Budget 2013-14: Expect responsible, pro-capital market Budget: Kotak

Rajesh Iyer
Kotak Wealth Management

The forthcoming Union Budget assumes significance because it will be Chidambaram's first Budget after a gap of five years and the last full Budget before next Lok Sabha elections. We expect the Government to keep a Balance between Fiscal Consolidation and economic recovery. Based on sound bytes we can expect a pro capital market budget to sustain FII flows and moderate Current Account Deficit. The Finance Minister (FM) may raise taxes selectively and control expenditure to achieve the Fiscal goal. He would also focus on reviving investment demand since activity on the ground has still not picked up. Real GDP growth target for FY14 could be set at 6 percent v/s estimate of 5.5 percent in FY13.

Last four months have seen slew of reforms. Few recent measures such as Fuel price hike, increase in Gold import duty and increase in FII debt limit have come just before the Budget. To that extent the budget may try to take ahead some of the other pending reforms. Markets will keenly watch the FMs intent to tighten Fiscal Consolidation, since he has made promises on this front in his recent road shows. The FM has already stated his intention to reduce Fiscal Deficit to 4.8 percent of GDP in FY14 from our estimates of 5.4 percent in FY13. Oil subsidy and Disinvestment targets will play a crucial role in meeting the Fiscal Deficit target of 4.8 percent. 

We may not see much change in the existing excise and service tax rates (12 percent) given the ongoing economic slowdown. However, we do not rule out specific taxes in certain sectors and on individuals in the higher income slab. We see Government making positive announcements related to the infrastructure sector. DTC and GST are now expected to be implemented in FY15 only. However, some enabling measures may be announced in the budget. The FM could tweak capital market taxes (i.e. STT) and provide additional incentives for retail investors to boost financial savings.

The BSE Small Cap & CNX Mid Cap Index have corrected by 14 percent and 10 percent, respectively from their recent peaks. Broader Indices are close to the oversold zone and Nifty has not gone anywhere before the budget hence the risk of a sharp correction post budget is lower.