MUMBAI: The market’s expectations from this year’s Budget were rather low. After the state election results, the market was hoping that the finance minister would maintain a status quo on populist spending, if nothing else. The other thing it was hoping for was a degree of realism as far as growth and slippage estimates were concerned. The FM seems to have delivered on both fronts. He has not painted a rosy picture of the economy, given that he envisages a fiscal deficit of 5.1 per cent in the next financial year (FY13). This is a welcome surprise from last year’s aggressive estimate of 4.6 per cent, which has been overshot by 130 basis points.
The FM has also committed to restrict expenditure on subsidies to less than two per cent of GDP from 2.4 per cent in FY12. The fuel subsidy bill in FY13 is estimated to be Rs 43,600 crore, compared to the Rs 68,500 crore in FY12. However, to achieve this, the government will need to increase diesel prices by 20 per cent, says Sanjay Mathur, head of strategy and research (Asia-exJapan) at the Royal Bank of Scotland. Going by the prevailing political mood, the FM may not find it very easy to implement the entire increase. Clearly, crude oil is a bigger risk this year than last year and the FM’s fiscal deficit targets could go awry. The government may be committed to curbing expenditure on subsidies, but Sonal Varma, economist at Nomura, believes that with no concrete measures in place, she sees room for overshoot on the subsidy bill.
Apart from the impending fuel price rise, the market is also questioning revenue estimates from taxes. Given the slowdown in growth and corporate profits, indirect tax estimates look optimistic. Hemang Jani of Sharekhan, said, “While there is nothing alarming in the Budget, I am not sure if growth will support the kind of tax collections that the government is building in.” Besides, the proposed increase in indirect taxes will also have an inflationary impact. The difference is that this part of the inflation will be driven by consumption and not supply-side bottlenecks, which has been the case so far. Put together, both the fuel price hike and increase in taxes will delay any rate action further. On the downside, the FM has said nothing to revive the investment sentiment in the country.
Foreign investors are retaining their neutral stance on Indian equities. RBS’s Mathur says the Budget has done nothing to change the outlook on policy on governance. “Clearly, the days of the market’s outperformance are over. In addition, US bond yields are going up, so the international environment suggest that there is reason to be euphoric about equities.” Sampath Iyengar, partner in Ada Investment Management, a US-based hedge fund, calls the Budget “Birbal’s Khichdi,” as it completely lacks the fire (which is political will in this case) to cook a meal (which is growth).
He says: “The government’s challenges (growth, inflation and poverty) will continue. For foreign investors nothing has changed as they see rate cuts further away as inflation will be led by consumption now. And there is nothing on investments in this Budget.” This is equally true for domestic investors as well.