Uday Kotak, Executive Vice Chairman & MD, Kotak Mahindra Bank
I think the markets were ahead of reality. Therefore, there was disappointment. My view is that while there is short-term disappointment, I believe this is a great medium-term opportunity for investors who were not able to put money into the markets that as this correction happens, at some point in time it will be a good level for fundamental investors to look at the market. Otherwise the market was running ahead and this is a welcome reality check.
My view is that there was a lot of anxious money that was finding valuations a stretch. Post this correction and maybe a little more, at some level we will see money come in, which is looking at medium-term. The fact is that there is a positive and a negative to a 6.8% deficit. The positive is that he has left a lot of the tax rates unchanged, which therefore leaves more money in the hands of the people.
Also, keep in mind there are very significant steps that will over time stimulate domestic demand. At a time when the world is in a recession, if domestic demand in India is protected, that is a medium-term good thing. Weíve got to look at it in balance. The problem is, very often markets are consistently looking for steroids and are not ready to take medicines, which over the medium-term will be more useful, and that is precisely what I think is happening.
The bond markets were expecting a fiscal deficit of somewhere between 6% and 6.5%. So, this is a little higher.
My view is that with a lot of liquidity in the system, the additional borrowing that the government needs to do for the 6.8% will be absorbed by bond markets. What it will do is it will steepen the yield curve. The short end continues to be extremely easy. The short-term liquidity will remain comfortable. At the long end the rates may be a little sticky.
However, I would be surprised if there is a sharp jump in yields. I do not see yields going in the short run to above 7%. So, that is where I see in the short run.
I actually want to talk about two other very significant points for equity markets. Number one, the finance minister mentioned about non-promoter ownership being reduced for listed companies. One of the best ways for financial inclusion in India is broader equity ownership by Indians, the percentage is very low. If we can bring down the promoter ownership and increase non-promoter ownership in Indian companies over time, that is very positive for equity ownership and financial inclusion for Indians.
Number two, Fringe Benefit Tax (FBT) going away is a big benefit for lots of employees who had FBT on their Employee Stock Option Plans (ESOPs). I think that is also a very big plus for compensating employees across corporate India through ESOPs, which will broaden equity ownership amongst individuals in India.
I think youíve got to keep in mind that worldwide fiscal stimulus is still being continued to be used by almost all governments and therefore to dramatically reduce fiscal stimulus in a hurry is not necessarily a smart thing. That is what the Finance Minister has continued to do.
I do believe that this budget is good for domestic economy; it is good for domestic investment, domestic savings and domestic consumption. That is the heart of what we need to do. We donít need to pull the plug of withdrawing stimuli too early.
I do believe we can raise the resources. Of course, it will put some pressure on the long end. But it is a price well worth paying to make sure that if the world goes into another spin, again India gets more insulated. I feel good about that.
I would say that if they achieve it by then (April 2010 target for GST) it will be a good thing and it will make a first, significant step in rationalisation of indirect taxation.
Beyond that, I basically feel that the India story at this stage has a great opportunity to be differentiated. I actually continue to be medium-term positive about this. The budget is being excessively reacted to by the markets at this stage. As people absorb it and as people look at the medium-term, I do believe that the India story is in good shape. This budget will provide significant stimulus to domestic demand and I would be very comfortable without getting exuberant to be a long-term investor in the India growth story.
I donít think he has mentioned the number (Rs 25,000 crore of divestment), but I would say somewhere between Rs 15,000 crore and Rs 20,000 crore is what the market can take.
It brings me to another very important point in the context of the global economic recovery. There are essentially two routes for the recovery. One is, a government dominated stimulus as a government led fiscal recovery. The second is a capital market led recovery.
I think the government has now done its bit to what I call as the fiscal part of supporting the economic recovery. I think in due course as the news gets absorbed, India will also see a capital market based economic recovery as balance sheets of corporates get stronger and more capital is infused into them. Therefore a combination of a certain amount of government stimulus combined with a robust capital market would make the India story extremely positive.