Ride The Crest, Chid

The time seems to have come for rural India to play a major role in India’s growth story. Agricultural growth has picked up momentum again. The government is spending vast sums in programmes such as Bharat Nirman, Sarva Shiksha Abhiyan and the National Rural Employment Guarantee Scheme. Expect rural demand to pick up as a result. Higher rural demand has the potential to lift the GDP growth rate from the present respectable level of 8 per cent to the next benchmark of 10 per cent.

Let’s take a look at the specific proposals:

At a time when retail lending rules, banks are being goaded to also look at long-term projects, with the proposal that fixed deposits in scheduled commercial banks with maturity tenures of more than five years would get tax exemption. This should encourage banks to mobilise long-term deposits to support credit growth. Buyers of their first cars can rejoice too. The 8 per cent reduction in excise duty on small cars will be passed on to consumers of hatchbacks. Carmakers Maruti, Hyundai and Tata Motors have already announced their intentions to slash their product prices.

Smokers are a community that any finance minister can afford to hit without worrying about a backlash. That has been proven yet again. The 5 per cent hike in excise on cigarette manufacturers such as ITC will be passed to consumers. As usual, some sectors will see their fortunes improve. The restoration of import duty on steel melting scrap at 5 per cent will have a positive effect on domestic steel majors such as Grasim and JSPL. HLL will benefit on account of slashing of customs levy on LAB (linear alkyl benzene) and soda ash. Prices of LAB, soda ash, caustic soda and polymers were on an upturn in 2005, while product prices were stable. Therefore, the move should release some pressure on HLL’s margins. The cut in customs duty from 15 per cent to 12.5 per cent is good news for multinational pharmaceutical companies. The proposal to dereserve coal blocks for power projects would benefit power companies.

The proposal to treat food processing companies as a priority sector for bank credit will obviously help credit off-take by food packaging companies. The increased corpus for the Rural Infrastructure Development Fund (RIDF), at Rs 10,000 crore, and a separate new corpus of Rs 4,000 crore for rural roads would translate to better prospects for cement and steel firms. They would also gain if the proposed thrust on building new industrial townships gathers momentum. If the 25 projects involving the e-governance initiative are launched as proposed in 2006-07, personal computer manufacturers such as HCL stand to gain much. About 50 million additional rural telephone connections would mean more money in the coffers of BSNL. Reduction of excise duty on CFC would benefit companies such as electrical products manufacturer Havell’s India. Complete exemption from excise duty for DVDs, flash drives, etc would add to the profits of Moser Baer.

Alignment of duties with other nations could inevitably hurt some sectors. The reduction of the peak rate for non-agricultural products from 15 per cent to 12.5 per cent will hurt segments such as non-ferrous metals, even though it will bring us closer to the prevailing structure in Southeast Asia.

Oil companies are reeling under the impact of rising international oil prices. The budget doesn’t give them any respite. The subsidy structure on cooking gas and kerosene continues. The finance minister has also raised the cess on crude oil produced by ONGC and OIL to Rs 2,500 per tonne from Rs 1,800 per tonne, to garner over Rs 1,800 crore. This would have a negative impact on ONGC of Rs 1,600 crore.

The slashing of import duty on all man-made fibres and yarns, from 15 per cent to 10 per cent, and the consequent reduction of import duty on petrochem raw materials such as DMT, PTA and MEG will hurt Reliance Industries and IPCL. Removal of the National Housing Bank from Section 54EC of the Income Tax Act is a negative for housing finance companies such as HDFC. The increase in MAT from 7.5 per cent to 10 per cent does not bode well for companies that are profitable but do not have an otherwise taxable income.

Was it an exciting budget? No. But there isn’t much to complain about, either. Economic growth at over 8.1 per cent, inflation contained at about 4 per cent, the manufacturing sector racing ahead at 9.4 per cent, the Sensex at over 10,000 levels, non-food credit growing at over 25 per cent—all these factors put together make for a pretty picture of a resurgent India.

(The author is the joint managing director, Motilal Oswal Securities, one of India’s largest stockbroking houses.)