Pranab Mukherjee produced a small surprise when he quoted Shakespeare instead of the usual suspects like Tagore, Bankim or Sarat Chandra. That was perhaps the only surprise in the speech. Everything else was more or less along expected lines.
The excise rate was increased back to 12 per cent. The hope is this will boost tax revenues during the current growth recession. Ironically, excise had been cut in order to provide a stimulus during the last growth recession (2008). The service tax rate was also raised and the net widened.
These measures are slated to raise roughly 10 times the revenue foregone by cuts in personal income taxes. Since increase in excise plus services affect wide swathes of the economy, the effect may be to reduce consumption demand and actually slow down recovery.
As to the rest, scarcely any broad stimulation measures are evident. The power sector should be a beneficiary but upstream oil and gas will suffer. The sops to the aviation industry may have come too late to make a difference.
Financing norms are being eased somewhat across infrastructure. But the Reserve Bank of India’s (RBI’s) hawkish stance on inflation means domestic money won’t be cheap. After the rupee’s gyrations over the past six months, corporations have become increasingly wary about exchange risks on external commercial borrowings (ECBs).
Even as the finance minister has “talked” the fiscal deficit down, it’s an open question if he can actually keep the fisc below 5.1 per cent, or subsidies below two per cent of GDP. Budgetary estimates are rarely met. This set depends on an assumption that the crude basket will cost an average $115 a barrel. That depends on things settling down in Iran, West Asia and North Africa.
The background noises on the tax front are disturbing. The deferment of goods and services tax (GST) and direct taxes code (DTC), perhaps forever, was no surprise. But the new General Anti-Avoidance Rules (GAAR) offers more discretionary powers and hence, more scope for corruption and harassment.
The retroactive change in the Income-Tax Act 1961 may allow the Government of India to claim tax from Vodafone on the Hutchison deal. But it sends a terrible signal about the arbitrary nature of the regulatory regime. In conjunction with the awful mess about 2G licences, it could well have the effect of choking off foreign direct investment (FDI) commitments and trigger endless litigation.
Amidst all this doom and gloom, the Budget clearly places its hopes on a cyclical recovery while doing little or nothing to accelerate any such recovery. The intentions may be pious but there are no obvious mechanisms for translating intentions into action.
This recovery will need to happen fast and it will need to be big to meet growth estimates. The bottom-up picture in terms of slower corporate earnings growth across most sectors doesn’t sync at all with the top-down view.
Coming to the stock market itself, the reduction in securities transaction tax is welcome. The disinvestment target of Rs 30,000 crore is modest. But going by the inactivity of the current fiscal when just about Rs 14,000 crore was raised, even this target may not be met.
Domestic sentiment and reactions aren’t, to say the least, positive. The RBI’s refusal to cut rates in the mid-quarter credit policy caused a certain bearishness before the Budget session. The Budget itself has been met with a lack of enthusiasm.
The foreign institutional investors (FIIs) continue to remain net-positive however. Their actions will be key in determining price trends. Domestic institutional sentiment and retail sentiment is likely to get even more bearish in the short run. FIIs have the money to balance this off and even push prices up though this Budget doesn’t give them any obvious reasons to pump in more money.
The optimists would now hope that interest rates come down in April. That could be a positive trigger. If it happens, we may see a bond market rally before we see a concerted equity bull run. As of now, bond yields are inverted with the 10-year government securities available at a yield of 8.4 per cent while treasury bills, of one year and less, trade at above nine per cent.
The financial index, the Bank Nifty, is sensitive to moves in the bond markets. An upmove in the Bank Nifty would provide early warning signals in a situation in which a bond market rally precedes a broad stock market rally.
The Bank Nifty is more clearly bearish than the Nifty at the moment though it has a similar pattern.
Technically, the Nifty remains above its own 200-day moving average, which is in the zone of 5150-5200 (depending on mode of weight or calculation). But the pattern since February 22, when the Nifty hits its 2012 peak of 5629 has been bearish, or neutral at best.
In the past fortnight, index values have barely changed as the market waited on the credit policy and the Budget. Now that both those events have disappointed, prices could slide. Keep a look out for either a breakdown below 5150, or a breakout above 5650 since a move outside the 5150-5650 range would confirm trends in opposite directions.
A couple of quick rule-of-thumb calculations are worth noting. The current Nifty PE of 19 would be a fair value in terms of earnings yield if interest rates were in the zone of five to six per cent. But interest rates are way higher. A PE of 19 could also be justified if earnings projections were better than 19 per cent for the next fiscal. Earnings projections aren’t really in that range.
In his speech, the finance minister quoted Hamlet addressing his mother, “I must be cruel only to be kind.” The next line, which the FM didn’t quote, goes “Thus bad begins and worse remains behind.” One only hopes that it doesn’t turn out to be apposite.
