Our views on Budget...
Saturday, February 13, 2010
Industrial production grew 16.8% in December 2009 from a year earlier, boosted by a 46% increase in consumer durables and a 38.8% jump in capital goods, indicating both consumer demand and investments are accelerating. There is room for statistical illusion here given that manufacturing contracted 0.6% in December 2008. Mining rose 9.5%, while electricity generation grew 5.4%.
A series of economic data, including car sales, point to acceleration of economic growth that could push inflation beyond the upwardly-revised Reserve Bank of India's target of 8.5% for the fiscal year.
The RBI stopped short of raising interest rates, but increased the cash reserve by 75 basis points on January 29 as it waits for the government to signal a return to fiscal discipline.
While some economists, politicians and poor worry about inflation, policy makers have a sense of achievement after pumping in record liquidity to get the economy to return to near 9% growth achieved before the crisis levels. Finance minister Pranab Mukherjee is hoping for a 7.75% growth, while RBI says it could be 7.5%. The Central Statistical Organisation (CSO) has forecast 7.2% for the year ending March 2010.
Thus the higher growth would definitely prompt a case of reversal of stimulus.
"You cannot be on life-support system for good. The Centre needs to start unwinding the stimulus. This has to be done gradually, but can be started in the Budget," said Suresh Tendulkar, former chairman of the PM's Economic Advisory Council.
We have to be prepared for the same. Most believe that this could dampen market sentiments but we believe that the fact that we are out of the support system and running towards 9 to 10% GDP is enough reason to cheer and keep the India head high.
Apart from stimulus withdrawal there is another threat of CRR rate hike again following China.
Even that has to be kept in mind.
These triggers will be used for short term volatility and but at the end of the robust growth will transplant into higher revenue for Govt and the concern of fiscal deficit will get resolved which could be the single most driver of the market.
Apart from the domestic scene, there is huge global pessimism and most of the markets are in oversold state. The ownership pattern is very thin. Investors are sitting on cash and directionless for investment avenues. Many H F and ETF withdrew money from EM and diverted into strong USD but not sure of making money either there. Their investment in Gold is also on shaky grounds and ready to tank any time as the demand for GOLD is tapering off. It seems Gold is held on at the crucial levels and may give up any moment. If the debt crisis spread to some other country the only asset class which is liquid and sellable is GOLD and more trounce of GOLD may come selling in international market. There is complete confidence crisis which is reflected in the pessimism.
Read their concerns…..
"'This is more than just a 7%-10% correction', screams a headline on one of the financial portals. The man behind the quote is none other than the famous financial observer and trader Dennis Gartman. In a recent interview, Gartman has opined that it would be a mistake to aggressively buy stocks at the current juncture. He fears that a deep correction in stocks across the globe could happen anytime soon. And he has based his observation on the fact that unlike the previous correction in US equities a few months back, the correction this time around is far more spread out. In other words, it has engulfed practically the whole world and this, as per him is a dangerous sign. He further observes that confidence, which is so key to the functioning of any financial market has gotten badly affected with events like the Greece debt crisis. And this too, does not bode well for capital markets including equities.
If the fundamentals would have pointed to another direction, we would have certainly taken traders like Dennis Gartman with a pinch of salt. However, even in India, the fundamentals seem to be pointing towards a not very rosy picture from a 1-2 year perspective. Even after the recent correction of the order of 10%-12%, it has become difficult to justify investment into a fundamentally sound company, run by a credible management team. It is the price that such stocks are commanding that is worrying us. Thus, while we may not know whether this is more than just a 7%-10% correction, what we know with a far greater degree of confidence is the fact that a significant correction from the current levels would set us up nicely for attractive gains over the next 2-3 years."
This is common concern and most of the global investors are going by that. They apprehend the sovereign debt crisis may spread like epidemic which will make global markets to fall in deep correction mode.
India is the first country to come of this shock and more resilient to global financial crisis. The growth is back on track and it will continue now even if the stimulus is withdrawn in a phased manner which is likely to happen. For overseas investors there is no better option than India.
Now have a look figures on FII inflow and outflow. FII sold stocks worth 14 bn usd in 2008 crisis yet India came up smartly. FII bought stocks worth just 5.5 bn USD from March 2009 to till date. As against this the investment of LIC alone is 216 bn USD in India and LIC is set to invest another 10 to 20 bn usd in next 12 to 18 months. Indian corporate succeeded in raising over 30 bn USD through QIP, IPO or other routes which will invested in Indian infrastructure and manufacturing. This proves that there is domestic demand in India which will save the day for India.
Only 2% of the Indians save in equity. If Government of India take measures and proper reforms to transform the Indian savings into capital market then India itself will be become a super power and the over dependence on FII will automatically get reduced. The high priority of Govt is first to bring the economy back on track, control inflation. Reforms will come on its own. In fact, every day the ruling party is gaining more and more solitaire after the break in the local and regional parties. UP and Maharashtra are the 2 state where ruling party has made major dent. This augurs well for policy making which will get reflected in the Budget 2010.
The tax code is getting delayed which means there will not be major changes in tax structure.
The stimulus withdrawal will be through sudden exit route as GOI want to raise over Rs 100000 crs over next 2 years from disinvestments. The partial stimulus withdrawal may not hurt market deeply.
In Budget 2009 Govt had provided Rs 40000 crs for 3 G auction which is not expected to happen before FEB 2010 thus increasing the fiscal deficit for a while. However Budget 2009 also had a provision of Rs 1 lac crs for PSU support which we believe not fully expended. To that extent the short fall will get matched. Also the tax collection is substantially higher.
Since economy has come back on track, there could be rise of 2% service tax again and some rollback of excise in auto sector. Even the budgetary support to PSU will go down due to recovery. 3 G auction amount will come in next fiscal.
Thus there will be enough head room to reduce the fiscal deficit below 6%.
The major stress in this budget could be some policy measures and there may not be big tinkering with direct and indirect tax rates. Capital gains tax will continue in the same form as new tax code is still away.
Conclusion….
Market will have concern of rate hike and withdrawal of stimulus. PIGS sovereign debt crisis will continue to hog foreign investors. Budget may used as trigger for profit booking leading to further fall in the market.
On plus side economy is growing at excellent pace. IIP nos are at 20 year high at 17% whereas the feasibility of testing 8% GDP growth is possible. Government of India is continuing its programme of disinvestment as per schedule irrespective of poor response to NTPC issue due to market conditions suggest higher confidence of Govt. LIC CIO gone on record saying market may test 17500 can be read as more support from LIC in case market falls capping the downside of the market. Excessive global pessimism oversold state of markets in India and globally, skewed ownership pattern and lack of better opportunity of investment elsewhere could be drivers of market for upside.
Investors and traders should note that there may some other factors which cannot be foreseen at this juncture could decide the trend of the market and hence accordingly take their call on Budget.
BigGains !!
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