After today’s economic survey, all eyes are on the Finance Minister, who will present The Union Budget for 2013. The economic survey today managed to uplift the negative sentiments for the short-term.
Commenting on the upcoming Budget, Arindam Ghosh, MD & CEO of Blackridge Capital says with inflation and fiscal deficit being among the highest in the Emerging Market (EMs), India cannot really adapt a very aggressive fiscal or monetary stance.
He further adds that removal of the short-term capital gains tax or lowering the Securities Transaction Tax (STT) can ignite and flare up the markets.
“If the government is able to contain the fisc and the current account deficit (CAD), we may see Foreign Instituitonal Investors (FIIs) getting into slightly overweight position as far as India is concerned,” he asserts.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: The market has been quite oversold in the run up to the Budget, but according to you what can send the markets up on the Budget day tomorrow?
A: If one has to really go by the economic survey which has been rolled out today, in the short-term is it has managed to kind of uplift the kind of gloom and negative sentiments that we have seen over the last couple of weeks.
One needs to go beyond and look at how the Budget is accepted by the market tomorrow. However beyond that we need to understand that there are structural issues, which limits maneuverability on the policy front. With inflation and fiscal deficit being among the highest in the Emerging Market (EMs), India cannot really adapt a very aggressive fiscal or monetary stance.
Moreover, if we combine the fiscal slippages that we have seen in the past along with the widening current account deficit (CAD) and if you also look at issues around land acquisition, issues around environmental aspects, the supply-side bottlenecks in mining, the fuel linkages etc.
So, a combination of all these factors is what has actually been marking the growth down. Whilst we have actually been riding high on the orbit of about 8 percent plus growth, 5-5.5 percent kind of growth for this year and a modest recovery which would probably take us to FY12 levels of 6.5 percent is what is expected.
All attention would be on the kind of numbers that are actually spelt out and the math that goes beyond these numbers. Having said that, as far as the fisc is concerned the focus of the government is going to be clearly on how do we achieve greater fiscal consolidation? For the moment, I would say that the rub of the green would go in favour of the fisc rather than on growth.
Q: With regards to any sort of impetus that we could expect possibly on short-term capital gains tax or maybe STT revisions or commodity transaction tax (CTT) anything in terms of increasing the impetus of FIIs inflows into capital markets?
A: We have seen a fair amount of decibel level getting raised as we are getting closer to the Budget in terms of removal of the short-term capital gains tax and the opinion seems to be divided. Personally, I feel that would give a lot of boost to the market. One can argue that it will change the behaviour of investments.
A stimulus or an impetus cannot be on the back of tax for a very long period of time. Structurally, we have had tax incentives trying to boost growth for a long period of time but at the end of the day it is performance which actually matters. Therefore removal of the short-term capital gains tax or lowering the STT is something which probably can ignite and flare up the markets.
Q: If you had to put it into perspective for us. What does all of this amount to in terms of an equity market movement itself because in the last couple of weeks we have seen the markets move lower and one was worried whether we would get back to those 5,500 levels that we saw towards the end of November-December. Do you think that could be on the cards if this Budget is not delivered as promised or do you think there is only upsides in store for the market now?
A: We need to kind of look at both the domestic as well as the global issues. Aside of the fisc and the gross domestic product (GDP) growth numbers that is going to get articulated in the Budget tomorrow, we also need to keep a close watch on how inflation actually pans out. Whilst the economic survey really talks of a much more benign inflation environment, however we all know that wholesale price index (WPI), which includes core inflation is kind of tapering off.
We must understand that consumer price index (CPI) continues to remain very stubborn and in a country like ours transmission from food to non-food doesn’t really take very long. The whole issue is whether WPI can be sustainable and therefore how inflation is going to really play out and what kind of room it will allow in terms of maneuverability to the central bank, in terms of monetary easing going forward. So, that is going to be keenly watched.
We also need to take a look the CAD and how that’s going to get managed because whilst the government has been taking a lot of efforts trying to get in long-term investment through foreign direct investment (FDI). They are also trying to cut subsidies, trying to promote inflows into the market, but these are very fickle. We have to really focus on capital formation and that can really happen if we focus on domestic manufacturing. We have already seen the curbs really happening in unproductive imports. We really cannot expect too much to happen in terms of export in an environment where there is a global slowdown.
Moving away from the domestic factors globally if you see the situation is much more benign. Today, we have events which are kind of getting supported by a favourable financial environment. The household sector is recovering which is allowing the households to repair their balance sheets, but the joker in the pack is clearly the eurozone. That is where we see the biggest downside risk to global growth and that is where we would like to see how reforms in terms of a full banking union or the fiscal integration that has being debated and talked about for quite a while actually plays out.
If you move to Asia we have Japan which has been in some kind of a recession, but that is not really causing too much of an anxiety because we know that they have enough room and firepower both on the fisc as well as on the monetary side. Once we have the trade resumptions happening with China, all of that will also fall in place. So, the global environment is much more benign.
Going beyond Budget, and what is really going to happen tomorrow, as long as India is able to put up a credible Budget backed up by solid execution, the rating agencies are going to take it quite positively. India in an environment where liquidity is what is really pushing up and driving the equity markets up is going to continue to remain one of the biggest beneficiary.
We have already seen the FIIs shifting their weights in terms of moving from underweight to neutral or equal weight. I would go one step beyond and say that if the government is are able to contain the fisc and the CAD, we may see FIIs getting into slightly overweight position as far as India is concerned.