Budget: ManagerSpeak

Ritesh Jain, Head - Fixed Income, Canara Robeco Mutual Fund

The Finance Minister presented the Budget 2010-2011 in the backdrop of going ahead with fiscal consolidation as recommended by the 13th Finance Commission and consolidating growth of the economy with aim of achieving 9% GDP growth for FY11.

The budget emphasizes on reducing the fiscal deficit of the centre to 5.5% of GDP for FY11 as against 6.7% for FY10 (revised figures). The estimated revenue receipts would be Rs 7.47 lac cr and the expenditure would be Rs 11.09 lac cr. The Fiscal deficit for the BE 2010-2011 would be Rs 3.81 lac cr (5.5% of GDP), which puts the expected GDP for FY 11 at Rs 69.35 lac cr. 

The govt expects the net borrowing for FY 11 to be Rs 3.45 lac cr against Rs 3.51 lac cr for FY10 (adjusted for MSS).

The budget basically highlights control on expenditure and generating higher revenues by broadening the base, increasing excise duty and increasing the applicability of service tax to more services. 

Also, the budget has ambitious targets of generating Rs 40000 cr through disinvestment and additional Rs 36000 cr from auction of 3G spectrum licences.

Though the budget proposes to keep the fiscal deficit at 5.5% levels, as earlier desired, there is no significant change in the borrowings of the government as compared to current year. Also, with increase in excise duty on various products, and increase in prices of petro products, there is a fear of rise in prices and hence a risk of inflation going higher. As there would be ample supply of G-secs and risk of inflation on the higher side, the market is expected to be cautious and positioned defensively. With no clear case of contraction of yields, we expect the 10 year GOI yield to be in range of  7.75% - 8.25%, till the next monetary policy review slated in April 2010.

Ashish Nigam, Head – Fixed Income, Religare Mutual Fund

I think on overall basis it is a positive budget for the markets. The finance minister has resorted to fiscal consolidation and fiscal deficit target of 5.5% is very positive. The net borrowing of INR 3.45 trillion is marginally below the market expectations. Finance Minister has set a road-map towards withdrawal of stimulus which was clearly evident in the budget announcement. With hike in fuel prices (though the announcement came after the budget) and direct tax benefits given to individuals, I think inflation would be a worry for policy makers. I expect the yield curve to flatten going forward as there would be some monetary measures in the next fiscal (rate hike as early as April 2010) which would put pressure on the short-end of the yield curve. Long end of the curve would be more or less stable and would trade in the range of 7.70-8%.

Navneet Munot, CIO, SBI Mutual Fund

The Union budget is aimed at strengthening the pillars of Indian growth story which are consumption and infrastructure build up. The government stimulus which helped the economy weathering the global downturn has partially been rolled back while paving the way towards fiscal consolidation. Accepting the recommendations of Thirteenth Finance commission and reduction in the fiscal deficit will go a long way in enhancing macro-economic stability. Fiscal deficit at 5.5% of GDP and net market borrowing for the next year are in line with market expectations and will sooth fears of crowding out and sharp spike in interest rates. Measures on the taxation and spending in key programmes would keep the consumption story intact while some visible moves have been made to ensure increase in the pace of infrastructural build up. The long ranging reforms like roll out of GST, Direct tax code, further opening of banking sector, subsidy reforms with better targeting through Unique identification Number, will assist in increasing the growth potential of Indian economy. Though no major surprise,  budget should be taken positively by both equity and the bond market. As the event is behind us, the equity market would now focus on cues from global markets, incremental economic data and corporate earnings. There could be a brief spike in bond yields next quarter as government begins the borrowing programme but investors should use that to build duration.

Prateek Agrawal, Head – Equities, Bharti AXA Investment Managers

The budgetary maths has been more or less in line with the short note that we circulated earlier. However, the budget did manage to surprise with some cuts in the personal taxation. Most of the revenue is being sought to be raised through increase in excise duties and duties on crude and petro products. The budget has positive measures such as bringing the subsidies into the main budget as opposed to the practice of issuance of oil bonds. While the move to raise revenues through indirect taxes would be seen as being inflationary, we believe that given the expected number on net government borrowings, the bond market would not react negatively. Clearly a low interest rate environment (in terms of lending rates) is conducive for the growth of infrastructure sector in India. Measures like Infrastructure tax free bonds would also channel savings into this space and take care of the asset liability mismatch to some extent.

Rajen Krishnan, CEO of   Baroda Pioneer AMC 

This was quite a reassuring budget and one that would take the country forward without too many impediments. There was something for everybody. A partial roll back for those seeking a pull back of stimulus. Focus on the larger picture of Growth, especially Infrastructure with a commitment to tax reforms through implementation of GST and DTC from next fiscal. Good intentions on fiscal discipline with a roadmap of decreasing fiscal deficit nos and reasonable borrowing estimates. And best of all – more money in the hands of the “aam admi” through lower taxes.  This means better prospects for returns from equity oriented as well as equity-oriented mutual funds over the medium to long term. And the possibility of higher retail flows to mutual funds as tax savings get converted to investments

Ramanathan K, CIO-Single Manager, ING Investment Management

Overall a positive Budget for the markets. The finance minister has been able to continue the government’s thrust on rural and consumption sectors, with a lower than expected stimulus reversal, at the same time it is keeping the fiscal balance in check. The Budget has given a big boost to consumption through reduction of personal tax rates. The excise duty rollback (2%) was also lower than what was expected and status quo on service tax was a positive surprise. The fiscal deficit number at 5.5% of GDP was in line with market expectation. Roadmap for fiscal deficit reduction to 4.1% by FY13 is also positive.

IDFC Mutual Fund

The fund house summarized the Union Budget and related events thus: From a year of populist measures boosting consumption to a year of planned expenditure boosting investments. 

The Union Budget 2010-11 gave a positive as well as negative surprise to bond markets. The positive surprise was the gross and net borrowing figures of Rs 457,000 crores and Rs 345,000 crores respectively which was less than market expectations. The negative surprise was the hike in excise duties on various goods including fuel. The excise duties hikes will impact inflation and expectations are that inflation will touch double digit figures in the next couple of months.  Bond markets will now have to contend with forthcoming supply starting April 2010 in an environment of rising headline inflation.  Given the supply and inflation factors bond yields are expected to remain pressured at higher levels. Ten year bonds are trading at 7.85% and the trading  range is likely to be 7.75% to 8% levels leading into April 2010.

The Highlights of the Budget are :      

The finance minister Pranab Mukherjee in his budget speech stressed on the need to have fiscal consolidation without impacting recovery and aimed an explicit reduction in debt-GDP ratio.

A revision in the base year for calculating gross domestic product (GDP) coupled with higher growth figures has allowed the finance minister to present a lower fiscal deficit at 5.5 % per cent of FY11 GDP. The current year's deficit has been revised to 6.9% against a fiscal deficit of 7.8 per cent in 2008-09, inclusive of oil and fertilizer bonds.

The government fiscal deficit at 5.5% translates into a gross market borrowing of Rs 4.57 lakh crores and a net market borrowing at Rs 3.45 lakh crores as against Rs 3.98 lakh crores in the previous year. The net market borrowing number turned out to be lower than market expectation of around Rs 3.8-3.9 lakh crores, allaying fears of crowding out etc.

The Gross tax receipts are estimated at Rs.7.46 lakh crores, 18% higher than previous year. The Non tax revenue receipts are estimated at Rs. 1.48 lakh crore; higher by Rs30,000cr mainly owing to 3G inflows.

The total expenditure proposed in the Budget Estimates is Rs. 11.08 lakh crores, which is an increase of 8.6 per cent over last year. While there is 15 per cent increase in Plan expenditure, the increase in Non Plan expenditure is only 6 per cent over the BE of previous year.

Disinvestment and 3G auction have been used as a key lever to moderate fiscal deficit with significantly higher disinvestment target for FY11 (Rs40000crores) vs. a paltry Rs 1100 crores in previous budget.

Fiscal consolidation road map is laid out with the rolling targets for fiscal deficit are pegged at 4.8 per cent and 4.1 per cent for 2011-12 and 2012-13, respectively. Government also indicated its intention to bring debt to GDP ratio to 68% by 2012 and Direct Tax Code, GST to be implemented from Apr, 2011.

Further on the fiscal front Government has said that it would like to continue with this practice of extending Government subsidy in cash, thereby bringing all subsidy related liabilities into Government’s fiscal accounting.

However increase in excise on fuel and reduction in personal direct taxes would be inflationary.

The mathematics for the bond markets work out as under:

 Ritesh Jain, Executive Director, Morgan Stanley Mutual Fund 

The proposed annual government borrowing for the upcoming fiscal is more or less in line with the market expectation. The market remained neutral to the announcement. However, the news of domestic increase in oil prices led to some weakness in yield curve. The incremental data flow from here onward is likely to dictate the course of the market. The inflationary environment along with the expected front loaded borrowing calendar for the next fiscal is going to be the trigger to watch for. The Central bank is also likely to be hawkish and as such, we are unlikely to see an immediate rally in bonds.

Dr. Amarnath Ananthanarayanan – CEO, Bharti AXA General Insurance

Overall, the budget has sent out positive signals with the 9 percent growth forecast and 5.5 percent fiscal deficit target. The Finance Minister has laid much needed emphasis on Infrastructure, Water, Power and renewable energy sectors as well as non-polluting technologies.

However it is disappointing to see that this year too there is nothing significant in the budget for the Insurance Industry.

The pan India annual health checkup and survey of the rural health mission is a good step towards boosting healthcare and will indirectly help the Insurance Industry in building a National repository of data relating to disease profiles, which will help underwriting and actuaries in pricing of insurance products as well as enable Insurance cover to graduate from simple hospitalisation to comprehensive protection.

Though, overall the budget could have been more exciting for the Healthcare segment.

With the announcements on taxation for the Automobile Industry, the rise in car prices may result in a drop in car sales which could affect our motor insurance sales. Sales of Industrial All Risk policies may see a rise due to the Infrastructure focused benefits announced.

Sukumar Rajah, Managing Director & CIO – Asian Equities, Franklin Templeton Investments

The Union Budget was largely positive and a balancing act between political, social & economic factors. It has to be viewed in the context that in recent years most policy announcements have been made outside of the budget and that it is being increasingly used to announce revenue raising/tax measures. As expected, the economic statements on GDP growth, deficits & tax measures were positive and reflect the ongoing economic recovery. The roadmap for fiscal consolidation, direct tax measures and lower-than-expected borrowings were other key positives. However, there have been no indications with regard to reforms in key areas such as liberalization, labour reforms, etc. 

The timelines for introducing DTC seem to have been firmed up, but GST introduction continues to be plagued by lack of consensus amongst centre/states. The various studies commissioned by the Thirteenth Finance Commission (TFC) had indicated that GST can boost GDP by 0.9-1.7% and recommended an Rs.50,000 crore grant to the states to break the current impasse. As seen in the recent years, increased focus on agriculture and rural sector would help a wider section of India’s population to benefit from the economic growth. The strength in the rural economy helped India during the recent slowdown due to the global crisis. The increase in tax exemptions will boost disposable incomes. The setting up of commissions to study financial sector reform and effective tax administration are steps in the right direction The government continues to focus on various social sector & infrastructure development programmes, which is a positive for the economy as a whole,as it would help benefits of economic growth to percolate to all segments of the society. This in turn could help in bridging the socio-economic divide and boost economic activity across the  country.As always,implementation of policies and the various infrastructure projects will remain key to the eventual economic progress

EQUITY MARKETS

Markets reacted positively to the announcements in the Union Budget, fiscal consolidation roadmap and the continuation of fiscal stimulus measures. The latter helped stocks in sectors such as real estate and auto. Banking stocks also got a boost – the government is providing a grant to PSU banks to ensure that Tier I capital is at 8%.Sectors such as infrastructure development could be impacted by the MAT increase and excise duty hikes would affect cigarettes and cement. 

We remain positive about the medium to long term direction of the markets, as India’s growth momentum increases and companies benefit from the higher demand for goods/services. However, short term direction depends on global liquidity situation and risk appetite given the recent developments on the sovereign front. Earnings growth has been positive and while valuations are closer to long term averages, we believe that India’s growth potential warrants a valuation premium. Our interactions with long term global investors clearly indicates a growing appetite for India and this along with a large savings pool could provide liquidity support to the market.

DEBT MARKETS

The clear roadmap for fiscal consolidation helped debt markets rally and this along with better-than-expected fiscal deficit projections and efforts to cap the subsidy bill boosted sentiment. The gross market borrowings for FY 11 are estimated to be Rs.457,000 crs (net Rs.345,000 crs).Compared to recent years, the gross borrowings are on the higher side and a lot depends on revenue collections, divestment, successful 3G auction – could be a possible over run. These concerns seem to have weighed on the market and bond prices have fallen from day’s highs.

The US dollar has been benefiting from the ongoing increase in risk aversion due to sovereign debt worries in Europe and other parts of the world. However the rupee could benefit from continued strength in capital flows.

The economy is yet to experience the complete pass-through effect of the international crude oil prices and the possibility of demand-pull inflation given the indications of pickup in aggregate demand. On the other hand, credit offtake is expected to sustain a high growth rate. Markets are expected to be range bound going ahead and domestic rate movements would be dependent on fundamentals such as inflation and liquidity along with factors such as oil & commodity prices and rupee appreciation. Yields at the long end of the curve are likely to remain under pressure, while easy liquidity should help the short end of the curve. All eyes will be now on RBI, given that fiscal stimulus measures are largely unchanged.