Mar 04, 2013 08:18 AM IST | Source: CNBC-TV18

Budget Reactions: There will be no major rally soon, says Udayan

Udayan Mukherjee, Managing Editor, CNBC-TV18 feels that the finance minister presented an insipid Budget. He says the Budget provided no positive trigger, and the market reacted badly to the confusion of the tax issue regarding FIIs and Mautitius

Udayan Mukherjee, Managing Editor, CNBC-TV18 feels that the finance minister has presented an insipid Budget. He says the document provided no positive trigger, and the market reacted badly to the confusion of the tax issue regarding FIIs and Mautitius. There was a steep fall, particularly in the midcaps.

But today is the morning after, and the Budget is done and dusted.  Let’s see if we can rebound even a little bit from yesterday’s crunching blow, he says. The market could bounce a little, if in the course of the day you get some clarifications on the thorny issue which seems to be the undoing. But I think too much damage has happened for the market to bounce back and assume any kind of upward momentum any time soon.

I don’t think it is going to be that easy. At some point you might get a pop back because the expiry is behind us, some of the technical issues have got washed away. The memory remains and the damage is there for all to see, but at least those pressures might be off. We will have to see watch global markets.

The way US markets finally ended yesterday was slightly uncomfortable. The euro has also started weakening again, and the dollar has started resuming its upsides. These are not great signs.

While today is not a sell-off morning in the global markets, I hope next week we don’t go back to the risk off position again, because that would mean bad things. But I think the Budget has possibly a negative impulse in the tax confusion. Hopefully, if it is clarified, we will bounce back, but I don’t think we can resume a major uptrend anytime soon on the back of this.

On the part of the finance ministry, it is almost like a death wish. What are they doing? You had so many problems just year back. You resolved them with the Shome Committee, and said that GAAR will be out in 2015-16.

Then you come in with this googly, and when asked to clarify, you hem and haw and say okay, maybe we will clarify later. I don’t think the clarification yesterday cut much ice with investors, because it still seem to indicate that a Tax Residency Certificate (TRC) would not be necessary, and that left investors wondering whether it is opening the way for more tax litigation and confusion for the next couple of years.

But my sense is that the government will realise that beggars can’t be choosers. With our current account deficit, we can’t do anything to hurt FII investments.  We are in no position to drive away foreign capital. I think that the clarification should come today or over the weekend.

The tax issue will probably is a let down on the promise of growth and investment, and everything that the market might have wanted from the man. So, we may bounce back technically once this clarification comes in, but because the Budget is an incipid document, I do not think this will ever pave the way for a durable rally in the market.

Next week, if there is a benign global environment, then the market will go up and the FM will be let off the hook.  What will disturb the market this morning is the Foreign Institutional Investor (FII) numbers. Rs 1,300 crore cash market selling, Rs 1,500 crore Nifty Futures selling, these are large numbers on the day of the Budget. You cannot go and ask every FII who sold yesterday why did you sell? Is it because of Mauritius? Is it because you were disappointed on growth? Did you not believe the fiscal numbers?

A combination of all of these factors might have worked against the market, but to see such large ‘sell’ figures from the guys who are driving this market on the day of the Budget leaves you feeling a little unsure about the road ahead for this market. I do not think anybody is seriously looking at midcaps and small caps, because the sentiment and the spine of the market has been broken there. There are localised issues clearly, but some of it is just people going belly-up. There is capitulation in parts of the market.

Not every stock which is falling 8-10 percent is because of an operator problem. It is easy to say oh, this is down because operators have gone bust. I do not think Shree Renuka fell 12 percent yesterday because a promoter or an operator went bust. People are just capitulating because they have been hit so badly in the midcap end of the market. So yesterday the way that names like Larsen and Toubro (L&T), ICICI Bank etc kind of names started coming off, makes you think whether a far dimmer view of technicals should be taken on the market right now. Markets have broken down clearly, but the question at what level it will find support is still a bit up in the air.

I hope outflows do not happen for five days continuously with the Tax Residency Certificate (TRC) clarifications. You do not need to look very far. What should convince you surely of how vulnerable India is on the technical front, which is the balance between buyers and sellers. What appetite does this market have to digest any kind of outflows of whatever magnitude?

On the other side, there is nobody standing to soak up that paper. So the impact cost is very huge right now. Retail is out of the market completely, going by what has happened with midcaps. Yesterday, insurance companies could not offset even 25 percent of the quantities sold by FIIs. That is disturbing.

I think the Budget should be measured on two fronts the morning after. One is on what it has done to affect earnings, which is critical to the market. The other is it what it has done to the fiscal math. That usually happens the next morning because on the day of the Budget we just rush in through those numbers. But it seems like he has under-provided for both the fertiliser and fuel subsidy, and has overestimated tax revenues. On both fronts, he probably has worked out a math which obviously does not lead him to 4.8 percent. 

How will he achieve that? By what he has done, probably in the last two quarters of this year, is slash plan expenditure. Last year too he started with some Rs 5.4 lakh crore planned expenditure. We ended at Rs 3.9 lakh crore. If halfway through this year, the FM realises that’s the way we are going with tax revenues, then he will have to do the same thing, otherwise rating agencies will slap him on the wrist.

So, he will have to cut down planned expenditure. You know what that has done to growth over the last couple of quarters. So I think the fiscal math is not quite adding up though it’s a bit better than last year’s picture. Do not believe anyone who tells you that this is a great growth-oriented Budget. It will do nothing to raise GDP or earnings growth in India, and that I think remains the durable disappointment. He admitted in his clarifications yesterday that he has failed to produce surprises in the Budget.  

The one line that I held on to was that he will probably do more, given the track record that he has since September. I can only hope that he will do more over the next few months to address the growth and investment problem cycles because he left them virtually untouched in the Budget.

A lot of people have said that this Budget is not populist, but there are shades of populism. In the first 15-20 minutes all FM said was this scheme, that scheme. It could have been worse, sure, but it is not that cut-and-dried on the populism front. I wonder what the Reserve Bank of India (RBI) will take away from all of this.

If you just look at the quality of the fiscal math and the way he is arriving at 4.8 percent, I think the RBI may not feel that comfortable. There has been a huge clampdown in government revenue expenditure per se. That is what the RBI needs to see. How are you getting to 4.8 percent? Are you cutting down on expenditure? If you are, that gives me some room on the monetary side.

Remember, whatever you say about the fiscal deficit, for expectations on rate cuts the RBI still has to look at the Current Account Deficit (CAD), and I do not think yesterday a lot has happened to reduce the CAD dramatically from the alarming position it is in. 4.5 percent GDP growth is a horrific number. I feel bad. I can imagine what global investors are feeling sitting here in India. What are we talking about - recovery, PE multiple expansion with 4.5 percent GDP growth. My biggest worry is that Q4 government spending became virtually zero to arrive at Rs 3.9 lakh crore.

If we have reported 4.5 percent and we report something in the vicinity of same in Q4, the full year GDP number will be under 5 percent. Say we report an FY13 number of 4.9 percent at the end of the fourth quarter, how does it look to somebody who is buying India? I think we have got a serious problem on our hands with growth.

Services growth at 6.1 percent in India, when did you see a number like that? Forget agriculture, these are peripheral numbers. I think we have got a serious problem and one would be deluding oneself if one thought that growth has bottomed out and we do not need any help from the policymakers to re-stoke growth. 

I want to make a point in favour of HSBC. They were the first to put out that 5.2-5.3 percent GDP reading. I remember I was on air at that point, Montek Singh Ahluwalia was on air with me and he poofed at that number, saying HSBC has got it wrong, and of course it will be 6 percent. Everybody in Delhi has been consistently wrong on the GDP number. Look at the scorn which the Central Statistical Organisation (CSO) number was met with when they put out 5 percent. Everybody was horrified. Look where we stand today. We are at 5 percent. We can’t be in denial about the fact that growth has crunched down out here.
















Follow us on
Available On