VR Logo

Missed Opportunity: Angel Broking

The event could have been used to create a new platform for the Indian economy

The opportunity could have been used in a much better way, but nevertheless there are positive takeaways in the Budget, says Angel Broking about the Budget presented by the Finance Minister Pranab Mukherjee.

This is what some would call an opportunity missed by the Finance Minister (FM), Pranab Mukherjee, or let's call it the Government, to make a mark. Expectations were running high ahead of the event, which by the end of it were left all dry.

The markets reacted in an expected manner (Sensex slipped by almost 870 points or 5.8%), though it can also be called as an over-reaction.

We believe that the market has created an 'event' out of 'news' rather than the 'news' creating an 'event'. We remain confident that over the next few days, as dust settles on the Budget Act, markets would go back to tracking India fundamentals. However, having said this, we too believe that the government has missed an opportunity (this time around) to provide the necessary platform for India to move onto the path to the next growth trajectory, and has in fact shifted the onus (and people's expectations) onto its interim announcements or the next Budget.

Nonetheless, despite all the disappointment that the Budget has created on account of the things that it could have had done, we believe that there are still some positives to take away home, and writing off the Budget completely would be naïve. In fact, here, an extract from the Finance Minister's Budget speech best suits the situation, "While we are determined to convert our words into deeds, Members would appreciate that a single Budget Speech cannot solve all our problems, nor is the Union Budget the only instrument to do so."

Key Budget Takeaways

Fiscal Deficit: After a brief overview of the economy, the FM defended the high Fiscal Deficit position of the country, which increased from 2.7% of GDP in FY2008 to 6.2% of GDP in FY2009. Notably, the difference between the two constituted the total fiscal stimulus at 3.5% of GDP or Rs1,86,000cr, which helped the Indian economy find stability in the backdrop of a highly weakening external environment.

On the fiscal deficit front, the Finance Minster did not lay much emphasis apart from acknowledging the fact that it is important to 'return to the FRBM target for fiscal deficit at the earliest'. The fiscal deficit is expected to be at 6.8% in FY2010. Combined with the state deficit, it is likely to be over 10%. We would like to re-iterate here that we believe fiscal deficits of 10%+ to be incurred by the Government in FY2010E is a setback, albeit temporary, in the fiscal consolidation of the past few years. But in the context of the GDP slowdown facing the economy, this is not a large amount at all. Fiscal stimulus is a standard macro-economic prescription to tackle strong slowdown pressures that result (or threaten to result) in a sharp fall in private demand.

Disinvestment: This was a clear disappointment as the government could have opted for raising funds through this route, especially considering the appetite for Indian paper in wake of the return of the global risk appetite. Market expectation was of a disinvestment target of about Rs 20,000 cr, which would have helped in alleviating the pressure on government finances. The government remained silent on the issue despite acknowledging in the Budget that people's participation should be encouraged in disinvestment programmes and stating that Banks and Insurance companies will remain in the public sector.

Total Expenditure: Notably, the economy still needs public spending to prop up the economy over the next 6-12 months and maintain 7-8% growth rate - to its credit, the budget fulfils this need, by stepping up the total expenditure by Rs 1.2l akh cr over last year. At this juncture, increase in not just planned expenditure (up 34% yoy), but even unplanned expenditure (up 37% yoy) will have a salutary impact on domestic demand.

Consumer Spending: The Budget ensured that the 'aam aadmi' was not overlooked. Focus on agriculture, rebate for farmers paying loan on time, Rs3lakh loan for farmers at 7% per annum, 144% higher outlay towards National Rural Employment Guarantee Scheme (NREGA), food security, etc. are all measures aimed at the Rural India. For the urban consumers, the Budget reduced the 10% surcharge on Personal Income Tax, abolished the FBT, increased the tax exemption limit by Rs10,000 (women and others) and Rs15,000 (senior citizen). The above measures would increase the disposable income in the hands of the consumers, which in turn would encourage greater spending i.e. need-of-the-hour, if the economy is to revive back to the 8-9% growth trajectory.

Markets reaction: We believe that the market's response to the Budget was more in the nature of a knee-jerk reaction as it adjusted to the ground realities. However, we believe that the government will continue its efforts outside the Budget as indicated in the FM's speech. Thus, keeping this in mind and considering that the stimulus packages and low interest rates will help unleash the huge latent domestic demand in India going forward, we remain positive on the Indian stockmarkets.

As far as the Sensex valuations at 14,000 levels are concerned, it trades at 14x our FY2011E EPS and 2.0x FY2011E BV. Considering the historic averages of these two valuation parameters, we arrive at a Fair Value for the Sensex of 17,500 on FY2011E basis (including 500 points for embedded value in Sensex companies) over the next 12 months. This translates into a 25% return from current levels for the Sensex.