Hello Readers,

Mr.Chidabaram is coming with the last budget of the UPA-II government on 28th Feb and he would be carrying a high burden of expectations from the investors, industrialists and common man. Whether he will be able to deliver for all would be something which everybody is waiting with held breath.
I somehow feel positive and optimistic about this budget and the implications on the Indian economy and the markets in the medium and long run. There are many reasons for the same. Mr. Chidambaram has been the best and most competent Finance ministers we have ever got and have come with dream budgets in the past. Secondly, he has a great balance between innovative thought leadership and execution capability (normally, we find only one of the qualities in a person). For example, he was the person who came out with the idea of National Investment Board(Cabinet Committee on Investment) and many other ideas and he also delivered on his promise of getting to 5.3% fiscal deficit within FY13 by reducing the needless expenditure ruthlessly as well as meeting the revenue collection targets(Execution capability). Finally, he has made his budget themes very clear and transparent that this budget would be fiscal deficit friendly, reform friendly and investor friendly which music for everybody. Being a pre-election year, it should be common man and middle class friendly too which could mean some more welfare budget and subsidies and potential increase in Income tax exemption and deduction limits. It’s going to be very difficult for him to meet and balance these contradictory goals and forces. However, the good news is that we have the best person there.

Regardless of how the market reacts in short term, he definitely is going to announce some bold measures which will be good for Indian economy growth and fiscal prudence in the medium and long run. That’s for sure as he has never failed on that count in his earlier budgets. He definitely will announce some measures to divert the physical savings from real estate and gold to productive financial savings which is his favorite theme. This coupled with potential Income tax exemption and deduction limit increase could lead to improved savings and investment rates(Investment rate has fallen from 38% to 33% in recent times). He is going to announce some measures on the revenue as well as expenditure side to rein the fiscal deficit while allowing for contradictory forces of subsidy/welfare programs in an election year. He may not increase the subsidies/ welfare budget by targeting the subsidies and reducing the leakage better through cash transfers. He may also announce the timetable for GST rollout which may increase the GDP growth by 1% in medium and long run. He may also step the investments from the PSUs who are sitting on a big cash pile. He might announce some measures on power, infrastructure and real estate sectors which are languishing now due to issues on clearances, reforms and funding.
In combination with the budget, factors like growth oriented monetary and interest rate policy of the RBI along with certain growth and reforms friendly legislative actions from the govt (like Land acquisition bill, GST, Insurance/ pension FDI related bills etc.) would also go a long way in soothing the investors and industrialists to pump more money in the Indian economy.
Why am I optimistic? UPA-II government knows better than us that it has to deliver on growth to generate more employment and more money in the hands of Indian consumers to get the crucial vote of middle class, urban young class and everybody else in the 2014 elections. It also knows that credit agencies will put India in junk rating if it doesn’t reduce the fiscal deficit. Hence, it should be able to pull the political will to carry out these measures and reforms. Does it have a choice? History has been the biggest witness that our netas and babus have delivered their best when they have brought the country to a crisis situation (like early 90s when India was in a big financial crisis with Dr. Manmohan Singh as the finance minister).
Implications for Indian economy and Indian markets

As mentioned in my earlier blog, I continue to be bullish on the Indian stock markets this year with a target of 23000-24000 for the Sensex by the end of the year . Nobody can forecast the short term impact of the budget accurately as we have other global events like US debit limit increase and Italian election which can put a negative spin for all the global markets in short term. However, the budget measures in combination with RBI monetary policy stances and legislative actions (Land bill, Insurance/ pension bill, GST etc.) will put Indian economy and the Indian markets on a sound footing in the medium and long run.
I continue to be bullish on most of the stocks/ businesses I had declared as my favorite picks in 2012 and 2013 beginning. The key among them where I would put and am putting my money would be ICICI bank, Axis bank, Bank of Baroda, L&T, LIC Housing Finance, Mahindra & Mahindra, Power Grid, Bajaj Finance & REC(Best businesses in Banking & Finance/ NBFC, Power, Automobile and Infrastructure). Apart from these picks in my 2012/2013 portfolio, I would also put my money in Coal India and HCL.
All these players are dominant or big players in their sectors with consistent growth and profit performance, robust business models, well managed companies by competent management teams & strong balance sheets with sustainable competitive advantages in their areas. And they are available at good prices now with respect to their intrinsic value or historic PE, providing a great “margin of safety” for the value investors. Obviously, as a true value investor, we need to invest in these businesses with a horizon of at least 3-5 years which could deliver us ROI of >20% per annum.
Happy investing,
Cheers

Amar