The Indian equity markets remained bullish since the last interim budget which was presented by the government in February 2009. Since then, the Nifty has gained almost 60 per cent; mainly aided by the strong electoral mandate to the government on May 18, 2009 (The Nifty jumped almost 18 per cent on that day). However, after that, the markets have remained in the range of 4,200-4,400. The run up to the budget was marked by a high degree of optimism in sectors such as retail, insurance (relaxation of FDI norms), infrastructure and education (expectations of significant thrust by the government). Many public sector undertakings (PSUs) witnessed a significant rise in their stock prices on hopes of disinvestment plans picking up pace.
On the economic front, although the GDP growth rate has moderated from the highs of over 9 per cent achieved during 2003-04 to 2007-08, India has performed reasonably well in the current global economic scenario.
This was the first budget after the government came to power earlier this year with a clear mandate and much was expected out of it. While the Union Budget announced reforms in some key areas, it failed to put in place a definite roadmap in certain areas, including the government's plan of action on the PSU disinvestments and easing FDI norms in some sectors.
Key areas where reforms were announced included the Goods and Services Tax (GST) to be applicable from April 1, 2010, abolishing the Commodities Transaction Tax (CTT), a unique ID plan to be rolled out in the next 12-18 months and higher allocation of expenditure for National Highways Authority of India. While the corporate tax rate remained unchanged, there was no major announcement on disinvestment of the government's stake in public sector enterprises, except the assurance that the government's holding will not fall below 51 per cent in any such enterprises. Continuing the farm loan subsidy will have a negative impact on PSU banks' profitability.
Few measures to sustain and improve the overall GDP growth and schemes to boost investments in infrastructure, education and agriculture have been introduced.
While the impact of the budget on various sectors has been covered in the respective industry section, we have examined the impact of some of the other announcements.
Impact analysis
Minimum alternate tax (MAT)
The government proposed to increase the MAT applicable for corporate houses to 15 per cent from the existing 10 per cent. This will have an incremental cash outflow burden for the companies that come under the purview of MAT. Amongst all the sectors, we feel the information technology and telecommunications sectors will be the most impacted.
Fringe benefit tax (FBT)
We believe that abolishing FBT, which contributes around Rs 100 billion to the government exchequer annually, would not have any material impact on corporate profits (except companies in the IT and FMCG sectors) as it forms less than 1 per cent of the total corporate revenues. However, this would definitely avoid corporate administrative hassles.
Commodities transaction tax (CTT)
The government made an announcement today abolishing the 0.017 per cent CTT which was introduced in last year's budget but was yet to be implemented. CTT, if implemented, would have impacted the transaction costs (as it is linked to trading volumes) and would have been detrimental to the trading volumes. Abolishing this tax, we feel, has a positive impact for the commodity markets and especially for broking companies engaged in commodities trading.
Marginal increase in personal tax exemption limits
The Union Budget announced marginal tax benefits for individual taxpayers by increasing the basic exemption limit for taxpayers (male and female) by Rs 10,000 and that of senior citizens by Rs 15,000. We feel this will have a marginal positive impact on the disposable income of taxpayers and may have a slightly positive impact on the consumer durables sector. Abolishing the 10 per cent surcharge on income over Rs 10 lakhs would have a very marginal impact as a large segment of taxpayers are still in the below Rs 10 lakhs segment.
Markets today
The Union Budget 2009-10 received a thumbs down from the markets, mainly because of deferment of most of the key policy announcements. The Nifty closed at 4,166 points, down 6 per cent from Friday's close of 4,424 points.
Even after today's sharp correction, the market is trading at a forward P/E multiple of more than 16 times its 2009-10 earnings estimate. Till date, the Indian markets were commanding higher multiples relative to other emerging markets due to higher expectations on the reforms front as a result of higher political stability. However, given today's announcement by the government, we expect a further correction of around 8-10 per cent from the current levels in the broader market indices. Stocks in sectors such as infrastructure, education and banking may see sharper erosion.
