India’s Budget pleases janata but investors can’t see the light still

India’s Union Budget 2008-09 has been greeted by three successive days of stock market declines, including the day it was announced. Some of the negative sentiment is more global in nature. But the Budget proposals do not seem to have gladdened investors. It tries to give a boost to demand by giving more cash for people to spend, taking a leaf from George Bush’s largesse, including farmers whose debt has been waived.

Here’s a look at what the Budget has really done.

For the Individual
A change in the tax slabs will give more cash in the hand to individuals. Rising interest rates have pinched borrowers and even led to a slowdown in demand for home and auto loans, in turn affecting the sectors themselves. This move is expected to be a demand booster. Also done with an eye on the elections.

For industry
No change in the customs duty rate (if past trends had continued, this year too would have seen a reduction). That gives an element of protection to domestic industry but affects those who import. But the reduction in the peak excise duty will lead to lower customs liability, to the extent that the countervailing duty (equal to excise) will come down.

Reduction in the peak excise duty rate (cenvat) from 16% to 14%: this will lead to an across the board reduction in costs, which the government expects the industry to pass on the consumer, and give a push to demand. Certain sectors have got special attention: pharmaceuticals and automobiles have got several excise concessions. One should lead to lower healthcare costs, and the other, if it helps spur demand, will have a multiplier effect on demand in other sectors.

Indian industry does not have much to grumble about, no major concessions but no major nasty surprises either, considering the biggest announcement of the Budget

For farmers
Farmers worldwide hold governments to ransom, India is no different. The government is waiving loans worth Rs 60,000 crore given by commercial banks to farmers. The waiver will have restrictions limiting the benefit to the not so well off section of the farm community. Normally, such measures would have been funded through tax hikes. But the government has not provided for these farm loans in the Budget. They seem to have learnt a lesson from the off-balance sheet stunts done in developed markets.

Some hints have been thrown. Bonds is one, which is a much abused instrument, used for providing subsidies to oil and, now, fertilizer companies. The other is a backdoor-PSU privatization for which the stage has been set in a finance ministry discussion paper suggesting a minimum 25% public holding for all companies (including PSUs). The public holding in many PSUs is lower than that threshold.

For investors
Last, we come to why investors should be a worried lot. Specific measures affecting retail measures, one was a 50% hike in the short term capital gains tax to 15%. Short term capital gains tax was cut to 10% from 30% when the securities transaction tax (STT) was introduced. Though there has been no cut in STT, the short term rate has gone up. The other blow was not allowing STT paid as a rebate from the overall tax liability. Now it has to be reduced from the income, which lowers the benefit.

In sum, what these two measures do is lower the overall return for the short term investor. These measures affect domestic investors more, as most foreign investors take shelter under various tax havens, and do not pay tax on their capital market transactions. So, they should not be worried by these changes. Their sombre mood could have something to do with the populist stance of the government and what more to expect. The farm package is to be implemented by June 2008.

An early election seems likely which means more populism can be expected, till the code of conduct kicks in. Long term fundamentals one would think have not materially changed after the Budget. Indeed, if anything, corporate earnings should get a gentle boost. Moreover, the Budget is doing its bit to bring inflation under check by expecting companies to pass on cost hikes.

Only short term investors have got a raw deal, adding insult to the injury suffered in recent months, due to falling stock markets. Foreign investors are justifiably more nervous about global market conditions, unwilling to take a long term call at this juncture. Political uncertainty is the last thing they want to discount at such times. Till global markets return to normalcy, the volatility will continue.

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