Focus on infrastructure sector to continue: Citigroup

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According to a Citigroup report the Budget will have to retain a growth-supportive policy and the focus on rural and infrastructure sectors will continue.

Declining market significance of Budget - Structural changes to tax policy have already been done over the last decade. Tax changes are more subtle now, while mere policy intentions are taken with a pinch of salt given realities of coalition politics, limiting the Budget's immediate market significance.

Budget backdrop: Growth, Inflation, Politics - The FY08 Union Budget will be presented on 28 Feb. Unprecedented economic growth, buoyant tax collections, better-than-budgeted fiscal deficit and strong corporate profitability set the positive tone. On the flipside, rising inflation is an economic as well as political issue. Any tough measures will probably have to be looked at in the context of upcoming UP state elections, which are politically significant.

Potential measures - Buoyant tax collections will likely embolden the government to opt for reductions in import and excise duties to tackle inflationary pressures. Tax surcharges on personal and corporate taxes may be removed. Service tax net will continue to widen. IT/ITES sectors' tax exemptions may be extended. More clarity on SEZ taxation policy. Focus on rural and infrastructure sectors to continue. Improved access to pension funds for local capital markets.

No change in our strategy & portfolio positioning - Notwithstanding all the focus on inflation, the Budget will have to retain a growth-supportive policy. We retain our visible growth, large-cap bias, with Overweights on IT services, Telecom, Capital Goods and Consumer. We are also positive on Cement and Media. We continue to remain Underweight on rate/credit-sensitive sectors - Autos and Banks. Energy, Materials and Pharmaceuticals are our other Underweights.