BUDGET 1999-2000
COLUMNISTS
INTERVIEWS
ECONOMY
INDUSTRY
FINANCE
ECO SURVEY
RLY BUDGET
PROCESS
BUDGET 98-99
BUDGET 97-98
ARCHIVES

A 'tough' Budget that wasn't

This is an unexpectedly good Budget to which the market has reacted with a 400-point Sensex rally. But it is still doubtful if there's enough in the Budget to call for a re-rating of the market.

For equity mutual fund schemes, that is those who invest more than 50 per cent of funds in equities, there is no tax payable by either the investor or the fund on the dividends distributed. Which makes it more attractive than before.

Debt funds also are more attractive because the investor does not have to pay tax on dividends distributed by the scheme but the fund will have to pay a ten per cent tax on any dividend distributed.

The Budget has made it more attractive to invest in equities by effecting two changes: the exemption from income of dividend distributed by equity schemes and also by reducing long-term capital gain rate from 20 per cent to ten per cent. This increases attraction of equity investments.

Also, pre-Budget, there were concerns that the finance minister would come out with a "tough Budget". Since the Budget really contains nothing really tough, there is a lot of relief in the market.

Stocks of pharma and software companies have been very aggressive performers over the last few weeks because of the tremendous growth opportunities for these sectors.

If you're a long-term investor with a 2-3 year perspective, you can definitely expect to benefit from investments in the best companies in these sectors. However, given the strong performance in recent weeks, it would probably be a good idea to wait for a reaction.

Why has the RBI suddenly cut interest rates? The FM had given indications in the Budget that he would expect to see interest rates going down, given the low demand for funds from industry for investment. The RBI is basically responding to the signal given by the FM.

The RBI basically tries to control volatility in the money market and the exchange markets. The long-term trend towards reducing CRR and SLR and letting the market determine its own levels is pretty apparent.

Essentially we are seeing the quality of mutual fund management improve over the last few years. A number of funds have posted very attractive performances in recent times and I think the industry is learning from experience.

For the average investor who does not have all the time in the world to monitor his portfolio, the mutual fund offers an attractive way to participate in the market. You should probably choose the fund you want to invest in, after analysing recent and long-term performance of the scheme.

If one looks at in terms of where the market was trading pre-Budget, there was considerable scope for the market to rally.

Over the last few years, the market has traded in a range of 10-15 times average forward earnings of corporates. Pre-Budget, it was trading at around 11 times forward earnings. Which is at the lower end of the range.

The market definitely does not look overvalued at current levels, while one might see a correction because of the speed of the move. Calling it a bubble would be too extreme.

I would expect to see the market trade in the range of 3400-4000 (Sensex). Most of the sectors that are currently in favour are likely to continue to be in favour. Cyclicals may continue to underperform the market until we see strong evidence of an industrial/investment recovery.

The FM's assumptions on revenue growth appear reasonable. However, the target of raising Rs 100 billion through public sector divestment appears a bit aggressive, particularly in the light of the government's failure to achieve significant progress in previous years. Kotak Securities' estimate of gross fiscal deficit as a percentage of GDP will be 5.3 per cent against the 4.4 per cent assumed in the Budget.

The PSU banks and IDBI are basically lending institutions and it would not be a productive use of their assets to invest in the stock market. FII investment or disinvestment of Indian shares is driven by their assessment of the outlook for company performances. Trying to artificially support the market serves no purpose really.

FIIs are only one of the players in the Indian market. Net FII fund investment in the market accounts for barely 4-5 per cent of the market capitalisation. In that sense, they are not really drivers of the market. There is a lot of domestic participation in the market also.

Even if FII investments were large enough to drive the market, that's not necessarily negative, unless it's hot money which flips over very fast. The tax rates for short-term capital gains are a sufficient deterrent for this.

Many shares in the B group have actually done quite well in recent times. This is driven by the performance of the companies. A group shares generally tend to be of larger companies with larger trading volumes in the market. So we see considerable FII activity concentrated on them because of the liquidity they provide, that's not unusual.

Upto 1994, we used to see a lot of retail investors directing money into the markets. For example, in 1992 the total percentage of household savings invested in stocks, units and debentures was as high as 23 per cent. The large losses that retail investors suffered in the primary market boom of 1994 has basically made them very risk-averse.

However, in recent times, we have seen retail investors coming back to the market both directly and through mutual fund investments. This is a trend which can continue.

Essentially there is very little in the Budget to stimulate broad-based industrial recovery, to attract large funds towards infrastructure and to improve the government's fiscal situation. Only if these issues are addressed can we expect to see a long sustained bull run in the market.

Before allocating any of the PF money towards investments in equities it is probably important to ensure that sufficient expertise is built-up in the government's departments responsible for such investments.

Otherwise, it could risk small savings of a large portion of the population. It might be a good idea to allow investors the option to move a portion of their PF money into equity schemes, run by government or private mutual funds .

One of the most positive features of the Budget and the FM's speech is the complete silence on the question of swadeshi. This is encouraging because the FM has effectively indicated his openness to allowing greater foreign funds into the industry and infrastructure in India.

Note the FM's proposals to extend the list of industries where automatic clearance will be afforded for foreign investment and also his proposal to reduce the waiting period for clearance to 30 days only.

Let's hope the Budget is followed up with necessary policy measures in the areas of opening up foreign direct investment and strategic divestment of government holding in public sector enterprises. Positive measures in this direction will help keep investor sentiment and the market buoyant.

Rajashekar Iyer is head, institutional broking, Kotak Securities

Budget 1999-2000

Budget Day Special

Business news