Budget Preview Indian Budget : Highlights Page 1

Transcription

1 Budget Preview Indian Budget : Highlights Page 1

2 Indian Budget : Highlights Likely Budget Impact: Positive Auto Banking Metals Power Negative FMCG IT services Oil and Gas Pharma Cement Key points of the budget: Focus on infrastructure spending: According to the planning commission, India needs to double its ports, roads, power, telecom, and airports capacity. The inauguration of the India Infrastructure summit organized by FICCI is a step in the right direction. The problem with the infrastructure spending is the expensive financing involved leading to several projects being shelved. The importance of infrastructure outweighs the need to control the fiscal deficit as one study shows that every percentage of GDP spent on infrastructure leads to the rise in GDP by one percent. The key to increase infrastructure liquidity is by smart spending. The government needs to involve more private participants to reduce the fiscal deficit burden and also provide impetus for Page 2

3 future infrastructure spending. Public private partnership is the way forward for the infrastructure sector. Implementation of goods and services tax (GST) scheme: The GST is almost a given to be effective from April 1 st 2010 as the then finance minister, P Chidambaram, has on numerous occasions indicated the same. VAT has been successfully implemented in several states and it is our expectation that it will be projected as the GST in this budget as well. This is what P Chidambaram had to say about the GST. "It is my sense that there is a large consensus that the country should move towards a National Level Goods and Service Tax (GST) that should be shared between the Centre and the states. I propose that we set April 1, 2010 as the date of introducing GST. World over, Goods and Services attract the same rate of Tax. This is the foundation of GST. People must get used to the idea of a GST. This will be an important step in indirect tax reforms, which should improve tax collection efficiency and business productivity. In principle, there is no difference between present tax structure under VAT and GST as far as the tax on goods is concerned because GST is also a form of VAT on Goods and services. Here at present the sales tax, with an exception of CST, is a VAT system and in case of service tax the system also has the Cenvat credit system hence both sales tax and service tax are under VAT system in our country. At present the goods and services are taxed separately but in GST the difference will vanish. FDI norms: India s FDI regime has already made adequate progress. We believe that the government without any pressure from its allies will be pro reform and hence will bring about a change in either one of the two following sectors. a) Liberalization of the retail sector b) FDI limit increased from 26% to 49% in the insurance sector The latter of the two looks more likely as there have been some indications from the government that they are not yet ready to liberalize the retail sector. Page 3

4 Deficit financing: It will be interesting to see how the government will finance the growing fiscal deficit. The below graph indicates the fiscal deficits over the past five years as a percentage of GDP. As can be clearly seen, the fiscal deficit has been decreasing. However we are not expecting the same trend to continue as this trend was broken in when fiscal deficit climbed to 6.9% of GDP and also due to the large fiscal stimulus package that the government adopted to revive demand and encourage investments. It is assumed that the 3G auction and the public sector divestment will be the two main sources for deficit financing. The public sector divestment initiatives have been disappointing over the past few years. However, with a stable government and lack of large allies, this budget is expected to finance the deficit through these divestments. The divestment initiatives, if taken, could bring in $50 bn over the next five years. The auctioning of the telecom licenses could bring in $5bn. This together would help the rising fiscal deficit to a great deal. Page 4

5 Reviving falling exports: Exports have gained relevance as a major contributor to India s GDP over the years. This can be observed from the graph as well. Although India s growth predominantly is through domestic demand, the export sector has scope for becoming a major revenue earner for the Indian government in the long run. However, taking into consideration the current economic downturn and its negative impact on Indian export, it is imperative for the government to provide short term relief for the sector. The interim budget provided some relief for the exporters through excise duty cuts; however, it will be interesting to see Whether the government will revert back to the old excise duties or provide more relief to this beaten down sector. The major stumbling factor for the government to do so is the rising fiscal deficit which could compensate their decision to give excise cuts to the export sector. Page 5

6 Historical government expenditure Clearly there have been steps taken in the infrastructure and the education sectors. However these levels nowhere meet the demand and hence have to be scaled up. Hence we are looking at these key sectors as major expenditure avenues for the government in the budget. Page 6

7 Implications on the stock market The above graph represents the movement of the SENSEX on the day of the budget. As can be seen from the above graphic, no clear patterns can be derived to make a judgment on the movement of the SENSEX on the day of the budget as over the past nine years the SENSEX has risen on five occasions and fallen on four occasions. We predict the current budget to be pro reform and populist and expect the markets to react positively to the same. Page 7

8 SECTORIAL IMPACT Automobiles The above graph tracks the post budget monthly performance of the BSE automobile index. Historically the auto index has not performed well post budget as can be seen from the above graph. It has given negative returns in eight out of the last ten post budget months. If the 4% excise duty cut given by the government in the stimulus package is retrenched it will negatively impact the auto sector and hence the auto index. Having said this, if the government spends heavily on infrastructure, it could benefit auto companies like Tata Motors and Ashok Leyland. Page 8

9 Banking and financial services The impact of the budget on the BSE Bankex index has been largely positive over the last eight years. If the government further liberalizes the insurance sector from current FDI norm of 26% to an expected 49%, it will positively impact the banking and insurance companies like HDFC, SBI, ICICI, Kotak, etc. We expect a positive impact of the budget on the banking sector and therefore strongly recommend strong banking companies like HDFC, SBI and ICICI. Page 9

10 FMCG The FMCG sector has historically performed poorly post budget as can be seen from the graph above. Five out of the eight years the BSE FMCG index has posted negative post budget returns. We expect the government to rollback the excise duty and hence this would, in continuation of the trend, adversely affect the FMCG index and its constituents. HUL and ITC are two of the companies that would be affected the most. Page 10

11 Pharmaceuticals The pharma index performance has been largely inconsistent after the budget and hence no clear trend can be observed. We expect the government to provide strong incentives for the health care sector and this could positively impact companies like Apollo and Fortis. Page 11

12 Metal The metal index has historically performed poorly post the budget as can be seen from the graph above. If the excise duty on steel is raised from the current 8%, it would adversely affect the steel companies like Tata, Jindal and JSW steel. Having said this, if on expected lines, the government spends heavily on infrastructure it would be positive for the above metal companies. Along with these companies, we think that SAIL would be one of the major beneficiaries of the budget. Page 12

13 IT SECTOR The two expectations of the IT companies are the extension of the tax holiday and reduction of income tax rates. If these are implemented, it is expected to help large and small IT companies equally. Some of the software firms that could benefit are Wipro, Infosys, TCS, Patni, etc. Expect a surge in the BSE IT index if these expectations are conformed to. Page 13

14 Analyzing India Using Maslow s Hierarchy of Needs Self - Actualization Esteem needs Social needs Safety needs Physiological needs Physiological needs- These are the basic needs that are required to sustain life. They include food, water, air, etc. According to Maslow s theory, if these fundamental needs are not satisfied then one will surely be motivated to satisfy them. Higher needs such as social needs and esteem needs are not recognized until one satisfies the needs basic to existence. Safety needs- Once basic needs are satisfied the attention turns to safety and security needs of the individual. The various safety and security needs include housing security, insurance, job security, financial security, etc. Social needs- This, according to Maslow s, is the first level of higher level needs. Social needs are those related to interaction with others and they include friendship, belonging to a group, etc. Page 14

15 Esteem needs- Esteem needs can be internal esteem needs or external esteem needs. The esteem needs include self-respect, achievement, attention, recognition and reputation. The first two are internal esteem needs where as the last three are external esteem needs. Self-actualization- Self-actualization is the summit of Maslow s hierarchy of needs. It is the quest of reaching one s full potential as a person. The needs associated with self-actualization include truth, justice, wisdom, etc. By placing India in the Maslow s hierarchy of needs we can analyze the requirements of the Indian population and therefore our expectations from the budget. The growth patterns of the Indian economy are an indicator of not just the economic scope in the country but societal pattern as well. The further study analyses specific indicators of the Indian economy relative to the GDP growth, which may support the positioning of the Indian people on Maslow s Hierarchy of Needs. Through the findings, it seems most probable that India has the majority of its population lying in the Security and Social Needs of Maslow s Hierarchy. Subsequent passages show examples from the demographics of the country which may corroborate this position of the Indian population on the Hierarchy of Needs. Page 15

16 Background Facts Population: 1.17 billion Demography (Age): 0-14 years 30.8% years 64.3% 65 and above 4.9% Average age: 24.9 years Poverty: The following figures show the percentage of population below poverty line % % Literacy: % % % Mortality rates: per 1000 Life expectancy: years Page 16

17 Analysis and expectations from the budget The demography pattern of India shows that the majority of the population lies in the years age bracket. This by itself can lead to an assumption that the majority of the population fall in the Security and Social needs of Maslow s Hierarchy. If we look at the average age of the population we notice that India is by and large a young nation, which further substantiates the finding. The poverty figures have been declining over the years. From 26% in 2000, the population below the poverty line by 2006 estimates dropped to 22%. The literacy rates of India are unimpressive at a mere 61% and have decreased over the years, which is not a promising sign. The decreasing mortality rates and increasing life expectancy show that healthcare in India has been bettering over the years. As such, even on the healthcare front Security needs of the Indian people even though improving, need substantial improvement. From the GDP growth it can be understood that India is an emerging growing economy. The average age of the Indian population is 24.9 years and hence by and large a relatively young population. Also a majority of the population fall under the years age bracket which substantiates the finding that majority of the Indian population lie in the Social and Security needs of Maslow s hierarchy. What this indicates is that the budget needs to address the security needs of the Indian population through more reforms in the insurance sector, more impetus on rural education and finally more investment in the rural household sector. The last of the three is substantiated by the fact that the poverty figures in India are very disheartening and there is an urgent requirement from the government to spend heavily on the rural household sector and the best way to do so would be in the upcoming budget when there is no political pressure faced by the government. Hence we from the DreamGains team feel that for India to sustain its growth over the long term, the focus of their expenditure must be on the key sectors like infrastructure, education and health care. Page 17

18 DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. The stock price projections shown are not necessarily indicative of future price performance. The information herein, together with all estimates and forecasts, can change without notice. DreamGains does not purport to be an invitation or an offer to buy or sell any financial instrument. Any surfing and reading of the information is the acceptance of this disclaimer. All Rights Reserved. Page 18