The Hindu Business Line : Balancing populism, growth

The Union Budget 2006-07 placed before Parliament by the Finance Minister, Mr P. Chidambaram, has tried to balance populism on the one hand and provide growth impetus on the other.

While he has postponed implementation of the Rangarajan committee recommendations on oil subsidies and policy changes in fertiliser subsidies and food subsidies, he has given adequate thrust to infrastructure and Bharat Nirman Yojna, targeting GDP growth in excess of 8 per cent.

The Budget hopes to rein fiscal deficit at 3.8 per cent of GDP vis-a-vis 4.1 per cent for FY'06, which is positive for the economy as a whole. It has a clear-cut emphasis on the power sector with focus to electrify 40,000 more villages by 2007.

There has been an increased allocation in this regard, 20 billion tonnes of coal to be deblocked for the power sector by 2012, extension of section 80IA, increased FDI, etc.

The one negative for capital markets is the increase in STT across the board, which may adversely affect liquidity and sentiments.

There has also been some disappointment in the form of no concessions in short-term capital gains in spite of an increase in the STT.

Overall the Budget would be positive for sectors such as made fibres, integrated steel, auto, agro processing, paper, travel and tourism, cement, construction, power and IT. Sectors that would be negatively impacted are cigarettes, petrochemicals, upstream oil companies and inorganic chemicals.

With the BSE-Sensex being over 10,000 and high global interest in Indian equities, investors across the world were looking to Budget 2006-07 to set the tone for the future. The Finance Minister has done a commendable job by ensuring that growth remains on track and has stuck to his commitment of fiscal discipline. Laying the platform for GDP growth of 7.5-8 per cent, the Government expects to bring down fiscal deficit below 4per cent. This is a big improvement, considering that there has been no increase in tax rates.

The markets have reacted very positively to the Budget, with the BSE Sensex moving up by over 1 per cent to touch an all-time high.

Equity markets will get a boost from the continuation of economic buoyancy and larger investments in infrastructure and agriculture.

Considering the strong flows from both FIIs and domestic funds, we expect equities to deliver attractive returns. Investors should bet on equities for longer-term capital appreciation.

(The author is Managing Director, Motilal Oswal Securities.)