High hopes from low expectations!
From the representations of various industry associations, trade
associations and business chambers, it is clear that in his attempt to manage
expectations from budget, the finance minister has actually raised the hopes to
very high level. While the general refrain is that the expectations from the
budget this time are low given the fiscal challenges; we find the hopes running
high.
It is general anticipation that he will present a tight fiscal
budget – cutting on plan and non-planned expenditure substantially. Aggressive
disinvestment target and lower fuel subsidy will allow the finance minister to
adhere to the 5.3% FY13 and 4.8% FY14 fiscal deficit target.
It is also widely hoped that he will announce substantive
measures to motivate equity investments by household investors. The incentives
are expected to include tax incentives like raising limit under section 80C and
tax free infra bonds. Ambitious disinvestment target also warrants good market
conditions.
It is also widely hoped that he will do enough to reignite the
comatose investment cycle, especially in financially stressed infrastructure
sector. Industry as well as investors are expecting serious measures to boost
private investment, including tax concessions, debt restructuring, besides fast
tracking mega projects.
The current account deficit has emerged as one of the top
concerns for all. RBI, rating agencies and PMEAC have all highlighted this
concern on numerous occasions. This high pitch debate seems to have raised
significant hopes of substantive measures to boost exports and curb imports to
make domestic industry more competitive. A wide range of industry sectors are
expecting duty realignment to serve their interest.
Farmers, infrastructure developers (especially power sector)
etc. are seriously hoping for another round of debt related concessions,
including loan waiver.
While the elevated fiscal concerns should be preparing people
for higher effective taxation, the hopes at present seem to be placed to the
contrary.
In our view, despite low expectations, everyone might have
reasons to be disappointed by the budget. A pre-budget rally driven by high
hopes should therefore be used to cut positions in financially stretched infra
and realty names. The global commodity rally is also a bad news for capital
goods producers who have benefitted from low commodity prices in past 3-4
quarters.
We also believe that fiscal tightening by cutting development
expenditure, constricting public investment, letting the taxmen loose to hound
the taxpayer may not be the most appropriate path to be taken in the current
environment of low confidence, tight liquidity and crippling infrastructure
bottlenecks.
4-6hours of power cuts and deficit financing at 12% (the
interest government will pay on numerous income tax refunds deliberately
delayed since past many months) is not motivating at all.
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