FM's honeymoon with markets over, for now

Markets disappointed due to absence of concrete measures to revive growth

Finance Minister P Chidambaram has fallen prey to his own image. Given his past record, the market was expecting a clear road map to revive growth. By and large, the Budget has disappointed the Street. Other than curtailing the fiscal deficit and thereby averting a sovereign downgrade, the Budget has attempted to be everything to everyone and, as a result, failed to give decisive direction to an economy that has been adrift for the last two years now. The Street believes the piecemeal approach to revenue generation and investments may not work.

It's not that the finance minister has done nothing to improve the capex cycle or address issues facing some of the distressed sectors. The glitch is that most of the announcements may have little impact on the capex cycle in FY14. For instance, the announcement on accelerated depreciation or the private public partnership on coal mining may not have any immediate impact, believes Rajesh Cheruvu, chief investment officer, Royal Bank of Scotland, private banking. Also, the allocation of 3,000 km of roads in the first six months would find few takers if it is on the build, operate and transfer model. According to India Ratings, if road projects are allocated through the engineering, procurement and construction route, the target could be achieved.

Similarly, the move to provide 15 per cent investment allowance to manufacturing companies investing over Rs 100 crore over the next two years will only benefit brownfield projects, as few companies are looking at fresh investments currently.

The Street is also disappointed with the FM, as he has not done much to cut expenditure in FY14. Given the precarious fiscal condition, the FM should have also focussed on cutting expenditure and not only on boosting revenues. The FM has also not laid out any road map on how he intends to fund the current account deficit (AD), which will require $75 billion over the next two years. India has been heavily reliant on erratic portfolio flows and short-term debt rather than stable foreign direct investments. Saurabh Mukherjea, head of research at Ambit Capital says: "It was a disappointing Budget as the FM has not shown a willingness to address structural issues like inflation and funding of the CAD. There is no clarity on how he intends to crack down on gold imports." The tax breaks he has given are not sufficient to boost savings. High food prices have led to elevated consumer inflation levels and the Budget does not adequately indicate a gameplan to address supply-side issues in agriculture.

Sonal Varma of Nomura calls this a missed opportunity. Though the finance minister has presented a prudent Budget, Varma says: "The question is whether the numbers are achievable. In our view, the growing size of the government is worrying. Higher taxes are intended to redistribute income from the rich to the poor through the government's social sector schemes, likely with an eye on elections. Fiscal consolidation ought to be attained through a combination of higher taxes and lower spending, but the Budget uses only the higher revenue route."

Given the tough macro-economic conditions, FII flows are critical and any disruption could lead to more pain for the economy. The market has been stumped by the proposal to amend Section 90 and 90A of the Income Tax Act, with a few market participants calling this move "devious," as it brings back General Anti-Avoidance Rules after agreeing to postpone it. All FII investments routed through Mauritius or similar tax havens will now come under scrutiny.