Budget 2010-2011

The market welcomed the Union Budget 2010-11 by crossing the technically important hump of 4940-4950 levels (intra-day as of now) on the Nifty. What cheered the market sentiments is the fact that the finance minister has addressed the key issues of containing fiscal slippage and has outlined a clear roadmap for fiscal consolidation for the next three years. This essentially means that the government’s net borrowing for FY2010-11 is well under control (below the physiologically important mark of Rs3,50,000 crore) and allays fears of crowding out of bank credit for private sector. In another words, the government’s borrowing program is not likely to put much pressure on interest rates.

Apart from the positive outcome of the above-mentioned macro issues, the market have reacted positively as expectations were relatively low from the budget and there are no apparent negatives. The finance minister has stayed away from touching tax proposals that directly impact capital markets such as capital gains tax, securities transaction tax and dividend distribution tax. On the other hand, the slabs for personal income tax has been widened considerably that will result in higher disposable income in the hands of salaried working class. The partial rollback of fiscal stimulus in form of excise duty is in line with the market expectations.

Coming to government finances, the target of bringing the fiscal deficit to 5.5% seems to be achievable. The finance minister has assumed 18% increase in gross tax receipts and relatively much lower total expenditure growth of 8.5% (5.8% in revenue expenditure). In the given improving economic conditions the revenue growth target seems achievable but the key would be to watch out for the government’s ability to curtail growth in expenditure.

From the stock market’s perspective, the major event is behind us and it will be business as usual from the next week. Fundamentally, the Sensex’ earnings could decline marginally as analyst adjust for the higher minimum alternate tax (MAT) rates (15% to 18%) and the negative impact of excise duty rollback on automobile and some fast moving consumer goods (FMCG) companies. Thus, it will be prudent to not get too carried away.