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In the Union Budget 2011-12, the Finance Minister has articulated its commitment to fiscal consolidation, infrastructure development, agriculture growth and higher governance standards.
The fiscal deficit target has been aggressively kept at 4.6 per cent for FY12, which is more stringent than the FRBM target of 4.8 per cent. The economic growth targets also look very aggressive at 9 per cent for FY12, given the moderation in momentum in the third quarter of FY11, when GDP growth was 8.2 per cent. It is worth noting that while the GoI has delivered on its targets in the past, the under-budgeting of subsidies and added strain on finances from elevated commodity prices may pose an upside risk to fiscal deficit.
It is heartening to see that the increase in allocation to infrastructure and education sector has been higher than that in social sector spending. The move to cash subsidy for petrol and kerosene to BPL families is a bold one.
FII IN INFRASTRUCTURE
The 23 per cent hike in government allocation to infrastructure, issue of tax-free infrastructure bonds worth Rs 30,000, steps to augment FII long-term flows to infrastructure sector, and creation of infrastructure debt funds with a reduced FII withholding tax rate of 5 per cent, from 20 per cent, has rightly made infrastructure one of the key beneficiaries of the Budget.
Enhancing FII investment in infrastructure bonds will also help in deepening the corporate bond market and provide a hedge against the more volatile FII equity inflows.
One disappointment was that despite the dire need to enhance IIFCL’s disbursements in consonance with our funding requirement, its disbursement target has been raised by barely Rs 5,000 crore for the year. Further, there was no focus on attracting FDI, which could have really spurred such inflows in the current environment of easy global liquidity.
AUTO, BANKING SECTORS
Fiscal compulsions & determination to move to GST and DTC rightly ruled out any substantial tax changes. Hike in personal income tax exemption limit, reduction in qualifying age for being a senior citizen and higher pension will augment disposable income in the hand of tax payers. This is a positive for consumer sectors. The auto sector, which is already showing strong momentum, will also benefit from maintaining status quo on excise duty.
Banking sector will benefit from lower government borrowing as it will ensure that there is no crowding out of credit to private sector, amidst improvement in liquidity and well-anchored bond yields. This is also a positive development for sectors that require funding like infrastructure and power.
Overall, India Inc stands to benefit from the reduction in surcharge from 7.5 per cent to 5 per cent. The lowering of the tax rate on dividends received by an Indian company from its foreign subsidiary is a great move as it will increase the repatriation of money. The marginal hike in MAT and inclusion of SEZ under the ambit of MAT are in line with expectations, as these were already part of the DTC proposals.
BENEFIT TO EQUITY MARKETS
Equity markets will also gain from the move to permit foreign investors to invest in Indian mutual funds as it will diversify the sources of foreign inflows. The proposed Rs 40,000 crore disinvestment target will also attract flows and provide good opportunity to gain from investment in quality PSUs.
Overall, while the market direction will also be dictated by the movement in global commodity and crude oil, the budget remains positive for the broader markets. The medium-term equity market outlook remains robust given the recent underperformance vis-a-vis developed world counterparts, attractive valuations and robust economic growth outlook. In my view, any correction should be used as a buying opportunity to build a long-term portfolio to reap the true gains of India’s economic growth potential.
Liftout: Enhancing FII investment in infrastructure bonds will help deepen the corporate bond market. The disinvestment target is good news for equity markets
(The author is Chief Investment Officer, Birla Sun Life Investment Company.)
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