Budget Reactions: Budget steadies inflation-hit aam admi: ICICI Pru AMC

Sankaran Naren
ICICI Prudential AMC

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Union Budget 2013-14 was delivered on the sidelines of a pre-election year, amidst a constrained economic environment on account of high twin deficits and with worries of a rating downgrade. The Finance Minister has provided us with a Union Budget that clearly demonstrates the commitment towards fiscal prudence.  In our view, the Budget is a budget for the Aam Aadmi (Common Man) who has been reeling under high inflation for past few years and with special emphasis on initiatives towards Women, Youth and the Poor....the mool mantra being ‘higher growth leading to inclusive and sustainable development’.

On the positive side the finance minister delivered his promise of fiscal consolidation, projecting a fiscal deficit at 4.8% of GDP for FY14 (year ending March 2014), in line with our expectations. The revised estimate of the FY13 fiscal deficit is 5.2% of GDP, better than the revised budget target of 5.3% of GDP. The objective of the budget was to ensure that there is no chance of a rating downgrade in the next one year and that has been achieved in our view.

The budget also announced measures to boost financial savings. This is a very welcome step since we have seen a lot of erosion in household savings post the credit crisis years. By introducing a TDS on sale of houses above Rs. 50 lacs and increasing the service tax for new flats, they have de-incentivised real estate transactions. The budget has also sought to increase home ownership by assuring a first-time home buyer of additional deduction of interest of Rs. 1 lakh for housing loans of value Rs. 25 lakh or less taken from banks in 2013-14.

The government in this budget has also demonstrated clear intent on facilitating infrastructure development.  Steps like investment allowance reserve framework allowing an additional  investment allowance at the rate of 15 percent to a manufacturing company investing more than Rs 100 Crore in plant and machinery over the next two years  as aimed at incentivising investment  and triggering the capex cycle will strike the right cord.  Infrastructure sector is now poised for growth.  

To raise tax revenues, various measures have been taken including:

1.        The list of services exempt from taxes has been shortened
2.        The excise duty rate raised for select sectors
3.        A higher surcharge has been imposed on the rich and on Corporates above a certain threshold.

The trajectory adopted is right. On account of the increase in taxation, there will be a slowdown in consumption which will lead to a lower inflation number and aid in bringing down the current account deficit. This will allow RBI to cut rates leading to a pickup in investment cycle.

On the equity sides markets are likely remain volatile. We are more positive than before now since the budget has achieved our trigger on taxation and is beneficial for economy.

Economics: Government has taken many good steps in the last six months to cut both fiscal deficit and current account deficit. The steps taken today to increase taxation add to our comfort.  

Valuations: Due to the recent correction, valuation has corrected and is now in closer to the lower end of the fair value range, so on that count it is positive.

Sentiments: On the sentiment side investors have remained away from equities. There is a big scope of investing in equities today for long term wealth creation.

On the fixed income front, markets have been disappointed by the Budget primarily on account of two reasons:
The market was expecting the gross borrowing number to be around Rs. 5,90,000 crores instead of the stated Rs. 6,29008.84 crores (This takes in account scheduled repayment of Rs. 95008.84 Crs. and Rs. 50000 Crs. towards buyback of Government Securities for better debt management. The net borrowing is placed at Rs. 484000 Crs (net borrowing FY13 Rs. 467384.06 Crs.). The market was also hopeful that withholding tax for foreign institutional investors will be waived which did not materialize. This may impact markets in short run.  In our view, the tax revenue numbers which are being indicated in the finance bill looks realistic and achievable. The expenditure side also is realistic making the budget estimates credible.

The government could have provided a lower gross borrowing number. We think there is reasonable scope for government borrowing to come down but expect it to happen over a period of time.

Finally the budget is a roadmap and real test is now on execution.