Inputs on Budget by Mr. Sivasubramanian KN, Chief Investment Officer, Franklin Equity – India, Franklin Templeton Investments
SALIENT POINTS
• FY 12 GDP growth rate pegged at 6.9%, down from 8.4% in the previous year due to global uncertainty and domestic factors. Expect growth rate to range between 7.35-7.85% in FY13.
• Union Budget retains emphasis on inclusive growth – increased spending on agriculture, education, and healthcare.
• Capital Markets: Has proposed QFI access to Indian Corporate Bond Market; Greater participation by retail investors in equity markets through Rajiv Gandhi Equity Savings Scheme.
• Has provided Rs. 15,888 crores towards re-capitalisation of public sector banks, regional rural banks and other financial institutions including NABARD
• Infrastructure: hiked infrastructure outlay and has relaxed ECB norms for select sectors.
• Disinvestment: Rs. 30,000 crore target for FY13
• Sharp upward revision in FY12 fiscal deficit to 5.9% (4.6% estimated earlier) and target for FY13 set at 5.1%. Aims to restrict central subsidy outlay to 2% of GDP in FY13
• Net market borrowing estimated at Rs. 4.79 lakh crores in FY13
• Direct transfers of subsidies mooted
• Taxation:
– Tax exemption limit hiked to Rs.200,000 from Rs. 180,000
– Investors with income of up to Rs.10 lakh can invest 50,000 in equities to get additional exemption (subject to 3 year lock-in)
– No change in corporate tax rates; STT reduced to 0.1% and duties on gold imports increased
– Service tax and standard excise duty rate hiked to 12% from 10%
– Has indicated GST rollout by August 2012 and DTC at the earliest possible
Franklin Templetons Views
The Union Budget continued with the government’s theme of inclusive growth but desisted from announcing any populist measures, despite the background of the recent state election results. Instead it has focused on fiscal consolidation through a slew of tax measures and efforts to curb expenditure by limiting subsidies.However, there were no big announcements on the reforms front, which could be announced outside the Union Budget, as has been the practice in recent years.
The government has also rightly focused on infrastructure and manufacturing sectors through various measures – a higher number of sectors will now be eligible for viability gap funding and the amount of tax free bonds that can be issued by government owned infrastructure companies has been doubled. Also there has been increased outlay for infrastructure sectors and relaxation of ECB norms for select sectors.
However, some of the announcements need to be evaluated carefully as the changes to IncomeTax Act have been proposed with a retrospective effect, which could have implications for Corporate India.The proposal to attract new flows into the capital markets from domestic and foreign investors can have a positive impact over the long term.While the fiscal consolidation measures are a positive, investors are likely to focus on execution, given the tough macro economic conditions and the overrun witnessed in recent years.
EQUITY MARKETS
Lack of big bang reforms and specific measures to address the current issues seem to have weighed on market sentiment and leading indices lost ground.The hike in exemption limits and increased rural spending gave a boost to FMCG stocks.Despite the hike in excise duties, auto stocks closed in the positive territory.
Indications that RBI will announce guidelines for issuing banking licenses to private sector players boosted NBFC stocks.Amongst FMCG stocks, ITC was trading firm as duty hike on cigarettes was lower than market expectations.The reduction in SecuritiesTransactionTax (STT) on delivery transactions is a positive for brokerages.
Measures to discourage flow of money into gold are positive – will need to see impact in coming months. It’s good to see the government offering tax breaks to direct retail investors’ savings into equity markets, however will await details to see the modus operandi and its potential impact.
While headline inflation has tapered, Corporate India continues to face challenges in terms of high borrowing costs and rising input costs.The weakness in the rupee is adding to the pressure on current account deficit. In recent months, we are seeing positive data emanate out of US and decent manufacturing data from the rest of the world.
This means that there is a likelihood that input costs will remain at current level and any increase will put pressure on inflation numbers, once the base effect starts wearing off from the second half of 2012. Overall, we are not very comfortable with the inflation situation and the government needs to undertake structural reforms to address supply-side issues from a long term perspective.
DEBT MARKETS
While the headline fiscal deficit projections and market borrowings were broadly in line with expectations and seem realistic compared to last year,markets were impacted by the lack of concrete measures to curb expenditure/subsides. There has been no roll back of the fiscal stimulus measures introduced over the past few years.Also the experience of government overshooting their targets in recent years has led to increased skepticism about the projections.
Like FY 12, global commodity prices will play a key role in determining the level of subsidies and imported inflation (exacerbated by the weakness in the rupee).As a result, debt markets have reacted negatively and yields have moved up across the curve.
We will need to see the details on QFIs being allowed in the corporate bond segment, but overall the FII flows in Indian debt markets have been strong in recent years and this trend could continue.
Various factors such as expenditure, slowing revenue collections, absence of divestments and fuel-related subsidies are adding pressure on the government’s balance sheet.The government has deferred some of the under-recoveries to next year and we need to monitor if the divestment and spectrum auction targets are met.Headline inflation numbers should continue to taper due to the base effect in the coming months, but we remain concerned about the core inflation drivers.
We do not see any change in our investment strategy that has been on the cautious side, despite the change in RBI’s monetary policy stance.We remain focused on the short end of the curve and believe investors should focus on funds that are invested at the short end, corporate bonds and are adopting an accrual strategy.
