Critics may have slammed finance minister Pranab Mukerjee for pressing the roll back button

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on fiscal stimulus too early, but Vikram Kotak, chief investment officer of Birla Sun Life Insurance, contends that the timing was just right. In an interview with Kumar Shankar Roy, Kotak says putting more money in consumer’s pocket will not impact inflation negatively. Excerpts



What do you make of the deficit targets of this budget?

The fiscal deficit target for FY11 has been projected by accounting for controlled government expenditure, which ensures that the government has the necessary room for a calibrated rollback of stimulus. At the same time, direct and indirect tax measures have been, to a large extent, motivated by the objective of seamless integration with the Direct Tax Code and Goods and Services Tax by April 2011. Tax reforms, rationalisation of subsidies and disinvestments will be crucial tools in achieving the fiscal consolidation targets. Implementation is going to be the key for success.

What do you think were the key themes of this budget?

One of the key themes has been the success in arresting the fiscal deficit at 5.5 per cent in FY11. Equally important is the FM’s articulation of a quantitative roadmap for further reduction of deficits in FY12 and FY13 to 4.8 per cent and 4.1 per cent, respectively. Going by the government’ s actions and performance, this looks achievable. Another important measure has been the move to reward both individual and corporate taxpayers for prudence. The FM has incentivised individual taxpayers with savings of more than Rs 50,000, which in turn can lead to substantial demand in discretionary and non-discretionary consumption.

What are the prospects for oil companies after the excise duty hike on petrol, diesel?

The proposed duty changes will increase government revenues by Rs 30,000 crore. However, it will delay the process of complete deregulation of the oil sector and make the operating environment tougher for oil marketing companies (OMCs). The impact on OMCs due to the change in the duty structure has been almost nullified by the hike in the prices after the budget. However, any further hike in petroleum prices looks extremely difficult in the present inflationary environment.

Post-budget, what are the sectors you are bullish on and why?

We are positive on financials, as we expect credit growth to rebound in the next financial year. Also, with the pricing power back with banks, we expect their net interest margins (NIMs) to improve. The government’s commitment to recapitalise public sector banks to maintain the capital adequacy ratio at 8 per cent is a big positive for many PSU banks.

The broadening of personal income tax slabs will benefit consumption-driven sectors, including two-wheelers and passenger vehicles. Increase in spending on rural development will also be a positive for the auto sector. Plus, capital goods and engineering companies will benefit from stable interest rates that will drive private capex.

Which are the sectors you are bearish on at the moment?

We are neutral on FMCG, telecom and IT sectors. Intensifying competition in the telecom sector will impact margins of the telecom companies. Further, the pressure on minutes of usage and slow pick-up in value-added services remains a concern despite valuations being reasonable. Recovery in the US not being full-fledged, the strengthening Indian rupee and stretched valuations are negative for the IT companies. Valuations of FMCG companies are also on the higher side. Further, higher soft commodity prices, intense competition and higher ad spend are likely to impact profitability of FMCG players.

Is the FM’s disinvestment target of Rs 25,000 crore attainable?

Against the budgeted disinvestment target of Rs 1,100 crore, the FM is likely to garner Rs 25,000 crore in FY10. The fact that he has over-delivered even in the backdrop of uncertain global environment and domestic challenges, gives enough comfort. Further, with India being the second fastest growing economy globally with structural resilience, we expect foreign portfolio flows into Indian equities to be over $20 billion in the next financial year. This coupled with an additional $15 billion expected from domestic insurance companies, fresh flows into equities will amount to around $ 35 billion. So, there will be enough demand for the quality public sector companies.

What are the things in this budget that worry you and why?

Firstly, given the massive infrastructure needs of the economy, in my view, the allocation to infrastructure has been lower. It is true that it has been allocated a massive 46 per cent share of the total plan allocation. But, it is skewed in a few sectors with allocation to transport and communication rising by only 15 per cent. Secondly, 3G auction is not taking place in this financial year. Lastly, the budget has not taken any measure to address the supply side constraints that resulted in a surge in food prices.

The revision in the personal income tax rates will put more money in the pockets of the middle class, thereby increasing their buying power. Will this stoke inflation?

Having more disposable income will surely spur demand for goods and services, but it will not impact inflation negatively. It is important to note that the tax savings will be spread over a period of next one year and it may not get translated into consumption immediately. As it is, by the second half of FY11, the rate of inflation will come down to RBI’s comfort zone thanks to a favourable base effect.

Do you feel the timing of the partial rollback of stimulus was right?

With the economy heading towards 9 per cent growth and concerns over inflation becoming more broad-based, it was the right time to start rolling back fiscal stimulus and focus on improving the fiscal health. The finance minister has taken the right steps.

With the budget behind us, what are your views on the equity market?

In our view, the short-term outlook for equities is ‘neutral to negative’ in the backdrop of global worries over sovereign defaults and volatility in the currency and commodity markets. On the domestic front, the headline inflation number is likely to reach double-digit levels and domestic liquidity is likely to shrink. Fresh equity inflows from insurance companies will also remain muted during the first quarter of the financial year. However, from the medium-term scenario, this budget has set the momentum for sustained economic recovery. Overall, we expect equities to deliver 30 per cent returns over the next one year.