Sandip Sabharwal - Uncategorized - BUDGET AND BEYOND

The Union Budget was presented today. Normally budgets are taken as a statement of intent of the government and give a directional view of where they want to take the economy and the country going forward. There were only two major things that I was frankly looking for in the Budget, firstly whether the 3.5% Fiscal Deficit Target will be adhered to (which was) and whether Long Term Capital Gains tax will be reimposed (which was not). Overall it is a focussed budget which will help the economy recover going forward.

There is a thrust on Rural Development and especially on infrastructure build up as well as irrigation which has multiple impacts on the overall economy. Firstly the huge rural distress due to two poor monsoons will be addressed to some extent and on top of that if we get a normal monsoon this year, which is quite likely then we should see a strong rural sector revival. This is positive for the entire economy as these moves are likely to generate lot of employment which generally has a multiplier impact on consumption.

The second big factor has been continued emphasis on the Roads Sector where allocations have gone up substantially and many major thrust areas were announced. Roads investments are also very positive as they generate employment, demand for products as well as help the economy grow. Overall across all plans nearly Rs 100000 Cr might be spent on roads in the next financial year. Road sector stocks should continue to do very well.

The move to give flexibility to Asset Reconstruction Companies as well as REIT’s in terms of ownership and tax passthroughs is also a positive move which will boost the sector. Low cost housing projects have been given lot of incentives and this should lead to some revival in the battered real estate sector. Additional interest deduction on loans up to Rs 35 lakhs for houses below Rs 50 lakh in value is also a positive which will boost the sector.

There have been some negatives like the cess on Autos, plus enhanced cess on higher incomes along with dividend taxation on dividend income above Rs 10 lakhs is a negative however only incrementally so. There was expectation of a cut in Corporate tax which did not come through. However the fact that Service tax was left unchanged is positive as there was a general expectation that it will move to 16%.

The move towards a less confrontationalist tax regime is also positive and the Govt has spelt out various means by which it is looking to address the entire tax litigation issue. By reducing penalties and fastening the process there is a possibility that the government might actually realize some money out of the Rs 550000 Cr stuck in such litigations.

The other big announcement was the Amnesty scheme that has been announced. Undeclared assets (and also as a follow through income) can be legalized by paying a tax of 45%. Such a declaration will not invite any penal action and the issue will be closed at this stage. Now this can be a huge thing. I had argued for a GOLD AMNESTY scheme earlier where my view has been that the only way to bring out huge quantities of Gold which Indians hold is via an amnesty scheme and not through the current Gold bond and monetization schemes. That said, gold schemes have been improved in the Budget . In case of Gold Bonds – No Capital Gains on maturity 2. If sold prior – Indexation and Gold monetization interest tax free. These are strong improvements.

The last successful VDIS scheme was launched by Mr Chidambaram in the year 1997. It netted Rs 10000 Cr in taxes. Twenty years later even going by the normal trend of inflation in the economy the Government can easily net Rs 50000 to Rs 100000 Cr in taxes under this scheme if run properly and by giving confidence of non disclosure and non prosecution. Given that the peak tax rate is around 35% with surcharge a 45% tax rate is quite competitive. Maybe it could have been 40% and it would have bought out much more of the black money assets. This scheme will be interesting to watch as it can boost government’s fiscal position as well as domestic liquidity.

The big advantage of adherence to Fiscal Deficit targets at 3.5% is that the Net Borrowing by the government next year will be Rs 4.25 Lakh Cr Vs Rs 4.56 Lakh Cr this year. In an economy which should grow nominally by over 10% and money supply growth should be 12% plus lower borrowing by the government will create a huge space for private sector borrowing. This will also give a push to the RBI to cut rates which will take market yields down further. Lower rates and better liquidity can create a virtuous cycle for strong revival at a time when inflation is well under control.


I am positively inclined towards the direction of the Union Budget and it is growth oriented. The Indian markets have been battered over the last few weeks due to various factors that include global market weakness, banking sector stress as well as poor corporate earnings.

All these factors are built into the markets today. On a Market Capitalization to GDP basis we are trading near 55% today which is the lower end of the spectrum. The economy has gone through a phase of high inflation and low growth which has compressed margins. The margins seem to have bottomed out now and as the recovery plays out we will see the market valuations also improve again. The markets have corrected 400-500 Nifty points more than I had expected however in Euphoria and Despair these things can happen at both ends. We are well placed to move significantly higher over the next one year and the markets provide excellent stock picking opportunities which investors should capture.

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