As the budget speech started and Part I of the speech wound down I actually thought that it was Mr Chidambaram speaking and not Mr Jaitley. However Part 2 did wave me up from the slumber and increased the rating of the budget substantially.
First of all the thing that pleased me the most. The rule for establishing where the permanent residence of a Fund lies will no longer be dependent on where the Fund Manager sits. This absurd rule had forced many Fund Managers managing investments into India to sit in Singapore, Hong Kong, Dubai, London etc. Now if the Fund Manager is in India it will not establish permanent residence and the taxation of Foreign Funds. This makes the life of Fund Managers like me who never wanted to move out of India easy and creates more opportunities. Now there is no longer any need to sit at high cost destinations away from on ground research to invest into India.
Also in line with changes to improve funds flow into India were the proposals to treat taxation of Real Estate Investment Trusts (REITS) at par with equity and allow pass through status. The other major change was with reference to taxation of Alternative Investment Funds (AIFs) where again there will be pass-through and moreover foreign funds can now invest into AIFs which will improve funds flow into these funds and provide greater opportunities for Foreign Investors investing into India.
The other positive announcement was the strong action of the government on Black Money where holding black money abroad and holding Benami properties in India now will become a criminal offence imprisonable with sentences upto 10 years. The government has shown its sincere intention to control black money generation and this will eventually lead to greater flows into Equities, Bank Deposits and Insurance.
Tax breaks on savings have also been increased with a further limit of Rs 50000 being allowed into the New Pension Scheme as a tax exempt investment.
The postponement of GAAR by two years and its implementation from 1st of April 2017 and will also be applicable prospectively on investments made after that date. This improves lot of tax ambiguity. There are also moves to reduce taxation on royalty payouts by domestic arms of MNCs.
The GDP growth next year is projected to be in the range of 8-8.5% which looks realistic as per the new series. The proposed legislation on reducing red tape for setting up new establishments by formulating regulations to follow and not take approvals from various authorities is a big positive.
Combining FDI and FII into one single category of FPI is also positive as it reduces monitoring requirements, an artificial distinction between good and bad foreign money and simplification.
I do not want to get into each and every step but just focus on main points.
The negative impact of the budget is in terms of the increase in Excise duties as well as the substantial 2% increase in service tax which will be highly inflationary. On top of that there has been hardly any move on addressing structural issues which impact inflation especially food inflation. I am afraid that this will make food inflation raise its ugly head sometime in the near future. When the finance minister said that problem of inflation has been addressed structurally it is simply not true. You just got lucky due to the commodity price collapse. Brent crude prices have already moved up from $ 46 to $ 63 now and might see levels of $ 70 during the month of March driven by reduced OPEC output, disruption in Libya production as well as short covering.
There have been no major steps taken to improve the balance sheet of PSU Banks. The contribution towards PSU Bank recap at Rs 7940 Cr is a joke. Given their balance sheets they need at least Rs 30000-50000 Cr this year.
The disinvestment target is too steep at Rs 69500 Cr when the achievement for this year is just Rs 26000 Cr, although the move to undertake strategic sale of loss making PSU’s is positive.
Although a long term direction has been given on reducing the Corporate Tax rate in the current year it has actually gone up. This is ridiculous given the slowdown in the economy. We need lower taxes now not at a time when the economy is roaring.
There is also no clarity on final GST rates which could create some volatility for the economy as 1st April 2016 approaches.
Overall there have been lot of announcements however no substantive steps to improve the growth of the economy in the near term. At a time when we are undergoing growth slowdown this is a negative.
In conclusion I would say that the budget is directional good but does little to provide near term economic stimulus or momentum. The probability that in light of poor corporate performance and a likely bottoming of inflationary downswing that the markets will move substantially higher from the current levels is extremely low. The markets need to consolidate and possibly give up some gains over the next few weeks and months. Can markets rise from here? Sure they can on momentum but will find it difficult to sustain. The attention will now shift from making the Ordinances into law via the parliament.
As I conclude the article new is coming in that Petrol and Diesel prices have gone up by Rs 3 per litre. The best of deflation is behind us; don’t bet on lower rates in the near term to drive the markets.
The action from here on will be stock specific where there is still potential of generating huge alpha.