With less than two weeks to go before the Union budget for FY13-14, it is time to look at what the markets are expecting from finance minister P Chidambaram.
Will Chidambaram deliver another dream budget? Despite a set of mini-reforms announced since September and the huge inflows from foreign institutional investors (FIIs) into the equity market this year, the benchmark equity indices have disappointed investors so far in 2013.
After an unexpected surge of about 26 per cent in 2012, investor expectations had turned from cautious to optimistic, when the New Year began. But, one-and-a-half months into 2013, the market has moved nowhere.
The Sensex is slightly in the green territory with a gain of 0.21 per cent, or 41.44 points, so far this year. Indian stocks are also the worst performers globally till now.
The lacklustre performance by Indian equities has been in contrast with the robust inflows from FIIs, which have pumped in over $8 billion (Rs 43,117crore) into Indian equities till date. This is 33 per cent of the $24 billion that they poured into Indian stocks over the whole calendar. To put this in context, it must be remembered that 2012 saw the second highest inflows into Indian stocks ever since FIIs were allowed to invest in domestic equities in the mid-1990s.
Several analysts are betting on Chidambaram to unveil a ‘dream budget’, on the lines of his famous 1997-98 budget, where he had set the stage for lower income tax rates, removed surcharge on corporate taxes and reduced corporate tax rates.
From the market’s point of view, the finance minister has given enough indications that he will take several steps to boost investment in the stock market, by diverting household savings from idle investments such as gold. In a speech in Mumbai earlier this month, Chidambaram said he would make some changes in the Rajiv Gandhi Equity Savings Scheme (RGESS) to make it more attractive for investors. He also hinted at steps to boost delivery-based volume in the stock market and also bring back volumes to the options segment, which is getting ‘exported’ to centres such as Singapore.
“The Union budget for FY14 is likely to be a dream budget, which will deliver the promised fiscal consolidation and imbibe progressive tax reforms. The FM is likely to peg the budget estimate (BE) at 4.8 per cent of GDP, thereby offering fiscal consolidation of 50 bps compared with that of FY13,” said Ritika Mankar Mukherjee of Ambit Capital.
She said the new finance minister, who took over in the middle of 2012, is likely to have averted much of the fiscal slippage that could have materialised sans corrective action and is likely to limit fiscal deficit for FY13 at 5.3 per cent of GDP (compared with the budget estimate of 5.1 per cent of GDP).
“The FM is likely to have done this by making deep cuts in plan expenditure and taking advantage of the fact that the government accounts are maintained on a cash basis (which allows for postponement of expenditures such as the petroleum subsidy bill payment),” the Ambit analyst said in a note.
The stock market has this unsettling effect on finance ministers over the past several years, as it gives instant approval or disapproval to the budget.
Analysts at Morgan Stanley looked at the equity market performance after the budget. Over the past 20 years, the MSCI India has outperformed the MSCI emerging markets on eight occasions (1997, 1999, 2001, 2004, 2005, 2006, 2010 & 2011) in a month after the budget. However, except for 1997, it is difficult to attribute these performances to the budget. On an average, India is down 2.3 per cent in a month after the budget with the first 15 days accounting for most of it, underperforming other emerging markets by 1.5 per cent, Ridham Desai and Sheela Rathi of Morgan Stanley said.
“That said, the influence of the budget itself has been declining from the 1990s, when it used to be also the platform to announce reforms,” they said.
This view was echoed by Religare Institutional Research.
Their analysts, led by Tirthankar Patnaik, said in a note last week: “Union budgets in India have progressively lost significance for the market over the past few years. Despite being the next macro-economic trigger for the market, we think this year may not be very different, other than sustained equity supply. The budget recipe is likely to be a sweet-and-sour mix of reforms and populism in a pre-election year, with a potential dose of regressive policies thrown in.”
A key number to be looked at closely by the market in the budget is the quantum of subsidies.
“On subsidies, we believe the government will try its utmost to keep the total bill at or lower than 2 per cent of GDP, continuing with FY2013’s trend. This, of course, does not take into account the final quantum of the subsidy bill incorporating slippages, which may result in the figure being much above 2 per cent of GDP. For example, our estimates show that this year’s revised subsidy bill may work out to around 2.4 per cent of GDP compared with the budgeted target of 1.8 per cent,” ICICI Global Markets analysts Kamalika Das, Kanika Pasricha and Surbhi Ogra said in a February 11 note.
Axis Capital’s Nandan Chakraborty and Sachchidanand Shukla expect the FM to announce a roadmap to rein in subsidies through direct cash transfers, among other things.
According to Religare Institutional Equities, a sharp reduction in FY14 subsidies (assuming no deferral) would happen only when the government goes for sharp hikes in fuel and fertiliser (urea) prices. “While structurally a big positive for government finances, this also implies higher inflation as a necessary corollary with higher food/fuel/finished goods prices, which in turn would hurt not only consumption in the near term (we are worried about urban consumption), but could potentially also extend the monetary easing on one hand, and a growth revival on the other,” the Religare analysts said.
Broadly, market analysts expect some tweaking in tax rates and higher resource mobilisation through divestment in FY14.
Ambit Capital’s Mukherjee is expecting an upward shift in personal income-tax slabs and the imposition of a higher tax rate on the super-rich. “This is likely to assume the form of a 10 per cent surcharge on the super-rich, which will help the government meet the twin goals of tax augmentation and project a pro-poor stance as the super-rich (i.e. with an income of more than Rs 20 lakh) account for one per cent of tax payers in India and they pay 63 per cent of total income taxes,” she wrote.
Ambit Capital also anticipates imposition of a temporary 10 per cent tax on annual dividend income, exceeding Rs 15 lakh.
As far as various sectors are concerned, the beaten-down or underperforming segments of the economy — such as capital goods, infrastructure & power, real estate and telecom can expect some relief from Chidambaram, analysts reckoned.
Axis Capital analysts Chakraborty and Shukla expect three key announcements for the real estate sector: an increase in the limit for income tax deduction on interest on home loans, extension of one per cent interest subvention on home loans by one more year and infrastructure status for affordable housing.
For the telecom sector, there is an expectation of infrastructure status for tower companies and a reduction in multiple taxes andlevies.
As far as infrastructure and power sectors are concerned, there are expectations that the limits on tax-free bonds will be hiked, which will reduce cost of debt by allowing firms to refinance rupee debt through external commercial borrowings while the FM may ask IIFCL to guarantee private infrastructure bonds. Axis Capital also expects the FM to announce lower dividend distribution tax from SPV if re-invested in capex. zz