This budget will be more closely watched given the “COALITION COMPROMISES” that the PM referred to, “ELECTIONS”, “HIGH INFLATION”, and “SUBSIDIES for the common man” excluding the one given to telecom subscribers. With Mr. Raja behind bars until a few days after the budget is announced could mean that the Parliament will function during the budget session. This is a positive and a relief for equity investors whose confidence and wealth have been impacted by 1) Inflation and rising interest rates; and (2) Ethical Deficit and its fallout on key decisions. However, given the forthcoming elections in Tamil Nadu, Kerala & West Bengal and COALITION COMPROMISES, the government may defer tough decisions on decontrolling diesel prices and curbing other subsidies until inflation cools off. At $100/bbl crude oil prices, losses could be in the region of `110,000-120,000 cr with the government’s 33% share at Rs. 35000-40000 cr as against Rs. 21000 cr for Apr-Dec-10. At 45% sharing as in 3QFY11, the burden rises to Rs. 50000-55000 cr. Fertilizer subsidy (Rs. 50000 cr BE) and food subsidies (Rs. 56000 cr BE) that were budgeted at 11% of FY11 budget expenditure are likely to expand with food inflation and higher oil price. A mechanism and framework for direct subsidy to end users being established is a positive. Direct money transfer to the rural consumer in the form of NREGA (Rs. 40100 cr BE) will continue to be the focus and could see its outlay rise with the rise in CPI (AL). The final fiscal deficit for FY11 is likely to be lower than the 5.5% budgeted due to Rs. 106000 cr inflow from the Telecom auctions. From companies, indirect tax changes could be minimal given that GST will be big change. Clarity on implementation of GST will be a positive. Additional services under the tax net is a possibility. The STPI clause extension for another year will be a keenly watched event from IT companies perspective. The Direct Tax Code being implemented in FY13 will mean cosmetic changes on income tax in the budget as a psychological relief to inflation burdened middle class. From a stock market perspective, we would keenly watch for clarity of taxation on Long-term under DTC as any tax on long-term gains could lead to profit booking before the tax comes into place. Another, key point will be disinvestment proceeds that could be below target for FY11 with a large target for FY12 to compensate the 3G inflows in FY11.
Tuesday, February 22, 2011
Manish Shah - Associate Director, Equity,Motilal Oswal Securities
This budget will be more closely watched given the “COALITION COMPROMISES” that the PM referred to, “ELECTIONS”, “HIGH INFLATION”, and “SUBSIDIES for the common man” excluding the one given to telecom subscribers. With Mr. Raja behind bars until a few days after the budget is announced could mean that the Parliament will function during the budget session. This is a positive and a relief for equity investors whose confidence and wealth have been impacted by 1) Inflation and rising interest rates; and (2) Ethical Deficit and its fallout on key decisions. However, given the forthcoming elections in Tamil Nadu, Kerala & West Bengal and COALITION COMPROMISES, the government may defer tough decisions on decontrolling diesel prices and curbing other subsidies until inflation cools off. At $100/bbl crude oil prices, losses could be in the region of `110,000-120,000 cr with the government’s 33% share at Rs. 35000-40000 cr as against Rs. 21000 cr for Apr-Dec-10. At 45% sharing as in 3QFY11, the burden rises to Rs. 50000-55000 cr. Fertilizer subsidy (Rs. 50000 cr BE) and food subsidies (Rs. 56000 cr BE) that were budgeted at 11% of FY11 budget expenditure are likely to expand with food inflation and higher oil price. A mechanism and framework for direct subsidy to end users being established is a positive. Direct money transfer to the rural consumer in the form of NREGA (Rs. 40100 cr BE) will continue to be the focus and could see its outlay rise with the rise in CPI (AL). The final fiscal deficit for FY11 is likely to be lower than the 5.5% budgeted due to Rs. 106000 cr inflow from the Telecom auctions. From companies, indirect tax changes could be minimal given that GST will be big change. Clarity on implementation of GST will be a positive. Additional services under the tax net is a possibility. The STPI clause extension for another year will be a keenly watched event from IT companies perspective. The Direct Tax Code being implemented in FY13 will mean cosmetic changes on income tax in the budget as a psychological relief to inflation burdened middle class. From a stock market perspective, we would keenly watch for clarity of taxation on Long-term under DTC as any tax on long-term gains could lead to profit booking before the tax comes into place. Another, key point will be disinvestment proceeds that could be below target for FY11 with a large target for FY12 to compensate the 3G inflows in FY11.
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