No immediate positive reaction from market

Going into the Budget, Finance Minister P. Chidambaram’s main task was to ensure that India avoids a possible downgrade from the rating agencies, at any cost. Fiscal consolidation was going to be the key message of the Budget. On this count, Chidambaram has scored a near 10/10. Less than six months ago, even a 5.7 per cent fiscal deficit was being scoffed at. The Finance Minister has not compromised on fiscal consolidation. He kept the current year’s deficit at 5.2 per cent and projected a fiscal deficit of 4.8 per cent for next year.

The Budget is honest, workman-like (at the cost of it looking ‘boring’) and very high on clarity (barring the PC ‘googly’ in the form of the FII tax clause regarding Tax Residency Certificate (TRC) and the distinction between FII and FDI), though it falls short on any big-bang reforms/announcements and has very few measures that can spur growth or kickstart the investment cycle in a hurry.

If one looks at the stock market post-Budget, there was hardly any reaction. Then suddenly, the fine-print came regarding a clause in the Finance Bill stipulating explicitly that the TRC issued by Mauritian authorities is not in itself a sufficient condition to claim tax benefits on investment profits in India. Despite some reassurances from the Finance Ministry, the market is not yet fully settled.

Among the disappointments for the stock market, there are just no direct measures in the Budget that will aid growth or earnings. Earnings will be helped led by fiscal consolidation and decline in CAD.

Another negative from the stock market view is that the Finance Minister has not aggressively used tax instruments to boost financial savings.

Among the few measures that could direct more money into the equity markets is the Rajiv Gandhi Equity Savings Scheme, where the taxation benefits has been extended for a period of three assessment years.

The Budget also plans to categorise FDI and foreign direct investors (FIIs), based on their holdings in a firm. While this move could have its own benefits, ambiguity prevails at the moment. Where an investor has a stake of 10 per cent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 per cent, it will be treated as FDI. FDI entities attract up to 40 per cent tax compared with 30 per cent for FIIs, and are bound by lock-in periods in their investments as promoters. So, if a foreign entity keeps changing his holdings, he will keep switching between FDI and FII and the norms will keep changing for him accordingly.

MARKETS – WAY AHEAD

The uncertain global environment will keep coming back to affect stock prices in India, though to a lesser degree than last year, since we are more domestic-driven today than six months ago. The correlation with global markets has fallen and is at a five-year-low.

The stock markets will be looking forward to a slew of domestic policy actions. A lot of announcements and measures were made before the Budget and some in the Budget, which has to be followed by further action. The Finance Minister has assured that more steps are on the anvil.

We have the RBI monetary policy and the RBI will be looking at both the fiscal deficit and the inflation numbers. So, the likelihood is that we will get more monetary easing and the growth will get better.

Equities could inch higher. We have had a very steep correction which has made valuations attractive again.

There may not be any immediate positive reaction because of the Budget, but I think there will be a little bit more considerate evaluation, as one looks forward to improving deltas, as regards macros.

(The author is Principal and Head, Private Client Group, Nirmal Bang Securities. The views are personal.)

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