Dal, roti, chawal - a no masala Budget - The Honest Truth By Ajit Dayal
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7 JULY 2009


The markets were looking for a booster - something to keep the party going. The Finance Minister has delivered a seemingly dull and sobering statement of accounts.

There is nothing in the budget for near term investors. No big announcements; no divestment plans; no bail out of the robber barons who call themselves real estate developers; no special favours to large industrial groups and business houses.

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No, this was not a budget with any Viagra. We all came to the party to have some wild fun: the finance minister gave us a few quotes from Kautilya and spoke about marriage. Kind of a dampener for traders on a mission for a one-night stand.

Their actions proved it. Within minutes of Pranab Mukherjee indicating more rural efforts and little for the punters on Dalal Street, the markets tanked. The graphs were like boulders falling off a cliff. The BSE-30 Index slumped -870 points (-5.8%) and was lucky to stay above the 14,000 levels to close at 14,043.

If the election results started the party, could this budget have ended it?

Chart 1: Market moves are meaningless
Sensex on Budget day
Source: 5MinuteWrapUp

No Viagra, just some dal
Yes, I am disappointed. Not because I came to the markets for a one night stand, but because this budget was a dal-roti-chawal budget. Good, basic food for the stomach but nothing for the taste buds. It lacked that little masala, that extra spice to tell you how you felt as you digested the food.

I was hoping that the Finance Minister would announce a higher interest rate tax incentive for homes less than Rs 20 lakhs in value. And, while it is difficult to cut taxes when the government deficits are increasing, an increase in the exemption limit for the lower and middle class would have been a good psychological boost. And while I was keen to see some statement on divestment, I was hoping that there would be a limited change in FDI rules in insurance. I am not a supporter of the lobby that says increased foreign ownership of insurance companies in India is a must for economic growth.

But the budget has some really important long-term statements within its scope of being an annual accounting exercise. The focus on rural India, on helping those at the lowest rung of the economic ladder with the guaranteed job employment schemes - are all very good. Every rupee allocated to the poor should be welcomed. Every rupee that finds its way to the poor - and more will with the increased usage of the Right To Information Act - is building a base for the sustainability of a 6.5% rate of growth in India's GDP.

The decision to remove the tax surcharge, to make the tax code simpler, to give full tax deduction to donations to political parties, and to remove the Fringe Benefit Tax are all moves in the right direction. Simplicity dilutes the power of corruption.

Kautilya at work?
Yet, the budget has failed in explaining how it will take India to a 9% rate of growth in the long term. Or how the borrowings and deficit-financing will be met. Maybe that will be announced on another forum. We need to remember that the budget is open to a debate in Parliament and sale of shares in government-owned entities will draw the familiar criticisms from political ideologies fighting for their survival.

The Finance Minister may be doing a little bit of Kautilya here: only revealing what is necessary when it is necessary - and staying away from the unnecessary. From an economic perspective, the government has no choice but to sell its stakes in many companies. The rich have no choice but to pay their fair share of taxes. The politicians have maybe 3 years to start delivering on what they have failed to provide for the poor. Or the next election will be won by the Naxalites! Last year's budget was an HUF budget. And I had said we need 19 more of those budgets. Well, we need 18 more such budgets now.

And every time the HUF budget is announced there is a risk that the stock markets will sell off. Let the stock markets do what they want to. The markets are not gods, or beacons, or any kind of barometer for policy making. They have become gambling dens where speculators come for one night stands. The Finance Minister may not have banned the P-Note punting money that slips into India under the FII policy, but he has probably burnt them. May they stay away from India while we build the country.

The noise and wild mood swings of the short term speculators and P-Note holders should not scare us from investing for the long term. As long term investors, we know you can find great companies in growing economies. And we will continue to look for them in earnest.

Yes, I liked the dal-roti-chawal - it is good basic food, but I did miss the masala. Is this the end of the party? No, we can still make a case for an Index of 21,000 by June 2010. The budget would have given the market momentum to make that level more visible.

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Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited. To write to Ajit, please click here.


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6 Responses to "Dal, roti, chawal - a no masala Budget"

RAVI SANKAR

Jul 15, 2009

o k

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omnath garg

Jul 9, 2009

commendable.
I want to be associated with you, for mass welfare at large.
Pl.inform me your email, and I will send you my resume,for the larger benefits of masses.
I am a retd.class I officer, aged 71 plus with lot of services to offer all free.

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lifeisbeautiful

Jul 8, 2009

central as well as state deficits are shouting from the roof, monsoon is likely to be bad, food security is in shambles, interest rates will harden, equity borrowing for corporates seems tough given psu disinvestement, to top it all global uncertainity will keep rising with unemployment and protection to their own population will further dampen prospects of exports for counties like india, markets may still touch 21000 as you say but i see no fundamentals supporting that.

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R. Swaminathan

Jul 8, 2009

I am a fan of Mr. Dayal. His articles give hope for people who have still belief in Indian Values; His views on current stock markets coincide with mine.His respect for poor and rural mass is evidenced in his welcoming the allocation in those areas. May his service continue. I am looking forward to investing in Quantum funds.Regds
Swaminathan

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Dara Kalyaniwala

Jul 7, 2009

As usual, a straight-as-straight-can-be type of commentary on the budget. I loved it.......specially that bit about the "robber barons who call themselves real estate developers".......so true!!

And yes, I fully agree that this is a roti-dal budget. I am glad it is not a "destroyer" type of budget i.e it will not destroy growth or value in the economy. It is basically a non_eventful budget. Which is Good because a budget is supposed to be an annual exercise for Govt to match its inflows-outflows. It should not be looked upon as an event giving annual doleouts

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Vivek Mahajan

Jul 7, 2009

Very well analysed indeed! Mr. Dayal has taken a very balanced view on the budget proposals - unlike most of the stock market punters.
If our country is to prosper towards becoming a super power and remain politically & socially stable alongside, it is high time that we shift our focus on the well-being of our poor masses in the rural as well as urban areas. Economic divide between rich and the poor has since time immemorial been a part of the social systems accross the world and perhaps would remain for ever. India is no exception. But then to what extent should this disparity be allowed to grow? Certainly, not to the extent of creating militant groups in the name of naxals or maoists or whatever. Mr. Dayal leave alone 18 more annual HUF budgets, even if 100 more of these are needed - these should be done on quarterly basis without caring a damn about the short term direction of the stock markets.
So well done! Pranab Babu for the budget proposals & well done Mr. Dayal for your honest & truthful analysis. Last, but not the least....I hope these proposals are sincerely implemented in the times to come.

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