Latest Commentary - As of February 28, 2010
Muted pre-budget expectations, no major negatives, and an emphasis on fiscal consolidation by the finance minister, Pranab Mukherjee, led to a post-budget relief rally.
The government has laid out a medium term plan for fiscal consolidation, aiming to reduce the deficit to 4.8% in FY12, and to 4.1% in FY13. In addition, the Finance Minister also proposed to bring out, within six months, a status paper giving a detailed analysis of the situation and a road map for curtailing the overall public debt. This would be followed by an annual report on the subject.
These steps create a positive environment for long-term portfolio flows into the country as foreign investors find comfort with the macro parameters. This has assumed heightened importance after a recent spate of unpleasant consequences of fiscal imprudence in Greece, Spain, and Portugal.
In the budget speech, the Finance Minister also confirmed the government's commitment to tax reforms by planning to implement the nationwide goods and services tax (GST) system from April 1, 2011 along with the new Direct Tax Code. These are again significant steps towards simplifying tax legislation in the country and thereby reducing compliance burden on businesses.
The proposed income tax changes would result in more disposable income in the hands of consumers (both urban and rural) which should stimulate discretionary consumption. The infrastructure sector has been kept in focus with an allocation of Rs 1.73 lakh crore to the sector. Moreover, continuation of sops for real estate, extension of 1% interest subsidy for affordable housing bode well for low end housing demand.
While the budget has been neutral to most other sectors, there are some clear negatives for real estate and refining companies. Imposition of service tax on commercial renting and on construction services would hurt large companies in the sector. Restoration of 5% customs duty on crude oil imports and 7.5% customs duty on petrol & diesel and increase in excise duty of Re. 1/litre on petrol and diesel will hurt refineries.
However, markets have taken much of this in their stride and its near term focus remains as follows:
- Global markets jitters on the back of the shaky recovery and increased risk aversion following the sovereign debt impasse in some European countries.
- Domestic inflation: the budgetary actions by way of increase in excise and customs duty, fuel price hike and widening of service net will lead to inflation moving up sharply in the near-term.
- New equity issuances: The PSU divestment target for FY11 is higher at Rs. 40,000 Crs.
Despite some near term headwinds such, we remain positive on market for medium to long-term and expect market outperformance in the second half of CY10 as inflation eases and earnings growth gathers momentum (22%+ earnings growth in FY11E).