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| Zeroing in on infra |
| Devangshu Datta / New Delhi Feb 28, 2010, 00:16 IST |
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Thrust on the core sector can increase the valuation of engineering companies.
Friday's Budgetary jugglery illustrated the problems imposed by the 2008 crisis. The approved response to recession is to loosen purse strings. The government duly did that with its stimulus packages. This may have helped accelerate recovery. At any rate, it prevented complete slowdown. However, loose fiscal and monetary policy inevitably means larger deficits. As demand recovers, that causes inflation and/or bubbles. So eventually policy has to be tightened.
When and how to start tightening is a delicate matter. Delay tightening too much and there is danger of inflation and bubbles. Tighten too early and the recovery may be choked. This was the dilemma the Finance Minister would have faced in late 2009, when the contours of the Budget would have started being worked out.
Estimates of the Q3 (Oct-Dec 2009) GDP estimates suggest that GDP grew at just 6 per cent in those three months. Anecdotally, activity has picked up in Jan-Feb 2010 but the FM wouldn't have known that. He has tried to balance out spending with raising new resources.
At one end, he has tried to put more money in consumers' hands by cutting direct tax rates. At the other, he has raised indirect taxes (removing stimulus cuts in some cases) and re-jigged service taxes. Net-Net, the Budget should be a net tax revenue earner.
If all goes well, the central fiscal deficit will be held to around 5.5 per cent of GDP. Apart from the net tax gains, the GoI is depending on further disinvestment and presumably, on the 3G telecom auctions, which should ideally have bolstered the 2008 finances if it had happened on schedule. The FPO and IPO programme of PSU disinvestment should raise around Rs 25,000 crore.
As we've seen in the recent NTPC and REC FPOs, it could require serious work and “sentiment-management” to achieve the disinvestment targets. Essentially the retail quota of both issues devolved due to complete lack of retail interest. The government-controlled domestic institutional investors (DIIs) such as LIC ended up picking up the slack.
If this pattern is repeated in upcoming 2010-11 FPOs and IPOs, the PSU disinvestment programme will effectively cause DIIs to reserve resources for the primary market. That in turn, could cause a vicious cycle, since DII selling may well pull down the secondary market and further damage investor sentiment. So there is a chance that secondary market values could get hit.
On the expenditure side, the government will continue to try and support the infrastructure building programme. Well and good. If there must be a deficit, the borrowed money should be used to create long-term assets. The Central Plan allocation for infrastructure (energy, transport, communication) is roughly five per cent of GDP – well below what GoI hopes will actually be spent.
That means the government is relying heavily on attracting private funding into infrastructure, probably through the PPP route. Well, in order to do that, it has to sort out well-known issues with concession agreements, take-out financing processes, land acquisition, telecom auctions, and so on. If it can remove those self-imposed bottlenecks, the money will come in.
Identifying and understanding the issues, which have prevented infrastructure creation from being as smooth and efficient as possible, is not difficult. There is a decade worth of feedback and case studies from stakeholders. The same problems have risen and been documented, again and again.
Eliminating or at least reducing the problems is more difficult than identifying them. That requires political will. If the government is serious, it can certainly alleviate the problems and by setting ambitious targets like building 20 km of road/ day it is signalling some degree of seriousness.
If it does follow-through on the ground, infrastructure stocks, which were among the hardest-hit after 2008, will finally rebound. That means higher valuations and more business for engineering and construction, for project financiers, and for manufacturers of key raw materials like steel and cement. This is where the biggest gains might be logged in the next six months.
In other key sectors, the Budget is mostly neutral. It remains to be seen what GoI finally does about petro-product decontrol. It's unclear if the sops in renewables will translate into significant gains for listed companies like Suzlon. Excise hikes in automobiles, and other sectors, may be offset by higher demand. It's not a great Budget but it's not terrible either. There's enough there to keep the market ticking over.
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