The Hindu Business Line : Poised for growth

THE three key engines of economic growth, namely infrastructure investment, domestic consumption and capex by corporates, look set to maintain their growth momentum following the Finance Minister Chidambaram's budget. The focus on infrastructure investment and increasing importance of rural investment will provide a thrust to telecom, roads, ports and airports. Indeed, the FM has stated that there will be an increase in Plan expenditure, an SPV to fund infrastructure and a provision for viability gap funding.

Increased provision of funds (through raising the cess on petrol and diesel) should help Highway Projects to accelerate. We expect infrastructure investment of $76 billion over the next three years.

From a stock market viewpoint, one of the key fears that corporate India would have to pay for the thrust on rural investment are allayed. Indeed, corporate tax rates were lowered which, apart from boosting overall earnings growth by around 3 per cent in FY 05/06, should also enhance the corporate capex cycle which appears much stronger.

Additionally, sectors such as textiles, sugar and tea were aided by various benefits in the budget. Domestic consumption should be boosted as tax slabs were raised on personal tax, thus effectively reducing the tax rate for lower income levels, and our views remain that domestic consumption will double over the next five years to $500 billion.

The budget, as expected, does seek to adopt the Kelkar approach but in a very phased manner. It has not, however, done with many of the exemptions that were widely expected. This has resulted in the target fiscal deficit at 4.3 per cent being somewhat higher than we had anticipated. On balance, we think, the fiscal deficit may overshoot by about Rs 90-100bn compared to the budget target of 4.3 per cent owing to revenue shortfalls. But we remain comfortable with our FY06 GDP estimate of 7.6 per cent assuming a normal monsoon. The positive news for investors was that the budget carried no real negative surprises and funds waiting to enter the market now have the confidence to do so.

(The author is Executive Vice-President DSP Merrill Lynch Limited.)

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