2012 Budget has come and gone as an non-event this Friday(16th March). And so has the critical RBI policy announcement a day earlier on 15th March and critical state elections results including UP elections.
One interesting fact is that market had been anxiously waiting for these 3 events as major positive / negative triggers for deciding the direction of the market this year.All these events came out with results which were negaitive to the market. While the budget was hailed as disappointing and non-reformist by most of the experts and analysts, RBI ended up not reducing the repo rates. The ruling UPA dispensation(mainly Congress) ended up as poor losers in the critical UP elections.Yet, the market(sensex) didnt tank in . It barely lost 3%(about 500 points) inspite negative results for all the 3 events. What does it tell us about the state of the market and economy?
Well , it tells us that the market didn’t have very high hopes from the budget and RBI policy and had already priced in negative results. It also tells that market is building a strong launchpad for a new bull market and is not going to be easily shaken by these so called “big” triggers. It also tells that the state and fundamentals of macro economy is improving and Indian economy is getting into high growth path again . Thats a good news for retail investors like us.
Having said that , lets briefly talk about the positive and negatives of the budget. Following are my thoughts..
- The fisal consolidation – FY12 turned out to be a very bad year on fiscal deficit with 5.9% and FY13 seems to be no better as the projections of 5.1% deficit is not based on reliable and credible assumptions. This will lead to Govt. continuing to borrow heavily from the market , crowding out private borrowings as well as hardening interest rates which in turn will not give RBI legspace to cut market rates enough
- “Tax and spend budget”- Govt. has increased the indirect taxes(excise and service tax) from 10% to 12% which can stoke inflation . While it has increased the taxes , it has done little to control its wasteful expenditures like subsidy etc. While it gave away some Income tax reduction, it was too meagre.
- Non-reformist budget – It doesnt contain any new or big idea like FDI proposals on retail, insurance or pension or clear timelines for GST and DTC rollout or General amnesty scheme for foreign/ domestic located blackmoney.
- Retrospective amendment in law to reopen vodafone and related cases- This has been hailed as anti-FDI move which will dent the foreign investor confidence and faith in Indian system.
- Power & roadways sector – Lots of good measures have been declared for power sector including exemption of power fuels(coal/LNG) from import duty, allowing cheaper foreign loans(ECB) access to refinance domestic loans, extending tax holiday for one more year. On Roads, NHAI road targets have been increased by 20% and acesss has been given for ECB funds
- Agriculture/ rural – Agricultural credit has been increased to more than >500,000 crores($100 Billion) and agriculture loan interest has been reduced . This should increase the demand for agriculture related products. Irrigation outlay has been increased by 14% to >14000 crore. Sops have been given for fertilizer production, warehousing and rural infrastructure too
- Direct transfer of subsidies and NREGA payments in 50 districts through aadhar/UDAI cards – Govt has supported UDAI project with sanction of aadhar cards for another 40 crore cards and has sanctioned payment of subsidies in 50 districts which will be ramped up to other districts. This is a very good medium term action as this will help in stamping out leakage and corruption.
In summary , the budget was dissappointing and an opportunity foregone to make a great impact to the Indian economy story and change the course of events . Now its on the corporate world to make the best of the situation and some positive budget provisions to improve their micro fundamentals. RBI definitely will be constrained to reduce the rates in a significant manner which is a negative for the market and corporate sentiments. Increased crude oil rates because of the geo-political tensions in gulf and Iran can be another negative for the market and economy.
Now onwards, the market will not have any significant domestic triggers to take direction . It will take its own direction based primarily on the corporate India performance in the next few quarters and global liquidity situation. I still continue to be positive about the market and economy in 2012 , though we have lost a very good opportunity to kick start the economy and take the economy and markets to new highs.
The fact that the markets have taken all the blows in a defiant manner shows that the foundation of the bull market is much more robust now and we are on a strong wicket to achieve new highs , though the speed and momentum will be a bit slower now.
Happy investing and cheers