Budget may focus on reviving equity inflows: Kotak Mah Bank

C Jayaram, joint managing director, Kotak Mahindra Bank feels that though the market is optimistic about the Budget as of now given the promises made by the government in the last few months, it will be watching the event closely to see if the finance minister will deliver on these commitments.

Also, the country needs capital inflows and so there could be a concerted efforts in the Budget on reviving equity inflows, a move which would definitely buoy the market. On the other hand, a largely populist Budget could have a negative impact if the market believes that it could derail the process of fiscal consolidation over time. Q: Whatever little enthusiasm that we had in December, or perhaps even in the early part of January post the good numbers seems to have faded, and now the Nifty and the Sensex returns are flattened out for the entire year. How do you expect the rest of the year to pan out and what would be your prognosis - is the Nifty likely to touch new highs this year?
A: I think on the back of some of the policy announcements, which the government made during the last few months, the market certainly was more optimistic. However, right now, given the fact that the Budget is so close, most investors, analysts etc are waiting for the Budget to figure out firstly, whether the finance minister will walk the talk in terms of some of the commitments that he had made and secondly, they also want to get a sense of what the rest of the year will look like. That is, if the Budget will talk about some of the so-called populist measures - whether it is a food security bill, farm waiver bill and stuff like that, or whether there will be something to indicate that the process of fiscal consolidation will continue forward into the year. Q: The finance ministry has dropped hints about taxing the super rich. We do not know exactly what colour that will take, that is, whether it will be an estate duty, a 40 percent slab for some super rich or if it would mean some tax on capital gains or maybe a cess. If that idea is fructified in some fashion, will the market take it very negatively?
A: It depends on what is the final way in which the super rich are taxed, like increasing the surcharge at the highest level, which to me seems the most likely possibility. I do not think it will matter too much from the market’s perspective. Even if the slab was to be marginally raised from current levels, I am not so sure that it will have an impact in the medium term. It could have a very short-term sort of impact but in the medium-term, I do not think that will bother the market too much.

Inheritance tax, of course, is a slightly different sort of issue. This is because there are all sorts of connotations that go along with it in terms of how inheritance tax comes through, whether it’s modelled on the line of some of the Western countries, where for example people might be forced to sell stocks to pay tax etc. So, that is walking into a whole new ballgame. But it is unclear at this point of time what that could be. Q: The finance minister so far has been very vocal about the fiscal constraint and about maintaining it (the deficit) at 5.3 percent and thereafter reducing it. So perhaps that has been already factored in into the market expectations from the Budget. What in your opinion could be included in the Budget which could positively or perhaps even negatively surprise the street?
A: I think what could positively surprise the street are specific things around the capital markets, which encourage investors, particularly the Indian retail investor, to put more money into equities. I think it is clear from the macros right now that at least for a short period of time we need capital flows into the country and the quickest route for this is portfolio of flows. So, there will be a concerted attempt to encourage equity markets and that could positively surprise the market.

What could negatively surprise the market is if there is too much emphasis on some of the populist schemes whether it is the food security bill or the farm waiver programme, and if the market believes that some of this could derail the fiscal consolidation process over long period. Then that could be a negative factor.
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Q: Lately the Budget impact tends to be restricted to perhaps a couple of days unless there is a googly like the General Anti Avoidance Rules (GAAR), usually impact on the overall economy, does not tend to be for too long. What is your sense therefore for the longer term for the market, for 2013? What would be the sectors you would back?
A: I think 2013 is not going to be an easy year because irrespective of intentions of the government etc, the reality is that many of our macros are in fairly challenging spaces whether you are talking about current account deficit, which is immediate sort of issue whether you are talking about fiscal deficit, inflation levels, oil prices. So, there are fair amount of challenges and what the market hopes will happen is that the government will continue to show the same resort that seems to have developed over the last few months going forward into next year to contain some of these issues and particularly on the policy front if decisions are made whether in the context of land acquisition bill whether in terms of some of the environmental clearances, in terms of some of the problems the power industry had. If some of those decisions are taken then the market would look far more positive. Having said all of this, I would not expect returns of more than 10-15 percent during calendar year 2013. Q: What are your investors saying? Are they giving you the impression that things are looking well valued?
A: Sectors which they have invested in over the last one year are fast moving consumer goods (FMCG) and pharmaceuticals and stuff like that. There is no question that value additions are rich there. So, if you need to get more flows from any of these investors, I think it will have to be across sectors where there are still valuations and possibilities in terms of growth. The financial services sector, particularly banking, looks interesting because if the monetary policy were to become a little more aggressive, and there is possibly a case for that because given fiscal consolidation is what the government is going to do and if growth is suffering, one way out of this could be to have a far more relaxed monetary policy. If that does happen it will positively impact sectors like banking. So, that is certainly looking positive.

The other sector where there seems to be some interest developing is IT; essentially on the back of the theory that if current account deficits are around these levels and they are unlikely to come down in the near future, then you have a reasonably good chance that the rupee could depreciate from these levels and that, along with some increased spending you are seeing from US clients, seems to make the IT industry look little more positive than what it was earlier.