Chaitanya Pandey, Head Fixed Income, ICICI Prudential AMC shares his view on the Union Budget 2011.
The India Budget 2011 has continued to maintain a pro growth approach and has primarily focused on ensuring growth sustenance. The budget has continued to focus on inclusive growth strategies, rural empowerment and socio economic stories. With time the budget has changed towards being an objective exercise rather than a policy dictating tool.
Ahead of the budget this year there was a lot of volatility in international events and expectation was that the budget would work towards managing the impact of international events. However, the government has instead focused on sustaining the domestic growth indicators. The market was expecting an increase in excise duty across categories. On the contrary there has been a status quo across most categories which are a big positive for sectors like consumer durables and auto etc.
The projections on the revenue as well as expenditure side look aggressive. Only 3% growth in overall spending leaves little room for a fiscal slippage during the year. The Union Budget FY12 has made no initiations towards creating cushions against crude price volatility. Managing economy has therefore been left primarily to monetary policy, rather than a combination of fiscal and monetary tools. A concerted effort at removing complexity in tax administration will clearly help widen the tax base and reduce systemic issues. From a mutual fund stand point, the fact that foreign nationals can invest in Indian mutual funds is a positive and we as an industry need to gear up and activate ourselves to handle this benefit. This initiative will, definitely make the Indian mutual fund industry more accessible to individual participants globally.
From an equity market point of the medium term outlook remains volatile, responding to crude fluctuations. Crude oil price behavior will be a far more important factor than valuations, which look fair as of now. We continue to believe that infrastructure sector has underperformed despite its vast potential in the current economic context. With the government focusing on infra financing and debt this segment should see improvements in execution. The consumer durables and auto sectors will gain from status quo on excise duty. Sectors like the oil marketing companies will be pressured due to their inability to pass on price increases. From here on, it will be global events and most importantly crude prices that will provide direction.
From a debt market point of view, there is no significant change in our view as far as short term interest rates is concerned. For the longer end of the curve, the Budget numbers look very good and have exceeded most expectations. Some of the assumptions in the calculations for arriving at a lower deficit number appear to be optimistic. It appears as if the subsidy numbers are understated given the market conditions. In a scenario where the oil prices come down, there should be no problem. There is a large amount of optimism built into the numbers for both fertilizer and oil subsidy. Keeping this aside, the borrowing program remains reasonably large. No structural view on interest rates coming down. The fact that deficit numbers are lower than expectations and initial borrowing numbers are low should keep the market stable for now. Also considering that no supply is available, and as per the borrowing program for this financial year another supply of Rs 10,000 cr may possibly come. If this auction is available in March, then we can expect rates to move up a little bit. There have been some comments from the Finance Ministry that this supply may not come and they may use other funding sources. In that case, we expect the markets to remain buoyant till the borrowing program for next year starts. The other assumption in fiscal numbers is the assumption of liquidity improving and therefore MSS of another Rs 20,000 cr coming in the system. If that doesn’t happen, then potentially the borrowing program may go up by that much which will take the numbers to what the markets were expecting.
The view on inflation remains same even though next couple of numbers may tend to look good but underlying inflation remains strong. In our view therefore, a structurally bullish call is still some time away. The inflation expectations are likely to remain buoyant for some months since commodity prices are not showing any real signs of cooling off.
The positive of the budget is definitely a lower fiscal deficit number. The government has shown some amount of restraint in unnecessary spending and putting to rest the worry that existed on spending in a big way just before the state elections.
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