This year’s Budget was not expected to be about economics at all, which is why the stock market had done absolutely nothing in the run-up to the event. After a few body blows, such as the farm loan waiver and a hike in short-term capital gains tax, the Sensex closed down 1.38%, losing slightly more than most other Asian markets. You could say the 1 percentage point or so extra loss was on account of the Budget.
The finance minister has assumed nominal GDP growth of 13% for FY09, so if inflation is 5%, real growth will be 8%, a slowdown from the 8.7% growth estimated for the current fiscal. In line with that, tax revenues are budgeted to grow at 17.5% in FY09, lower than the growth of 22.9% in this year’s estimated tax revenues compared with the actuals for FY07. Growth in non-tax revenues is also much lower, while borrowings in FY09 may be Rs10,000 crore lower.
So if the economy’s slowing, how is Chidambaram going to fund all those expenditure programmes he mentioned at such great length in his Budget speech? How’s he going to fund the Rs60,000 crore bonanza he’s dished out for farm voters? Well, revenue expenditure is budgeted to increase by 11.8%, well below the 14.4% rise in this year’s estimates compared with FY07 actuals. But while that may be a good thing, consider what he has done to capital expenditure. Budgeted capital expenditure for FY09 is Rs92,765 crore, well below the revised estimates of Rs1,20,787 crore for FY08. So that’s where the axe is falling: He plans to reduce capital expenditure by 23% in FY09. That may be the least attractive way to lower the deficit, but then,?as said earlier,this Budget was not about economics.
The Budget is also about smoke and mirrors. How is the Rs60,000 crore giveaway to farmers proposed to be funded? The minister has made no provision about it; all he says is he’ll make a “liquidity provision” to banks over three years. What are the details? Don’t worry, he says, trust him, he has a plan up his sleeve. But bank stocks recovered after bankers said they’ll be given bonds. Why hasn’t he made a provision for the Sixth Pay Commission? Even Lalu Prasad did that in his Railway Budget. But Chidambaram has to take credit for complying with the Fiscal Responsibility and Budget Management Act, so he keeps oil bonds, fertilizer bonds, and “liquidity” for banks off the books.
What’s in it for the markets? Well, he delivered a completely gratuitous blow to sentiment by increasing the short-term capital gains tax to 15%. At a time when volumes in the markets are very low and participation has plummeted, this was the last thing needed. Coupled with the ominous reference to moderating capital flows at the beginning of the speech, the signals he gave out are not good for the markets. Also important are the changes he has made in the securities transaction tax, which is now a business deduction instead of being set off against tax earlier. That’s a major blow for arbitrageurs and jobbers and could lead to lower market volumes.
The cutback in capital expenditure is very negative, because it could affect growth in much-needed infrastructure. But let’s take a closer look at the expenditure figures. Capital expenditure by the road transport and highways ministry/department is budgeted to increase by 5%, after rising 22% this year. Capital expenditure on urban development is down to Rs2,401 crore, compared with Rs2,860 crore this year. True, there’s a 37% rise in budgeted expenditure on power, but the bulk of that is revenue expenditure. But if capital expenditure will suffer, the silver lining is that the Pay Commission, the direct tax concessions and Chidambaram’s orders for give more loans to farmers, including to former defaulters, should together result in more purchasing power for consumers. This Budget should reinforce the recent revival of interest in consumer stocks. It’s no wonder the BSE FMCG index rose 0.91% on Friday, compared with a decline of 1.38% for the Sensex. The other relatively big gainers were auto stocks, with the BSE Auto index rising 1.19%, thanks to the Budget excise sops.
And inflation? The excise duty cuts may help a bit, but they pale into insignificance beside the liquidity likely to be unleashed by the Sixth Pay Commission and the impact of fresh farm lending. Add the “moral suasion” lending rates and consumption growth should look up. In short, in spite of the finance minister’s talk about meeting fiscal deficit targets and a smaller borrowing programme, this budget is expansionary. Given rising crude oil and commodity prices and it’s very likely that while consumption expenditure will get a boost, so will inflation a few months down the line.
Mint’s resident market expert Manas Chakravarty looks at trends and issues related to investing in general and Indian bourses in particular. Your comments are welcome at email@example.com.