Enthusiasm dampened

Aneesh Srivastava, Chief Investment Officer, IDBI Fortis Life Insurance Company Limited

Events like budgets are best assessed based on expectations & delivery. Key macro parameters which we expected budget to address were as follows; Target for Fiscal Deficit, which had been a prime concern for the economy, has been set at 6.8% which is certainly negative surprise for the market. This will have an adverse impact on yields as the market worries about being able to absorb such a massive government borrowing program. In case we include state deficits, it is targeted at 10.8%, which is much higher than expectation. Although medium term target of 4% is set by 2012, in near term such high deficit remains a cause of concern.

Divestment would have been one of the sources of social sector spending. However no clear target is mentioned for divestment barring 1,120 Crores which is way below expectations. It may be the case that government does not want to include the same in budget.

Infrastructure spend, which is assumed to be the key driver to boost the growth of economy has seen some increase in allocations. As per the announcement IIFCL will refinance 60% of commercial loans given by banks for PPP in critical sectors over next 15-18 months, can support Rs. 1,00,000 Crores of infrastructure finance combined with public budgetary support. Allocation for NHAI investment increased by 23% for FY10 and Railway Allocation increased from Rs 10,800 Crores to Rs 15,800 Crores.  Allocation for APDRP increased by 160% to Rs 2,080 Crores and Urban renewal project stepped up by 87% to Rs 12,800 Crores.  The announcement of the commitment to launching GST by April 1st, 2010 is also a positive in creating a common market. If all these moves are implemented well, it will certainly be a positive for the economy.

Market also expected that there would be announcement regarding FDI investments. However, this aspect remained untouched. Market was also negatively surprised by increase in MAT from 10% to 15%.

There has been some good news for individuals as FBT has been removed.. Investment community would have been happy had we given a road map for next 5 years of reforms. Unfortunately, we are managing our country on year on year basis instead of having a long term clear growth path.

Stock markets had rallied on the formation of stable government and had expected that reform process would continue and hence market started trading at higher multiples. However, this exuberance has been spooked by the lack of path breaking reforms.

From Debt market perspective, against the expected borrowing of Rs. 3,65,000 Crores, government has announced a borrowing of Rs.4,51,000 Crores and this has hit the sentiments of the debt markets and yields of 10 year G- Sec paper have hardened to 7.03%..

There are positive moves in terms of Income tax for individuals. The 10% surcharge has been withdrawn. Senior citizen income tax exemption limit has been hiked by Rs 15,000 to Rs 2,40,000 per year. Also, for women, it has been hiked by Rs 10,000 to Rs 1,90,000 while for others, it has been hiked to Rs 1,60,000. Consumption has been a strong component of the India growth story. These moves will go a long way forward in strengthening the consumption story in India and hence insulate us from the volatility that exists in foreign markets which can harm our exports. While this is going to impact our fiscal deficit, we must also accept that this government has made moves earlier like the NREGA as a social inclusiveness program which had created fears in terms of the impact on the fisc. However, it has been accepted now that NREGA also worked in creating consumption demand in the rural areas which has helped the economy. So net-net, if the government makes moves which increases consumption, it is good for the long term health of the economy.