Friday, February 19, 2010

Prateek Agrawal,Head – Equity, Bharti AXA Investment Managers

Budget Expectations (2010- 2011)
At this point in time the expectations from the budget is muted. We believe that given the high fiscal deficit of last year, this will be a budget that targets fiscal consolidation and hence we believe that a degree of stimulus withdrawal is inevitable and also desirable. We believe that achieving the fiscal deficit number of around 5.5% of GDP should not be a challenge on account of an expected 15%(around) growth in nominal GDP, revenue buoyancy as a consequence of partial rollback of excise duty cuts and growth in line with the growth in taxable areas of GDP and also on account of absence of several one off items in last year budget (such as central govt. pay increase, lower spend on farm loan waiver this year vs. last year and lower spend on job
generation schemes vs. last year when monsoons failed). This would leave the government with a gross borrowing amount similar to last year’s number of around 4 Lakh Crores. However, last year, the government could tap the MSS(Market Stabalisation Scheme) and this would not be available during this year. In a year when corporate loan demand is expected to be strong in response to a strong growth in economy, the market would be watching the gross borrowing figure closely. We believe that government can reduce the gross borrowing figure significantly through lower spend on various subsidies. This would be a measure that would take the form of retail fuel price increase and can be outside the budget. Similarly a drop in food and fertilizer subsidy would be the most market friendly way of reducing the fiscal deficit and would benefit the broad market besides the sector itself. We do not believe that increase in inflation as a consequence of such a move would cause concern because clearly it would be a policy driven move and not on a consequence of strong demand. The other market friendly way of bridging the deficit is to raise money by selling 3G licenses and stakes in government owned companies. While, the fate of disinvestments depends on the state of the markets, we believe that the government has assets which would have good demand. While the cut in subsidy bill is clearly a desirable outcome, it may not be accomplished in one go. We believe that in times like
these when it is difficult for Corporates to borrow money from outside, a 10-15 $ billion of government borrowing in the overseas market would do the trick. It would leave domestic liquidity for corporate growth and provide cheaper finance to the government. The risk on exchange rates would be low because India is slated to become a current account surplus country once again over the next year. We believe that such a move would also be taken positively by the market. Markets are unlikely to react positively if there is an attempt to increase revenue base by increasing taxation besides in the manner of rollback of stimulus granted in response to the slowdown. Similarly, achieving fiscal prudence through a cut in spending beyond the one time effort of last year again would be viewed negatively.

Prateek Agrawal,Head – Equity, Bharti AXA Investment Managers

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