Union Budget 2011: Can absence of negatives be enough?
Moneylife Digital Team 28 February 2011

Among the mega-cap stocks, the highest post-Budget gainers were ITC and Maruti—only because Budget 2011 has no negatives for them. The rest is a lot of hopes

It was a difficult time to present a Budget. Apart from the global political turmoil and the easy money policy of the US (which have caused oil, gold and silver prices to shoot up) the country is racked by high inflation (especially food), rising interest rates, flagging growth numbers and the multiple scams and corruption scandals.

This has created a sense of despondency which was reflected in the sharp fall in stock indices since November. The market was desperately looking for some cheer and finance minister Pranab Mukherjee's Budget speech provided some. Whether he lives up to the promises made is another matter.

The big news that the market reacted to is the promise of holding the fiscal deficit at 4.6%, when the expectation was that it will remain at 5% plus. The FM promises to ensure that the economy will grow at 9%, and he will bring down inflation, without increased taxation, or an amnesty scheme for black money.

Will he be able to walk that talk, or is the please-all Budget just a way to counter the flak that the UPA government has faced in recent months? Only time will tell.

Predictably, the stock market is confused and this is reflected in the way the Sensex had yo-yoed today (opened up 200 points, sank 150 points, soared again to 500 plus and was just 122 points up in the end). For a while it reacted positively to the lower fiscal deficit and government borrowing numbers, the proposal to allow foreign savings to come into Indian funds and also the absence of major negatives. But, at the end of the day, it is clear that the roadmap outlined by the Finance Minister won't be easy to follow.

On the positive side, the relief to marginal tax payers, the plan to raise Rs30,000 crore through infrastructure bonds with continued incentives for subscribers and the absence of any major new taxes is good news for individuals as well as companies. Permitting foreign institutional investors (FIIs) to invest in mutual funds may give a much-needed boost to this beleaguered sector and positively impact the capital market too. But that is over the medium to long term-provided all the taxation and Know Your Customer issues have been sorted out. There is nothing in it to change the short-term picture.

In our view, the Budget is long on talk but short on clarity about how it plans to implement various proposals. For instance, the apparent determination to moving towards a GST (General Sales Tax) regime is good, but it is well known that all States have yet to commit to its implementation. Similarly, the disinvestment target is maintained at an ambitious Rs40,000 crore, even though disinvestment plans for the current year have been postponed-after nine months of a bull market.

On new banking licenses, the policy framework is not ready, a year after the original proposal. Similar promises have been made on the Direct Tax Code, removal of supply side bottlenecks for the food sector, administrative reforms, simplification of tax filing and refund mechanism, the fight against corruption and the intent to curb the generation of black money. In short, everything remains the same as before and after the Budget, barring a few companies that have been hit (like Sesa Goa) and spared (like those in the auto sector and cigarettes).

Rajesh Mishra
1 decade ago
Very very well thought out reaction on hard budget. Pranavda walked safely amid fir all around..hope his intension and lack of negative actions works
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