The market and the people have been expecting a lot from the Budget both in terms of policies and reforms. Vibhav Kapoor, Director, IL&FS thinks that the Budget is overhyped.
The Street has been expecting a lot from the Budget both in terms of policies and reforms. Vibhav Kapoor, Director, IL&FS thinks that the Budget is overhyped. "Fiscal policy is an important instrument and therefore it is important as to whether the fiscal deficit is brought down to 4.8 percent or 5 percent over a period of time. Beyond that, it is the growth which matters and the Budget is only one instrument which can do and that too just for one day" adds Kapoor.
With regards to the disinvestment that government made this year, Kapoor feels government may target Rs 40,000-50,000 crore through disinvestment in FY14.
Futher, Kapoor adds that Budget may not influence poor performance of sector like capital goods and infrastructure because the sector is gripped by more administrative issues than financial issues. "I do not think there is any shortage of finance as far as the issue of financing projects is concerned, Budget has a limited role there," he adds.
Below is the verbatim transcript of Vibhav Kapoor's interview on CNBC-TV18
Q: Do you think there is a 10 percent upside or downside potential from this Budget or does that remains squarely on global developments, not so much on this unique development?
A: Yes, I think in India the Budget is overhyped. Fiscal policy is definitely an important instrument, no doubt and that can have an impact on how the economy grows and we have seen that over the last three years. In 2009-10, there was a lot of stimulus given to the economy through higher fiscal deficits. The economy actually grew at 9.3 percent. So, there was no need for that much fiscal deficit which has resulted today in higher inflation and lower growth rates.
Fiscal policy is an important instrument and therefore it is important as to whether the fiscal deficit is brought down to 4.8 percent or 5 percent over a period of time. It can impact certain sectors, like excise duty going up on cigarettes. Beyond that, it is the growth which matters and the Budget is only one instrument which can do that and is only done on one day. The growth cycle depends on a lot of other things which includes other government initiatives throughout the year, the RBI monetary policy, global news. All those things ultimately impact the markets.
Q: The Finance Minister (FM) is likely to look at rolling over subsidies which is not a great news. What would you look at in the quality of this figure that he sets out both for the 5.3 percent target and then what he has to say for FY14?
A: If you look at the figures, in order to bring that down to 5.3 percent or 5.2 percent you would need to cut down expenditure by about Rs 110,000 crore. For the next year, again, you will need some cut in expenditure or raising of taxes to bring it down to 4.8 percent. Unfortunately, the non-development expenditure which is interest on borrowings which is the subsidies, is difficult to bring down.
The government has taken a positive step by partly decontrolling diesel and liquefied petroleum gas (LPG). The move is going to help more in the next year rather than this year, because this year is almost gone. You cannot raise taxes at this late stage, so the axe is going to fall on development expenditure. Maybe out of Rs 110,000 crore, you can do about Rs 25,000 crore in non-development expenditure through cuts in defense, yet a substantial portion of it will have to fall under development expenditure.
Q: The path that interests the market the most is what FM has to say about his divestment target. He may raise it to Rs 40,000-50,000 crore as opposed to Rs 30,000 crore he did last year. How will the market react to that? How much paper is going to get hit and what kind of appetite will so much divestment get?
A: This year we have already raised Rs 22,000 crore and should raise another Rs 7,000-8,000 crore to reach closer to Rs 30,000 crore. Going to Rs 40,000 crore, I do not think it will cause extra supply of paper, but there are other alternatives. For example UTI, the government has investments in specified undertaking of UTI (SUUTI), three investments which are largely there which can easily raise Rs 40,000-45,000 crore, it is their market value and need not be done over a single day.
It can be done through gradual disinvestments over the full year and we have seen other governments like the US doing in many of the investments in 2008. For example, American International Group (AIG) where they have put in some USD 90 billion and have got out of it. So, I do not think that is really an issue. If it is done in a proper manner it is possible to do even more than Rs 40,000 crore.
Q: Do you think the names that are being discussed will see the same reactions like Oil India or National Thermal Power Corporation (NTPC)? It is not the best of read - National Aluminium Company (NALCO), Steel Authority of India (SAIL) or at some point Coal India.
A: They are good companies. Some of them may go through bad patches because of their cycle right now. The real issue in all these disinvestments whether they are good companies or bad companies is the pricing and the proper discovery of pricing, leaving something on the table for investors. This year the FM has done a great job in successfully selling these issues because the pricing was right. If you leave enough on the table for investors, you can sell them.
Q: The highest sensitivity will be capital goods and infrastructure, because of how bad earnings season has been? What do you think that sector needs to hear to come out of the poor performance it had?
A: It is not entirely a Budget issue. It may partly be that investors are looking at how much capital expenditure is going to be there in the Budget, how much is going to go for various developmental projects and that has never been a problem. Last year also, we had lot of expenditure in the Budget. The real issues are outside the Budget and have been very well discussed.
There are issues of clearance of projects, there are issues about fuel linkages for the power sector, there are issues about environmental clearances, forest clearances for roads. So, it is more of administrative issues rather than financial issues or shortage of finance. I do not think there is any shortage of finance as far as the issue of financing this project is concerned, Budget has a limited role there.
Q: There are some sectors which are seen as more vulnerable than the others. In the auto sector, there is talk of high excise duty for diesel cars in specific and cement the other one. Both the sectors in patches have been star performers, like Tata Motors, cement stocks has started picking up again how do you approach those two sectors?
A: Automobiles sector is very sensitive to the cycle in the economy and this sector starts performing well when the cycle picks up. This sector is also dependent on monetary policy because when interest rates come down it is easier for people to borrow and interest rates are lower. So, monetary policy and interest rates plays a very substantial role in this sector. The automobile industry always look out for lowering of excise duties which can have some impact on the issue of diesel versus petrol cars. I don't think it would be prudent to expect too many giveaways from the finance minister this time.
Q: Real estate space begun to improve at least on the ground till news of the scam hit again, are you expecting some tax rebate and extension of holiday in the upcoming Budget?
A: Real estate is based on the cycle and is very sensitive to interest rates. I would like to see that not much incentive is given to real estate, automobile and cement sector.
I think the real issue which the FM will probably address or should address, is the diversion of savings from real assets like real estate and gold into financial savings.
We saw savings moving into the real assets in a big way and financials savings as percentage with gross domestic product (GDP) have come down from 9 percent to 2 percent or 3 percent. Within that financial savings equity, for example mutual funds and particularly again equity mutual funds, I think there is a great need to revive that. Everything can’t be done through a Budget however he can address some issues.
Q: Yesterday, gold ended at a six-month low. Already duty has been slapped on gold import and generally the other competitor to equities, second to fixed income is what is been happening with gold. What do you think the FM could do to twist this around or turn this equation around a bit?
A: The Budget has a limited role and it always addresses tax incentive. Providing more tax incentives to mutual funds, investments, equity particularly equity funds, etc would help but I don't think that will solve the issue. Other fundamental issues like what kind of returns these instruments ultimately will give and tax is only one small part of it. Both gold and real estate have given far higher returns than financial assets in last five years.
After the high of 2007, equity has hardly given any returns. So, part of that problem is automatic to the type of returns or the extent of returns which investors perceive from that but part of it can be addressed. We are aware of the problem faced by equity mutual funds distributor, etc. These are part of the Budget but need to be addressed over a period of time.
Q: The FM made some comments about wanting to increase equity participation, he is worried about overseas volume, I think it is an indication to the SGX Nifty. Do you expect to hear abolishing of securities transaction tax (STT) or introducing a CTT, a commodity transaction tax or some relief?
A: There is a possibility that there could be a reduction or abolition of STT and this will help to reduce or stop the flow of transactions to other markets and it will be a positive step for the market. I don't think that these type of things change the course of markets, however, they can have a temporary act.
Q: Which stocks would you pick ahead of Budget and beyond what would that look like?
A: I don't like to comment on individual stocks but if growth rates goes up, interest rates comes down and if there is more accommodative monetary policy by the Reserve Bank of India then rate sensitive sectors like banking sector will be the one to be watch out for. I don't think the markets can go up into a major bull cycle without the banking sector.