As the market’s tepid reaction indicates the Budget did not deliver too much by way of surprises.  Off an environment with rising inflation, various charges of corruption and poor corporate governance, and global tremors, the Budget comes at a very challenging time to say the least. 

Broadly, the primary macro fear – the fiscal deficit – was addressed, with the number of 5.1% for FY11 coming in lower than the market’s expectations, a positive.   An aggressive target of 4.6% has been set out for next year but it is unclear how exactly it will be achieved.  This fiscal year, the government benefited in a big way from the 3G auction, as well as the blockbuster Coal India IPO, and with no 3G in the bag next year, PSU disinvestment has to be a big theme if a fiscal deficit of 4.6% has to be realized. 

Given the political backdrop, the Budget was expected to be fairly populist and a large part of the proposed spending was focused on such measures – agricultural, rural empowerment, education.  No bold moves were made on the reforms front, which is a disappointment for the markets.  Another dampener, though expected is that while GST implementation is on track, it will take time to roll out, and what form it takes is still unclear.

An unexpected positive for markets is allowing FIIs and foreign nationals to invest directly into Indian mutual funds.  On the debt side, this should definitely provide FIIs an easy way to access India (and enjoy the carry trade).  On the equity side, while it is a good move for the mutual fund industry, it is unclear what the impact is.  FIIs can already invest directly into equities and many of the details around foreign regulation (e.g. SEC registration) and taxation are unclear, and are critical in determining the success of this proposal.  Do we net expect massive FII flows into India?  Probably not, but at the very least mutual funds have got an entire new customer base to go after.

Among sectors, a few specific sectors stand to gain and lose.  There was no discussion on the excise hike in auto stocks, which should help the sector, which has been discounted on this expectation.   New banking license provisions should also help diversified financials players, but it is unclear how quickly this will happen.  Iron Ore players are probably going to be hit hard by the export duty change, particularly names like Sesa Goa who are export oriented.   A few other sectors like hospitality and airlines where various taxes have been increased will also come under pressure.

Overall, the Budget remained an in-line with expectations event for public markets.  In the short term, market performance is more likely to be dominated by mounting global pressures, particularly crude prices.  In the long term, the details – many of which are unclear – matter and markets will look at how of what was promised today will actually be delivered.

(Radhika Gupta is a Founder Director with Forefront Capital Management, a SEBI registered portfolio manager, and India's first specialized quant manager. She was also a strategy consultant with McKinsey and Company (New York).  Radhika graduated from the Wharton School at the University of Pennsylvania.)

Leave Your Comment(s)