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S. Vaidya Nathan

FOR long- and short-term investors, Budget 2004 should be a cause for cheer. Yes, for every transaction put through on a stock exchange, a buyer will now have to fork out 0.15 per cent of the price to the government. Day-traders, in particular, may find this tax on transactions cutting into their spreads.

This, however, appears to be a small price to pay for the flexibility that investors have with the abolition of long-term capital gains tax on securities and reduction in short-term capital gains tax.

Be it an investment in debt or equity, the Budget does not have significant negatives. The 2 per cent cess on taxes to fund education is here to stay and ought not to be viewed as depleting value.

The thrust of the Budget also indicates that this Government will not derail the reform process. There can be no quarrel about the emphasis on agriculture. What would have to be watched is the delivery of the benefits and the financing.

If delivery mechanisms are appropriate (though experience does not generate optimism), the focus on agriculture may spur rural purchasing power, which has taken a knock over the past four years.

It could also ensure that the benefits of economic reforms reach a larger number of people, make them more acceptable across the political spectrum and dispel the growing view that reforms could extract an electoral price.

As for financing, if the Government gets lucky with one more year of buoyant growth in tax revenues, bankrolling the enhanced outlay may not be a problem.

The interest rates on small savings, which have been left untouched, mean that they continue to be an island of prosperity. This could distort the efforts over the past few years to evolve an interest rate structure that is line with the risk profile of debt issuers.

With the rise in small-savings rates, the phase of declining interest is over. There is an upward bias to interest rates with a one-percentage point increase likely over the next year; in the best case, interest rates may remain stable.

Home loan products may be an exception to any increase in interest rates as lenders battle for market share. Loans for cars may also fall in this category as manufacturers, dealers and lenders may bear a larger proportion in order to push sales.

Investors in equities need to look beyond the Budget and be concerned about factors such as rising inflation, effect of higher crude prices, higher interest rates, the halting progress and inadequate spatial distribution of the monsoon, and the effect of lower earnings growth after the blistering pace of last year.

Higher crude prices and interest rates could have a bearing on profitability. This could pressure equity valuation though the bigger risk is an indifferent monsoon unless the picture changes in the next two-and-a-half months.

Concerns about disinvestment and lack of progress in financial sector consolidation have been priced into the stocks of PSUs and as banks. View these stocks on fundamentals. Gains linked to exogenous factors may be icing.

For FIIs, the relative attractiveness of Indian equities has been enhanced by the reduction in short-term capital gains tax and the policy thrust to reward long-term investing. This may encourage them to trade even more aggressively.

The FIIs may not be bothered by the turnover tax on transactions as they are used to such a system in Korea, Indonesia and Taiwan. In this backdrop, here are a few pointers for investment action:

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