»Straight from the hip by Jawahir Mulraj

Will Pranabda Bud-get or Bud-give?
26 FEBRUARY 2011

On Monday Pranabbabu will rise to present the Union Budget, an annual ritual which most fascinates investors. This is a bit surprising because nobody has ever done a post facto analysis of how much variance there is between budget estimates and actuals (revised estimates are given, but the actual figures are not. It may be interesting for someone to do a variance analysis of budget with actuals.)

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Given the image battering the Government has taken because of sickening corruption scandals, it would be tempting for Pranabda to counter it through fiscal largesse. One can expect outlays on various schemes to go up significantly. This would have the effect, in the absence of increased tax revenues to match the increased outlays, of widening the fiscal deficit. As the Economic Survey reveals, the methodologically of counting GDP has been changed, thereby increasing GDP and so reducing the % deficit. Clever accounting can solve vexatious problems!!

The stockmarket's worry is if, in an attempt to raise new tax resources to pay for the expected largesse, the Finance Minister were to do something it detests. For the creative minds in the Ministry, this could take various forms, such as raising tax rates (market will fall), or introducing wealth tax on shares (market will crash) or removing the excise cut given to stimulate the economy and raising excise by 2% across the board (market is expecting this, so will not be negative), or others. But the Finance Minister is a wise man who knows that a buoyant market helps him meet disinvestment targets (the IPO of Coal India was a roaring success), so he is unlikely to do anything that would disrupt sentiment, already badly affected by the scams. The Government has planned the complete sale of companies like Scooters India, begging the question why it took so long to take an obvious decision to bury a dead company, or, indeed, why the Government opted to go into scooter manufacture in the first place!

So it will be more of a Bud-give, for the weaker sections of society. Five States go to the polls this year, including West Bengal and Tamil Nadu. All 5 got the benefits of additional trains from Railway Minister, Mamta Banerjee.

The Economic Survey expects GDP to grow by 9% this year, led by services, which now account for 57% of GDP. Industry, which accounts for 28-29%, could be affected as interest rates will continue to rise, to tame inflation. India has a high savings rate of over 33% and the Survey expects an investment rate of 36.5%. Given the incremental capital-output ratio of 4.1 (4 units of capital result in an additional 1 unit of output), this translates into a 9% GDP growth rate.

The main risk, as pointed out by RBI, is the high current account deficit which is 3% of GDP and likely to rise as oil prices have hit $ 119/barrel because of turmoil in Libya. There have been regime changes, on popular uprisings, in Tunisia and Egypt and the rulers of Libya and Bahrain are also facing unrest. The danger here is of new regimes that may exacerbate the Palestinian-Israeli problem; if that happens and a war breaks out, global markets would tumble. As the Economist had recently pointed out, this time a conflict would be different, because the Hizbullah is now armed with rockets that can hit Israeli cities, causing civilian casualties, which was not the case earlier. This makes the situation frighteningly dangerous.

What investors should be concerned about is the absence of oversight and of planning. The Economic Survey points, for example, to the loss, by theft, of power. The losses of the state electricity boards add up to 1% of GDP. So simply by proper oversight, the Government can boost GDP by 1%. About 35% of power produced is stolen! This cannot be done without connivance of local officials.

The absence of planning for the future is seen in the rail budget, amongst other things. China is developing its rail network and now has the fastest trains in the world. It is not just a matter of speed. A faster train means that people can live in a wider radius and get to work in the same time. This helps decongestion of cities. A proper rail network is also a must in order to prepare for a world running out of fossil fuels.

Instead, our Parliamentarians are fighting over a JPC, and over how many members it should constitute (last count, 30). How 30 people from various political groups, are ever going to solve the mystery of who paid what to whom in the telecom scandal, beats me. It would be a waste of public resources for what will essentially be a junket.

Instead of scoring political points, the leaders should be looking at technological developments. One that will change the world is 3-D printing. This method, called additive printing, reduces wastage enormously, by upto 90% in cases. It cuts costs by getting rid of production lines. It can also replace, for example, heavier metal with lighter composites, thus leading to enormous savings in fuel costs. A 1kg reduction in weight leads to an annual saving of $3000 n fuel. Environmental benefits are a bonus.

In corporate news of interest, RIL did an impressive deal with BP, which bought a 30% stake in its oil & gas blocks for $ 7.2 b., plus another $ 1.8b in future, based on performance. This deal serves several purposes. One, it derisks RIL's gas business by recovery of this amount. Second, a tie up with BP gives access to its technologies. BP can use its technological expertise to, perhaps, double the gas output to 120 mmscmd.

The other interesting corporate news was that the buyout of Cairn plc's stake in Cairn India by Vedanta, may get clearance. The Petroleum Ministry, which had, hitherto, been insisting that the unfair deal with ONGC be modified, (ONGC owns 30% of the Rajasthan assets but pays 100% of the royalty), has now decided that that issue can be challenged in a court of law.

The stockmarket collapsed last week when oil prices spiked after troubles in Libya. The sensex dropped 516 points, to end at 17700 and the Nifty fell 155 to end at 5303.

The coming week will, of course, depend on the proposals in the Union Budget. It seems, however, that there ought to be a rally.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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