Power, banking, agriculture should be focus areas

The Union Budget 2013 kicks off amidst great political uncertainty, large fiscal difficulties and uncertain macro environment, both domestic and global. The biggest challenge facing the government is to strike a balance between spending for the growth of the economy and focusing on fiscal consolidation, at a time when the subsidy bill has been balooning and the economic slowdown could negatively impact tax revenues. There are also clear signs the domestic economy has been losing steam with the third quarter gross domestic product (GDP) growth at 6.1 per cent, lowest in the last 11 quarters. Resorting to fiscal stimulus to aid growth would be easier said than done as the fiscal deficit for the year is likely to exceed the targeted 4.6 per cent by a big margin.

Among segments that, we think, deserve attention and will help sustain economic growth, include power, banking, agriculture and real estate. In power, a reduction or removal of the five per cent import duty on coal, will benefit power plants that operate on imported coal and sell power on merchant basis. While measures to improve the finances of State Electricity Boards (SEBs) and to reduce transmission and distribution (T&D) losses can be overall positive for the sector, introduction of import duty on power equipment could be positive for domestic equipment makers.

For Section 80C benefit of investment in bank fixed deposits, the minimum tenure of five years may be reduced to three, favouring banking stocks. Likewise, an increase in the limit for exemption of interest payment on home loans from Rs 1,50,000 to Rs 3,00,000 will benefit housing finance companies, and will also increase demand for housing, benefiting the real estate sector. Housing demand could get a further boost if the housing loan limit for interest subsidy of one per cent is increased from Rs 15,00,000 to Rs 25,00,000.

On the agriculture front, measures to boost farm incomes will be welcome as it will help increase overall consumption. On the other hand, as a measure to reduce fertiliser subsidy, there is expectation for an increase in urea / farm gate prices by 10 per cent, which can improve working capital management of urea producers.

Though small, the media distribution industry should also see some gains. Import duty on set top boxes may be reduced or removed. This may result in reduction of capital expenditure for cable / DTH companies and provide a strong fillip to the digitisation of the electronic media. As a fallout, the government will also gain from reduction in revenue leakages in this sector.

Overall, the Budget will be keenly watched for the government’s take on the country’s fiscal situation and how it plans to walk the talk on infrastructure spending, fiscal reforms and reduction of subsidies. While valuations at around 14 times FY13 Sensex earnings are reasonable, market participants, including FIIs, would keenly watch whether this is a pro-reform Budget or a populist one. Any reform- or growth-oriented Budget would be cheered by the markets.

The author is managing director & chief executive officer, ASK Investment Managers Private Limited