Considering the limited options for the finance minister (FM) in this Budget, it seems unlikely that he can deviate from the path visible. The FM’s moves are expected to be calculative to ensure that a move towards fiscal prudence is initiated without jeopardizing the country’s growth prospects.
Also See What to Look For (Graphics)
Agriculture: India is currently at a critical juncture where strong government focus on agriculture is needed. Last year’s drought resulted in high food inflation in most basic food commodities. In the current year, India has grown by 7-8%, while agriculture output has grown at less than 1%.
The need to raise production along with productivity of land and developing cohesive logistical support are important to manage the long-term food security issue. Logistical support can be addressed by allowing more private sector participation. Overall, we expect the Budget to be positive for agri-input companies.
Power: The United Progressive Alliance government has always viewed the power sector as one of the major drivers of India’s economic growth. The government has set ambitious targets for the sector in the 11th Plan. More measures are expected to speed up the capacity addition programme. Overall, we expect the Budget to have a positive effect on the sector.
Real estate: In India, the sector is now on a gradual improvement curve with new projects being launched and liquidity position of developers improving. Banks are offering aggressive mortgage rates, but we expect rates to increase by 50-100 basis points over the next six months owing to concerns expressed by the Reserve Bank of India on inflation.
We expect the government to increase the tax limit under section 80C from Rs1 lakh to Rs2-3 lakh, which will boost the housing segment. Overall, we expect the Budget to be neutral for the sector.
Banking: Banks are one of the keenest Budget-watchers this year, not for specific measures relating to the banking sector, but for the overall fiscal deficit. In FY10, credit demand fell significantly though deposit growth remained strong.
We expect demand for credit from the private sector to pick up with every successive quarter, increasing to around 20% year-on-year by the end of FY11. Consistent with the gross domestic product growth and credit pick-up, interest rates are likely to start increasing. In case the government is unable to bring down the fiscal deficit (in the light of increasing private spending), the resultant funding of fiscal deficit could lead to bond rates inching up at a faster rate in FY11.
Smaller banks, especially public sector banks, are likely to be hit. Among specific measures, it will be interesting to see if the government announces capital infusion in state-owned banks (though the government has announced its intentions, nothing concrete has been declared so far).
The government could also look at bringing back tax exemptions on profits on infrastructure lending as well as increase tax benefits on home loans. Overall, the short-term effect of the Budget is expected to be negative, but we maintain our positive outlook.
Infrastructure: After the recent fall in share prices of almost all infrastructure stocks, primarily due to the disappointing December quarter performance, investors would keenly track the Budget.
However, with the stocks having corrected by 20-25% and languishing at those levels, we believe that markets are not building up huge expectations from the Budget for the sector. Nonetheless, we expect some customary announcements, such as increase in allocation for irrigation and roads as well as tinkering with matters that would ease the process of accessing capital for the sector. Overall, we expect the Budget to be positive for the infrastructure sector.
Oil and gas: Post submission of the Kirit Parikh committee recommendations, investors would track the Budget for implementation of the proposed recommendations, particularly on the subsidy-sharing mechanism.
If the government announces a clear subsidy-sharing mechanism by providing cash subsidy/oil bonds, it would be a positive for the sector. Some measures may be announced for delivery of subsidy to the target user segment.
We believe that markets are not building up huge expectations from the Budget for the sector.
On the gas front, we expect clarity on the tax front for natural gas produced under new exploration licensing policy I-VII. Overall, the Budget is expected to be neutral for the sector.
Graphics by Yogesh Kumar/Mint