Don't Fix It If It Ain't Broke

Assuming projections hold true, GDP growth should remain strong even as the fiscal deficit is pared slightly. That means government borrowings won’t spark inflation. The continuing infrastructure-building initiative ensures that demand for steel and cement will remain strong. Eventually, better infrastructure will translate into faster GDP growth and higher disposable incomes. The rest is up to the great Indian masses. Roughly two-thirds of India’s GDP is generated through personal consumption and this budget doesn’t contain measures that could curtail consumption. If individuals continue to spend and save judiciously, corporate growth will remain strong.

Here’s a look at various asset classes. The budget doesn’t distort natural demand-supply equations in case of commodities. Since economic growth remains good, demand should be strong. Sugar and coffee would be favourite bets (both here and in the stockmarket). Gold-bugs might like to look at the new concept of exchange-traded gold funds. Even real estate is likely to remain about as good an investment in 2006-07 as it was in 2005-06. The tax regime doesn’t change. Infrastructure development continues. Bharat Nirman should raise rural/small town real-estate values as quality of life improves. Along with the concept of cluster township developments, this could mean a wider, deeper boom.

But the signals aren’t too good for the debt market. Interest rates bottomed out almost two years ago. There is an upward trend in rates due to a combination of higher demand for corporate credit and rising inflation caused by high crude prices. However, the budget doesn’t make things any worse. Liquid, short-term and floating rate debt funds seem like the best available debt instruments. You don’t want to be holding a long-term, low-rate debt portfolio in circumstances where rates may climb. The inclusion of long-term bank fixed deposits as tax-exempt instruments should comfort the ultra-conservative. If a liquid market develops in corporate bonds as the FM hopes, a lot of new opportunities will open up for debt investors and traders.

For the stock punters, the security transaction tax will add an extra cost of Rs 2.5 for every Rs 10,000 worth of equity delivery. That will not make too much difference to sentiments in a buoyant market, which was evident from the manner in which the Sensex rose in the trading sessions after Budget 2006. The projections for corporate earnings remain the same. Equity valuations are uncomfortably high but that’s because the Sensex has risen around 150 per cent since the UPA came to power in May 2004. There could be a correction, but the budget won’t be the culprit. If you’re a long-term equity investor, this budget doesn’t have a negative impact. If you’re holding a portfolio of index or widely diversified equity funds, continue to invest in these through your favoured method.

Equity analysts often try to isolate sector-specific risks (that is, risks that affect every company operating in a given business) from company-specific risks that affect specific companies in a given business. The budget hasn’t really punished any given sector and stock performance will be much more dependent on company-specific risks in 2006-07. Still, small carmakers will gain in volumes and perhaps, in net realisations due to the 8 per cent cut in excise duty (down to 16 per cent from 24 per cent). That means Maruti and Tata Motors turn into "buys". Cement, steel, construction and engineering firms should benefit from the infrastructure building efforts. idfc should see strong volume expansion because of the sheer number of projects where its financial expertise will be required.

In specific terms, the power sector could gain a lot if the new scheme to tie up coal supply sources works. If the power sector does come out of recession and reduce its losses, there could be plays across the entire value-chain. ABB, BHEL, Siemens, NTPC, Tata Power, and Reliance Energy could all stand to gain. In energy, ONGC takes a hit as India’s dominant producer because the budget raises the cess on crude. All exploration and production activity (GSPC and Reliance are among the affected parties) will become more expensive because of the hike in service tax (which is levied on surveys etc).

In the textiles industry, polyester gains versus cotton. The food processing industry could gain from explicit support in the form of excise cuts on an entire range of items. ITC’s share price has jumped post-budget despite a hike in excise on cigarettes because ITC is a major player in food processing. FMCGs like Nestle, Lever and Dabur could gain as well. If you’re a stock-picker, look at the industries listed above. The budget’s impact in most other areas seems more or less neutral. However, outward-bound voice call centres and medical transcription centres will have to pay service tax and this could hurt the bottomlines in the BPO industry.

(The author is consulting editor, Outlook Money.)