clinkers are concerned will impact cement in some way. Overall, there is nothing very significant to worry about. Though some section of the corporates may complain, it is time India Inc. focuses on the topline and not on fat margins.
Touch of caution…
In the closing remarks, the Finance Minister highlighted the thoughts of Dr. Amartya Sen. "Growth of GNP or of individual incomes can, of course, be very important as means to expanding the freedoms enjoyed by the members of the society. But freedoms depend also on other determinants, such as social and economic arrangements (for example, facilities for education and health care) as well as political and civil rights"
As a post-budget strategy, our comfort factor with respect to investing in stocks stems from the following facts:
The Sensex is trading at a P/E multiple of 14 times FY06 estimated earnings (though with an upside, considering the lowering of the tax rate). With earnings growth visibility at over 15% per annum, there is a strong case for equities, even at the current juncture.
The impending investment cycle, based on our series of interactions with banks and corporates, is likely to provide to big kicker to the country's GDP growth, though the dependency on the agriculture is not likely to reduce in the medium-term. In this context, the fundamentals are strong.
The scrapping of Sec-88 and merging of the 80CCC pension related deduction into a new section (80CCE), leaves an investor much room for prudent financial planning with Rs 1 lakh limit. This is likely to see more money being parked in market-determined instruments like Equity linked savings schemes (MFs) and higher allocation for pension plans. The government allowing pension funds to invest some part of their corpus in equities is also a big positive. This is likely to change the 'tax' attuned saving psyche of the Indian investor at a broader level and improve retail participation in equities in the long run.
Risks are firm crude prices, repercussions of faster rise in interest rates in the US economy, the high dependence on Foreign Institutional Investors (FIIs) and more importantly, high expectations among the investing public.
We would continue to be 'value-based' in our approach and there are stocks, though not cheap, in which investors could park their investable surplus with a two to three year view. Happy investing!