The Union Budget 2010-11 is out and had open doors for number of suggestions in regards to the financial system as well as equity and debt markets for the coming year. In particular this budget aims to reduce the gap between the government’s overall revenue and expenditure, called fiscal deficit, from 6.7% in FY2010 to an estimated 5.5% in FY2011 a difference of 1.2%.The budget had aimed at improving finances by reducing subsidies and normalizing indirect taxes even as it had reduced income taxes on individuals. Over the last couple of years, due to the macro-economic crisis and high commodity prices leading to rise in subsidies, the government’s finances was weakened and the government has taken a multi-year road map to improve on the loss.
It has noted that growth in economic activity always leads towards improving long-term finances, and generating surpluses requirement for investment. On a closer look at the budget it reflects clearly that it had intended either maintaining the momentum, or at increasing it, with more allocations to various development and infrastructure segments this budget is designed keeping in mind the growth in economic activity. The reduction in income taxes on individuals will put more money into the hands of consumers who in turn will provide a boost to private sector demand, at the same time partly neutralizing the impact of price hike that will happen in various segments, such as petrol and diesel prices, on account of reduction in subsidies. GDP which is on an improving trend overall, despite the impact of weak monsoon, will maintain the pace in FY2011 showing a higher GDP growth rate than FY2010. As such the budget for the overall economy is growth enabling even though it is likely to be mildly inflationary.
Impact on Equity Markets
Good economy is usually good equity and productive markets. Strong domestic demand in the consumption-oriented segments will be boosted. An economical revival can be predicted FY2011 with the growth in corporate earnings a significant improvement from the flattish trend observed over last two years. Corporate revenue and earnings with this budget has positives note for consumer sectors such as Auto, negatives for cement and realty sectors and is neutral for banking sector. A positive environment for infrastructure and capital goods sectors, giving the increased outlays and additional tax break on infrastructure bonds.
While growth in earnings will remain robust, however the market valuation multiple is likely to remain capped, closer to the long-term trend line levels of 14-15 times one-year forward earnings, given the government’s planned disinvestment target of Rs 40,000 Cr for next year. We believe that there is a case for range bound markets in the short-term driven by factors like current valuations and likely supply of paper on account of fresh issuances in the backdrop of resurgent economic growth and capital flows.
Impact on Fixed Income markets
As discussed in beginning this budget aims to reduce the gap between the government’s overall revenue and expenditure, called fiscal deficit, from 6.7% in FY2010 to an estimated 5.5% in FY2011 a difference of 1.2%.The government has taken the first step towards fiscal consolidation by reducing the deficit to more sustainable levels in the Union budget for FY2011. The government aims to achieve this through improvement in tax to GDP ratio by increasing excise duty rates, Minimum Alternative Tax paid by corporates and increasing the scope of service tax
Less than expected increase in overall expenditure
Higher receipts through disinvestment and auction of 3G telecom licenses
To bring down the fiscal deficit to 4.1% of GDP by in FY 2012-13as committed by the government would likely to bring a lower interest rate in medium term. The net market borrowing program for the FY 2010-11 has been reduced to Rs. 345,010 cr compared to Rs. 398,411 cr for the FY 2009-10.
As soon as the government hits the market with next year’s borrowing program there might be some pressure on government security yields in an environment characterized by rising inflation, possible interest rate hikes by RBI and possibly no support from RBI in the form of Open Market Operation (OMO) purchases of government securities.
Summary
All in all an economy friendly budget in the medium to long term due to positive objective shown by the government in the areas of social spending, fiscal consolidation and tax reforms. The pressure is felt on the debt market in the near term .However the view on equity markets is one of range-bound markets, no long-term savings or investment decision should be taken based on short term outlook of the markets. Indian equity and fixed income securities remain an appealing investment opportunity in the long-term savings portfolio .The programs had sustained India to remain in the race of the fastest growing economies in the world, least impacted by global crisis.
What impact will budget 2010-2011 have on a common man??