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Finance Minister P Chidambaram has presented a pragmatic budget
keeping in mind the need to rein in fiscal deficit and facilitate growth. Also, radical
measures were absent, which is understandable, given the coalition political dynamics. On
the flip side, the finance minister is optimistic in some of his revenue assumptions.
Nevertheless, any budget cannot please all. In this context, the minister has presented a
pragmatic budget.
All positives and negatives, as expected by the market, were
present in the budget. Except perhaps the expected excise duty reduction on passenger
vehicles, from 24% (inclusive of 8% special excise duty) to 16%. The marginal increase in
securities transaction tax was also within expectation.
The reduction in peak customs duty, from 20% to 15%, has been
marginally negative for most industries. The adverse impact was partly cushioned by the
corresponding reduction in the customs duty on inputs and intermediates. Also, this
exercise was done at a time when both the business and commodity price cycles are up.
Hence, the buoyancy in demand and tendency of rising prices has cushioned the impact of
the cut in import duties on profitability.
The rationalisation of excise and customs duty structure on
petroleum, petroleum fuel products, feedstocks and polymers will be affecting all the
players except plastic processors. In particular, ONGC will be adversely affected, but the
company can count on buoyant crude prices and reduction in its share of subsidies to
facilitate growth in profit. The biggest beneficiary in the oil and gas space will perhaps
be Gail (India), which can get a net benefit of Rs 300 crore annually on account of
savings in subsidy burden net of the adverse impact of the reduction in import duty on LPG
and polymers.
Among industries, tyre, airconditioner and textile are the major
beneficiaries in line with market expectation. The cut in import duty on PTA, MEG and DMT
was from 20% to 15%, instead of the 10% expected. But this benefit was negated by the
reduction in customs duty on the entire range of textiles including PFY, from 20% to 15%.
Still, polyester players will benefit from reduction in excise duty on PFY, from 24% to
16%, even if the producers retain a part of the benefit.
The reduction in corporate income tax, from 35% to 30%, will lead
to 3% lower incidence in direct taxes for corporates due to the increase in surcharge.
However, this will also be negated due to the reduction in depreciation allowance from 25%
to 15% for income-tax purposes.
The personal income-tax incidence is set to come down despite
streamlining of exemptions, largely due to the raising of the exemption slab to Rs one
lakh, from Rs 50000. This will lead to improved disposable income. The FMCG and consumer
durable sector can expect improved demand offtake.
Major companies with huge property in and around major cities got
significantly re-rated due to the government’s pre-budget announcement that 100% FDI
under automatic route will be permitted, subject to certain conditions, in the
construction and realty sector. Companies like Bombay Dyeing & Manufacturing and
Century Textiles & Industries have already witnessed a surge in their market caps due
to the large tracts of land owned by them in and around Mumbai.
Banking reforms got off the ground with the government planning
to amend both the Banking Regulation Act, 1949, and the Reserve Bank of India Act, 1934.
In the process, greater operational freedom to banks as well as increased investment in
the banking industry is likely to be facilitated, thereby accelerating mergers and
acquisitions, which can actually strengthen the domestic banking industry.
Over the years, the competitiveness of the domestic industry has
been significantly enhanced due to the reform process initiated in the early 1990s.
Progressively, the peak customs duties have been cut to bring them closer to the Asean
levels. Considering the rupee appreciation against major currencies like the US dollar and
the various free trade agreements (FTAs) and regional trade agreements (RTAs), there
appears little room for further reduction in customs duties from the current levels. This
is a big positive for the industry, as it can operate in a relatively stable customs
regime. Rationalisation of duty structure within these peak duties cannot be ruled out.
In the entire budget presentation, the finance minister refrained
from specifying targets for PSU divestment. Also, the government has not reckoned any
revenue from PSU stake sale in its revenue side. Apparently, this is negative, but, in
reality, it evidences the maturity of the government in not raising sensitive issues.
Also, the otherwise rosy revenue projections can take cushion from the likely revenue from
stake sale, should it happen in due course. By and large, the UPA government has
demonstrated its ability to ensure a fine balance between economy and politics.
Employees are remunerated in cash as well as kind. The fringe
benefit tax proposes to bring the remuneration in kind within the taxable income of the
relevant assessee. But, unfortunately, the definition of fringe benefits has been widened
too far that even legitimate business expenditure incurred by the employer will come under
its purview. The fringe benefit tax needs a relook to remove apparent anomalies so that
only fringe benefit in lieu of cash payment to employees, wherever quantifiable, are
taxed. Otherwise, corporates, particularly FMCG and MNC companies, are likely to be
adversely affected.
The imposition of 0.1% tax on withdrawal of cash in excess of
Rs 10000 per day from bank is ostensibly for curbing/tracking black money
transactions. But it requires a revisit — at least a hike in the threshold limit of
Rs 10000 in view of the ground realities.
With GDP expected to grow at around 6.9% in FY 2005 on an
impressive 8.5% growth achieved in the previous year, the economy is on a sound footing
for a sustained rise. The decent growth is projected despite a steep fall in the growth in
agriculture, forestry and fishing to 1.1% in FY 2005, from a robust 9.6% in the previous
year. The key mover of the economy is the robust rise in demand for industrial products
and, as a result, the impressive increase in contribution of services to the national
income.
The industry has decisively come out of the consolidation phase
and is aggressively investing in expansion and modernisation of capacities. This is
evident from the impressive 13.3% increase in production of capital goods in the nine
months ended December 2004, over and above the 10.1% growth registered in the
corresponding previous-year period.
We can see a spate of new issues from major players in various
sectors including textile, power and other key industries that are witnessing a
significant re-rating across the board. Also, foreign interest in India has zoomed, as
evident from the consistent and robust rise in net FII flows into the stock market as well
as FDI in industry.
The thrust on agri-economy is well deserved as about two-thirds
of the population depends on agriculture. Proper trickle-down of outlays could lead to a
significant improvement in the disposable income of the rural economy, which can further
boost the demand for FMCG and consumer durables, leading to a spate of benefits from a
chain of positive economic activities. Also, the thrust on infrastructure, including
roadways and highways, airports and seaports as well as power, augurs well.
While it is necessary to facilitate the industry to improve its
global competitiveness, the government cannot do it at the cost of fiscal prudence. The
estimated reduction in fiscal deficit from a revised estimate of 4.5% of GDP in
FY 2005 to 4.3% for FY 2006 is sensible, but only if it is not achieved through a cut
in planned expenditure. Historically, the government has resorted to slashing planned
expenditure whenever revenue falls short to rein in fiscal deficit.
Instead, the focus should be on cutting non-plan expenditure so
that planned investments do take place and still the fiscal deficit is reined in. But, in
this context, the rather rosy revenue projections are a cause for concern. Reining in
fiscal deficit will become relatively easy, despite some shortfall in projected revenue,
if only the government is able to convince its partners of the need for divestment of
stake in PSUs.
While the Central fiscal deficit appears in control, the total
fiscal deficit of the country, including that of states, estimated to hover around 10%, is
on a very high side. Reforms at the Centre will sooner have to be replicated at the
state-level as well. The proposed implementation of VAT from 1 April 2005 is the
appropriate move in this direction.
Fortunately, states will be reimbursed, at least in initial
years, on any reduction in tax revenues due to the migration from sales tax to VAT. By and
large, implementation of VAT should facilitate the government in implementing one-country,
one-set-of-rate norm, which will be revenue accretive for states as well in due course. At
the same time, implementation of VAT with necessary infrastructure should be beneficial to
the industry as this would avoid the cascading effect of tax.
The budget is neutral-to-marginally-negative for most sectors.
Now the focus shifts to growth-oriented stock-specific action as, barring tyre and
airconditioner, no other major sector has unduly benefited or been adversely affected by
the budget. Hence, the key to market movements from here on is FII inflow and corporate
earnings growth. |
