Budget expectations: A test match, not T20
For me, a Test match is still the real thing. T20 is fine for the occasional thrill and I have no quarrel with the place it has carved out in the hearts of cricket lovers. Yet I suspect that any serious cricketer will still measure his career against his Test track record. So it is, or should be, with policy making. The stock market may want instant gratification but it's prudent to shed that T20 frame of mind going into this budget. A dream budget will be like a flamboyant Yuvraj Singh century within a test match, supremely welcome but the bigger goal has to be to win the Test match. Never miss the woods for the trees.
Reams have been written about the significance of this electoral verdict for the Indian economy. This may have raised the bar of expectations for the first Union Budget of this government though interestingly the Sensex hasn't added any weight at all from where it was one day after the election result. That could well mean that investors hope that strong reform signals come through but have not positioned themselves for such an outcome. It's like admiring the shape of a horse and fancying it's chances of winning but not exactly betting on it. You see the difference? The market is going in fairly light, into the event. If it is a complete damp squib, and let’s discuss what would qualify as one, the Nifty could certainly retreat to 3800 kind of levels but that would hardly be a dire scenario. If it has some positive tones but not a lot, the Nifty may not even break 4000. That is, on the budget impact alone. And if it is a complete dream budget, it will certainly rush back to 4600-4700 levels, it's recent peak, and then wait to see what is going on in the global equity environment. That is my best guess of the budget impact; depending on how good or bad it is perceived to be, the nifty will probably go to 4000 or 4700. Only a terribly insipid budget will break it below 4000 or an outstanding one take it beyond 4700. After that the environment takes over. If global markets rally on, the S&P goes to 1100, the Nifty will head to 5000 plus. If global markets correct, something which can certainly not be ruled out and the S&P falls to below 800, then the Nifty too perhaps heads to 3600-3700. The budget is just one event, even something as unexpected as the election result got discounted by the market in one day flat. I doubt very much though that the budget is a 20% binary event. Seems more like 7-8% to me, either way.
But lets leave the market aside for a moment. The budget is, after all, much bigger than just the stock market. The only thing that one expects will shine through the budget speech is positive intent. The budget is not the best forum to push through sensitive policy reform. One cannot forget that it is, after all, a very political document. However, given that Prakash Karat will not be sniping at his heels this time, one certainly hopes that Pranab Mukherjee can unveil a roadmap that he will execute over his five year term. Heavens will not fall if FDI in insurance is not taken to 49% in this budget or if a Rs 40,000 crore divestment target is not set out for the current fiscal. The budget should not be judged on some of these litmus tests alone. Yes, the policy inaction of the last five years has fostered a lot of impatience. Some observers are waiting to stand up say "if you couldn't even do it this time, shorn of the Left, then when will you ever do it?" and there would be a grain of truth in that criticism too. Yet, my only submission is that having waited so long, another year or so will not kill us. The first message that the Congress government wants to send out would be to the people who voted it to power. Not to big business or investors. Sure, the two need not be mutually exclusive but the government will probably prioritise and in doing that, will lean closer to those large sections of our population who do not invest in the stock market. I say, that's fine. What's good for India, is eventually good for the stock market. So if the FM lays stress on issues like education or rural employment generation, collective groans of 'socialist/populist' should not come up from investors. The Finance Minister's job is not to spark a 300 point Nifty rally on budget day. If that happens, it will be a bonus.
So what are the issues on which will hinge the stock market's response. The most immediate items are STT/Capital gains, disinvestment, FDI and GST. Let’s take them one at a time. Long term capital gains tax regime has worked like a dream for investors. Yes, lower STT may benefit traders and arbitrageurs but any move to phase out STT and reintroduce capital gains tax will go down as a big negative. If no change happens, the markets will be fine. Any disappointment from traders will be very short-lived. Unless LTCG comes back, this is not such a make or break item.
Disinvestment. Let’s call it that without confusing it with privatisation. Given that this has been on the backburner for the last five years, the FM may want to start small and then scale up. So the first step may well be to sell small 5-10% stakes in large listed PSU companies and raise some money. This will help raising some money for the fisc but it is a drop in the ocean of our deficit, so macro watchers should not get too excited. It's not as if divestment will bring down our combined fiscal deficit from 12% to 8%. No way. And frankly, these partial stake sales have little positive implication for the stock market. It is simply fresh supply of paper into a market which is already facing too much supply from QIPs, in fact it may even crowd out private listed companies from the capital raising arena. Money is better raised by companies for productive use than by the government for putting in the fiscal deficit blackhole. The other thing that may happen is IPOs for unlisted government companies. In fact, NHPC and OIL are already in queue. This is positive. New PSUs getting listed at attractive prices will revive the primary market and some of these unlisted PSUs like BSNL and Coal India are so huge that they will end up raising serious money for the government. So the more the FM stresses about new listings, the happier the market will be. If he goes on to lay a firm divestment target for the next five years and that number is substantial, say 4 lakh crore or 80 billion dollars, investors will be very happy. Privatisation is too bold a first step, that’s just being too wishful. That is the stuff of the Economic survey, not the Union Budget. On the subject of capital raising, a firm mention of the 3G auction would be welcome.
On FDI, some caution is warranted. Yes, there is no issue with doing 49% in Insurance and I hope he does that at least but don't expect much more than that. Retail is too sensitive for a first budget. Aviation too may not happen and but that will only make Vijay Mallya unhappy. Eventually, all of this will happen, it has to.
The goods and service tax (GST) is truly important. I hope it does not get postponed by a year, though it is increasingly looking like that. Also, whether it is a dual structure or not is important. This is frankly, the only substantial and material tax reform sought in this budget. Other irritants like FBT or the education cess on corporate tax etc are marginal and any cut in corporate tax rates should not be expected. Nor for personal income taxes. Now of course there will be sector specific stuff like sops for exporters and more taxes for tobacco companies but that’s minutiae. That never makes a budget a dream or a dud. Its much better to focus on the big picture. In that, I truly hope that there is some out of the box thinking. A VDIS (voluntary disclosure of income scheme) like amnesty scheme has been spoken about to channelise resources into infrastructure, something that sounds like a good idea to me. A front on approach to tackle subsidies would be great but given the recent fuel price hike one suspects that the budget will give the thorny issue of administered price dismantling a pass. Global investors will want to see a firm timeline for bringing our high fiscal deficit under control. The FM cannot be silent on this, but I hope he speaks of a phased reduction aided by higher capital receipts and lower subsidies rather than making it sound as the immediate and top priority. The intent and resolve is important, not immediate steps to rein it in at the cost of growth. Growth is the priority, managing the deficit a compulsion that cannot be ignored, if that note is struck even fiscal hawks may grudgingly agree and rating agencies baying for blood, kept at bay.
Having said all of this, I must confess that I am as ready to be surprised as anyone else, by this budget. I doubt very much though that the impact of the budget will last the week out. Unless there are huge surprises, which I am not betting on, it will be priced in within 48 hours or two trading sessions. It may not be a total non-event like the previous 3 budgets, particularly because of elevated expectations, but it may not be a trend decider for the market. That I continue to believe will be the global market environment, where worryingly some disturbing signs are cropping up.
This weekend I recommend Wimbledon and Yoga. Try not to work yourself into a frenzy with budget expectations, in fact try to temper them. Remember the oldest rule in the book of life: don't expect too much, you won't be disappointed.