What can send the markets up on budget day?

 

 

Indian equities have had a substantial correction in the run-up to the Union budget. They’ve also done worse than the rest of emerging Asia. Is that because they had run up too fast at the end of last year? Not really—the MSCI India equity index has underperformed MSCI emerging markets Asia year to date, in the last three months and also in the last one year.

That suggests the markets are keenly aware of the constraints being faced by the finance minister. The Indian economy is facing structural constraints in a number of key sectors—coal, power, land, iron ore, gas, agriculture—to name a few and there’s little the finance minister can do in the budget to tackle these problems. But with the run-up to the budget being so weak, could there be room for positive surprises? As Edelweiss Securities said in a research note put out on Wednesday: “Market looks oversold and with Union budget on the anvil, markets may rebound to any positive news flow.”

So what could be the positive surprises that may send the markets up? Here are some of them:

• The economy

The finance minister has already committed that the fiscal deficit for FY13 and FY14 will be 5.3% and 4.8% of GDP, respectively. A lower number will be welcomed by the markets, provided it is credible. For example, with the failure of the spectrum auction, it might be difficult for the finance minister to stick to his 5.3% target for the current fiscal. Any attempt to fudge the oil subsidy figures, as was done last year, will be viewed askance.

In general, a reform-oriented budget that does lip service to populism and shifts the focus on spending towards infrastructure-building and capital formation will be positive. A Citibank note says the market will focus on “(a) incentives for financial savings, including equity; b) road map or commitment on GST (goods and services tax); c) legislative intent on land acquisition, sectoral FDI (foreign direct investment), insurance; d) infra and capital investments; e) bond markets; and f) execution commitments and initiatives. It’s the incentives that should be the swing element, and where the surprises could lie.”

• Broad market

• Accelerated depreciation in some growth sectors such as power, renewables, or more industrial categories.

• Sops to route money through the Rajiv Gandhi Equity Savings Scheme or mutual funds.

• A reduction in the securities transaction tax and/or short-term capital gains tax will be viewed positively, although a marginal reduction like the one in last year’s budget will not move the markets. The introduction of a commodities transaction tax will be taken positively, as it will create a level-playing field and correct the large shift in trading to commodities.

• Raising the base exemption limit in direct tax will be a positive.

• There are fears (in some quarters) about the minimum alternate tax (MAT) being raised to 20% (from 18.5%); and excise duty being raised to pre-crisis levels of 14% (from 12% currently). If these rates are left unchanged, it will be a positive. If they are indeed raised, it will be negative for the market.

Here are some of the measures that could move stock prices in different sectors:

• IT sector

Any tax sops such as removal of MAT on special economic zones (SEZs) or revival of tax benefits for export-oriented units will be a positive surprise.

• Telecom

The key number that will be watched is the budgetary assumption on receipts from spectrum sales. However, given the government’s unrealistic expectations on this front this year, this number will be taken with large doses of salt. The budget numbers were most likely drawn before the failure of the auction this week and it’s unlikely budget estimates will be modest, leaving little room for upside.

• Banking and financial services

• Capping of gross government borrowing to Rs.5.4 trillion.

• Laying down a time-bound road map for FDI in insurance.

• Power

• Introduction of a take-out financing mechanism/allow debt restructuring for hydel power projects.

• Allocation of money towards incentivizing state governments to proceed with the debt-restructuring plans of state-owned electricity distributors.

• Fertilizers

• Hike/deregulation in urea prices.

• Road map for direct transfer of fertilizer subsidies to farmers.

• Auto sector

No increase in excise duty on passenger vehicles and utility vehicles and no levy of the expected differential excise duty on utility vehicles.

• Capital goods

• Imposition of higher duties on imported equipment—will give more protection to domestic industry and lift the investment cycle on home ground.

• Formation of any special investment vehicles for outlays towards roads and other infrastructure.

• Easing norms for Indian firms to access more foreign capital (ECBs, or external commercial borrowings)—this will lower borrowing costs for these firms.

• Cement

No increase in excise—directly or indirectly—will offset the marginal hike in costs through railway freight rates.

• Textiles

Reduction or abolition of duties on certain grades of fabric (man-made fibres) to make garments; any excise duty relief on branded garments.

• Oil and gas

• Public sector oil companies will benefit if the diesel subsidy is limited to a specific amount.

• The definition of mineral oil to include “natural gas” in section 80-IB will benefit exploration companies.

• Shipping and ports

• Revision of subsidy for ship building will be positive for ship-building companies and make them more competitive. It will also lower the cost of vessel acquisition for shipping companies.

• Extension of 80-IA benefits for a longer time period will benefit the ports sector.

• Aviation

• Support services of airports to be included under section 80-IA.

• Tax rationalization on the jet fuel front.

• Real estate

Increase in exemption limits on housing loan interest and principal repayments.

• Metals

• Increase in investment-based tax deductions that will benefit those who are setting up projects, especially if it’s done with retrospective effect. This is key because most metal companies are setting up large projects.

• Hike in import duty on finished goods—in response to complaints of dumping from China in sectors such as steel—that will give better protection to domestic industry.

• Exports have been a big disappointment overall—a return of export-linked incentives will be a big positive.

• Pharmaceuticals

• A return of export-linked incentives, since this is a major export-oriented industry.

• Any relaxation in the MAT rate or its applicability to SEZs will be a big surprise.

 

 

 


Paritosh Ranjan
PGDM 2sem