Budget 869.6 FM - thodi mithi, jyada khatti! - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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11 JULY 2009


Mr Pranab Mukherjee's budget was disliked by the market, because expectations built up for one that carried the torch of economic reform forward, without the anchor of obdurate coalition partners, were belied. In his defence, Pranabda stated that the Union Budget is only a presentation of the Government's books of accounts, and that the Government would unfold its vision and game plans in subsequent pronouncements. Like all political statements, this is a half truth which is more eloquent in its silence (like Sherlock Holmes' dog that didn't bark) than in its averments.

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On Monday, the BSE-Sensex fell 869.6 after the FM presented the Budget, one which was thodi mithi (a bit sweet) but jyada khatti (more bitter), to borrow the tag line of an FM radio station.

Look at it this way. The budget is televised by several channels, as well as being on the radio, and is heard, without commercial breaks!, by lakhs of Indians. A back of the envelope calculation would show the value per channel, of ad. time of the 2 hours the FM was given, would probably be Rs 50 crores per channel, with a multiple number of channels carrying it. Pranabda had the opportunity to outline a better vision; nobody was wanting details. He missed this opportunity.

To understand why the stock market was so harsh, lets take the khatti bit of the budget. The fiscal deficit was projected at 6.8% of GDP. True, this is in the backdrop of an unprecedented global financial meltdown which has impacted growth, and Governments all over the world are giving fiscal and monetary stimuli to their economies. (If it makes you feel better, the US budget deficit is likely to be 13% of GDP in 2009). The thing is that when it comes to cutting expenditure, our politicians have the backbone of jellied eels. So, when the economy would not need a huge boost from Government, it would only rely on rising tax revenues, and not on cutback in expenditure, to contain the deficit.

This inability to cut expenditure results in a continuing fiscal deficit, financed through increased borrowing, the interest on which is now the single largest item of expenditure. It also means that the Government has no elbow room to deal with, say, a severe water shortage. This is now a distinct possibility; though rains have picked up in June, overall they are still 43% below normal. This would impact agriculture (sowing of crops would not be possible unless the rains pick up in the next fortnight) as well as power generation (and hence industrial production).

How will the fiscal deficit be financed? If the Government will borrow the whole of it, that would crowd out private investment. If it prints money, the sleeping demon of inflation would be awoken. The Government could finance a part of it by disinvesting; something the market expected Pranabda to announce. He has taken credit for only Rs 1200 crores from disinvestment proceeds, which seems a bit like breaking into Fort Knox merely to stuff your pocket with pennies.

Now, to be fair, Pranabda has stated that he has given a 'hint' in the budget, avowing the Government's intention to retain 51% in banks, but also, interestingly, planning to make listed companies offer at least 25% of their stock to the public. If this also applies to PSUs, then companies such as IOC, NTPC, ONGC, BHEL, SAIL, which have over 75% Government holding, would come for divestment, or for fresh IPOs.

Now with a Government as fiscally incontinent as a new born baby, a booming stockmarket would be needed in order to divest stock at decent prices. Thus, by inference, rather than by averment, one can expect a proactive disinvestment policy. Why this cannot be explicitly announced by a Government which has bereft itself of unwanted partners, is beyond me. A wasted TV op.

Also khatti was the increase in MAT, a minimum tax on book profits, from 10 to 15%. The Government gives tax incentives to promote investment in certain sectors, or in certain regions. Having given these, and having attracted the investment, it now partially withdraws them by having MAT.

Also khatti was the absence of any increase in spend on primary education. The Government has been collecting education cess for this purpose. Has it spent this money on education? Where is the accounting for how the cess collected has been spent? Has this money been diverted to plug the leaky budget?

Now the mithi bits of the budget. Pranabda has announced that GST would be introduced from next April. If he is able to do this it would be wonderful! But will he? He has removed surcharge on individual income tax, which was long overdue. He has extended IT exemption for IT parks and SEZ by one year and has allowed 100% exemption for oil and gas pipelines, cold storage and agri warehouses.

It is, again, a pointer to the woeful strategic planning that takes place in India that we have a laughable gas pipeline infrastructure, to prepare for the change in our energy mix which our huge gas finds will permit. We have 10,600 kms of gas pipeline, about a fifth of Pakistan's and 1/170th of USA's 18 lac kms. The allowance given for cold storage and agricultural warehousing has not come a day too soon.

The structural problem facing India is that the 60% of its population dependent on agriculture gets only 18% of national income. Until this imbalance is remedied, we will have all sorts of economic, social and political problems. Several things need to be done, including providing non farm jobs in the rural areas (ergo better road connectivity, Kamal Nath is going on a 'road show' to attract investment in the 'road' sector, in which India will invest Rs 1,00,000 crores), better farm productivity, and better terms of trade for agriculture. In this establishment of a cold storage chain and warehouses, is crucial, for 30% of our fruit and vegetables get destroyed only in transit. This is why commodity transaction tax has also been withdrawn.

Amongst mithi was the removal of the FBT (fringe benefit tax, although I could coin another phrase if my editor allows me to). This was a travesty of fiscal justice and deserved to be junked. Pranabda has only corrected a wrong; the removal of FBT is nothing to be ecstatic about. He will probably collect more tax revenue now, taxing perks in individual hands

The BSE-Sensex fell a whopping 1408 points during the week, including the 869 point fall on Budget day. Interestingly, the selling by FIIs on budget day, at Rs 351 crores, and by domestic funds, at Rs 587 crores, was not very significant. FIIs in fact, were net buyers the next day, of Rs 2799 crores of equity. The NSE-Nifty fell 420 points to end at 4003.

One could see a bounce in the coming week, especially if the Government starts to make some reformist noises. After all, it is the Government that is most in need of a vibrant market. Pranabda is to lay out a road map for disinvestment in the next 3 months. It would be a wonderful thing for India if the Government were to get out of business and spend the money on what really matters, the physical infrastructure (roads, ports, bridges, airports, gas pipelines) and social infrastructure (schools, especially primary, colleges, hospitals and a social net).

More encouraging is the news to engage in Government the right sort of people, those with values and vision. Nandan Nilekeni is one, put in charge of a unique ID project which, if it clicks, would do wonders for India in a multiciplicity of ways. Air India is likely to involve people like Ratan Tata as an advisor; the airline is guzzling more cash than does its aircraft fuel. The Government is also thinking of inviting people like Amartya Sen, LN Mittal and Indra Nooyi to help it engage with foreign investors. If these invites are not merely cosmetic, but serious in Government intent, then there is nothing to stop India.

And nothing to stop the market!

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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2 Responses to "Budget 869.6 FM - thodi mithi, jyada khatti!"
Aniruddha Sengupta
Jul 12, 2009
Your writings have been an object of interest for a long time...however, what is painful to note in this write-up is that you are willing to frame your headline merely because the FM missed an opportunity to communicate his intent in so many words on live TV and radio. Though as a analyst, I presume you did not miss the point (your concluding lines seem to suggest so). Are we not allowing ourselves to get carried away by the P Chidambaram style of managing the Finance portfolio where the minister is more involved in "talking up" markets and citing the same as a reflection of the govt.'s sound economic policies?
Which makes me ask a basic question who would you rather prefer - Infosys or the erstwhile Satyam?
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Sivakumar.
Jul 11, 2009
Sir,
Nothing would stop INDIA. Nothing would stop the market.
Next rally to start from Monday. What we lost, we will gain in a weektime. PSU disinvestment is a long story it may not happen in a day or month. More over budget presention is not for any other announcement like disinvestmenr or spectrum allocation.Barking dogs will not bite.So wait and see. Every thing will go smooth and nothing can stop INDIA. Last week crash was a mere manipulation by the elephant investors to buy stocks at rock bottom price. Creating a panic selling in the market.
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