Market gives thumbs up to Budget

Investors gave a thumbs to Union Budget 2010-2011 as the market witnessed a strong post-budget rally. Data showing a surge manufacturing and services activity in the month of February and rise in exports for the third consecutive month in January 2010, also aided the rally. Finance Minister Pranab Mukherjee's budget proposals which offered to progressively cut fiscal deficit over the next three fiscal years, changed personal tax rates which will lift disposable incomes in the hand of individuals and reduced surcharge on corporate tax for domestic companies to 7.5% from 10% in Union Budget 2010-2011 boosted sentiment. The market gained in three out of four trading sessions in the week.

The BSE 30-share Sensex rose 564.94 points or 3.44% to 16994.49 in the week ended 5 March 2010. The 50-unit Nifty rose 166.40 points or 3.38% to 5,088.70.

The BSE Mid-Cap index rose 5.28% and The BSE Small-Cap index rose 5.36%. Both theses indices outperformed Sensex.

Prime Minister Manmohan Singh said on Friday the economy would grow by at least 8% in the year through March 2011. Asia's third largest economy would expand 7.2-7.5% in 2009/10. Singh said prospects for the winter-sown crop are 'very encouraging'. He also said the government must pay good prices to farmers to ensure higher farm production. The prime minister said the government will take all practical measures to bring down food prices.

He said the government will continue commitment to pubic and private investment in agriculture. The prime minster said there is need to find ways and means to stabilise the sugar economy.

A good harvest is likely to bring down food inflation, which accelerated to nearly 18% in late February. The government, facing mounting criticism for rising food prices, is struggling to meet conflicting aims of controlling food inflation and trying to please farmers by paying them attractive prices.

The economy is likely to do better in the quarter to March than the three preceding quarters, Finance Secretary Ashok Chawla said on Friday, 26 February 2010. The economy grew a slower than expected 6% annually in the December quarter.

Food price index rose 17.87% in the 12 months to 20 February 2010, faster than the annual rise of 17.58% in the previous week, government data released on Thursday, 4 March 2010 showed. The fuel price index was up 9.59%. The primary articles index rose 15%. Higher inflation is likely to add pressure on the central bank to raise interest rates in April 2010.

Meanwhile, business activity among Indian service companies grew at its fastest pace in 17 months in February 2010, climbing for the third straight month as both output and new orders increased, a survey showed on Wednesday, 3 March 2010. The HSBC Markit Business Activity Index, based on a survey of 400 firms, rose to 60.9 in February 2010, its highest since September 2008, and compared with 59 in January 2010. The business expectations sub-index rose for the second straight month to 73.1 in February 2010, its highest in four months. It stood at 66.6 in January 2010.

The manufacturing industry in February 2010 grew at its fastest pace in 20 months, expanding for the third month thanks to expanding output and new orders, a survey showed. The HSBC Markit Purchasing Managers' Index, based on a survey of 500 companies, rose to 58.5 in February, its strongest reading since June 2008, from 57.7 in January. A reading above 50 means activity is expanding.

Exports rose an annual 11.5% in January 2010 to $14.3 billion, the third consecutive rise after 13 straight months of decline, the government said on Tuesday. Imports rose 35.5% from a year earlier to $24.7 billion. The trade deficit stood at $10.4 billion in January compared with $5.4 billion a year earlier. Exports for April-January, the first 10 months of the 2009/10 fiscal year, were down 17.8% at $131.9 billion from the same period in the previous year.

Finance Minister in his budget speech on Friday, 26 February 2010 said the government aims to introduce the Goods and Services Tax (GST) and implement the direct tax code from 1 April 2011. The peak rate of excise duties has been raised to 10% from 8% as a first step towards the winding down of fiscal stimulus measures. However, the service tax was retained at 10%.The government has estimated Rs 40000 crore from disinvestment for FY 2010-11. Revenue secretary Sunil Mitra on Friday said he does not see any difficulty in achieving divestment target of Rs 40000 crore for FY 2011.The government has estimated Rs 35000 crore from sale of third generation telecom auctions in FY 2011.

The finance minister has raised personal income tax slabs which will result in increase in disposable incomes which in turn may boost consumption. The minimum alternate tax (MAT) has been raised to 18% from 15% of book profits. The fiscal deficit is pegged at 5.5% of GDP for 2010-2011, lower than an estimated 6.8% for the current fiscal year. The planned expenditure will rise 15% in 2010-2011. The increase in non-plan expenditure is only 6% for 2010-2011.

The finance minister said the government also aimed to reduce the deficit further to 4.8% of GDP in the year starting 1 April 2011, and to 4.1% in the year from 1 April 2012. He said there is a need to review stimulus and move towards fiscal consolidation and review public spending.

A thrust on the infrastructure sector augurs well from a long-term growth perspective. The Finance Minister has provided Rs 1.73 lakh crore for infrastructure development in 2010-2011, which accounts for over 46% of the total plan expenditure for the year.

The stock market has applauded the Union Budget 2010-2011 due to its thrust on infrastructure development, government's pledge to reduce fiscal deficit over the next three years, a smaller-than-expected 2% hike in excise duties, and reduction in taxes for individuals which will boost disposable income. The Finance Minister has assumed a modest GDP of about 8% and inflation of about 4.5% for 2010-2011.

The Finance Minister plans to tighten his belt on non-plan expenditure that includes heads like subsidies and administrative costs etc. He has forecast a small 6% growth in non-plan expenditure. The budget projects an 11% reduction in the government's subsidy bill for 2010-11, driven essentially by a massive drop in petroleum subsidies and some decline in fertiliser subsidies.

Though the Finance Minister said that the government will implement the Direct Tax Code from 1 April 2011, there is no clarity on actual changes in direct taxes from 1 April 2011. Further, there is also uncertainty with regards to rates under the new GST. One really does not know what the Central GST rate will be in April 2011. States also will charge State GST on the same base as that of Central GST. So the States will have a big say in fixing the rate. It has also to be a revenue neutral rate (RNR) which therefore will involve a lot of arithmetical exercise involving all the taxes which will be subsumed in the GST. It is most uncertain what it will be.

The government will introduce legislation for a direct tax code in the monsoon session of parliament, revenue secretary Sunil Mitra said on Friday.

The key benchmark indices surged for the second straight day on Tuesday, 2 March 2010, extending post-budget gains after finance minister Pranab Mukherjee on Friday 26 February 2010 offered to progressively cut fiscal deficit over the next three fiscal years. The BSE 30-share Sensex rose 343.01 points or 2.09% to 16,772.56 on Tuesday.

The key benchmark indices extended gains for the third straight day on Wednesday, 3 March 2010 on higher Asian stocks. The BSE 30-share Sensex rose 227.45 points or 1.36% to 17,000.01 on Wednesday.

Key benchmark indices ended slightly lower after witnessing intraday volatility, ending three-day winning streak on Thursday, 4 March 2010. Fears of rise in interest rates following rise in food inflation weighed on the sentiment. The BSE 30-share Sensex was down 28.31 points or 0.17% to 16,971.70 on that day.

The key benchmark indices eked out marginal gains in what was a volatile trading session on Friday, 5 March 2010. The BSE 30-share Sensex rose 22.79 points or 0.13% to 16,994.49 on that day.

Realty shares rose after the Finance Minister while presenting the Union Budget 2010-11 on 26 February 2010 said pending projects will be allowed to be completed within a period of five years instead of four years for claiming a deduction on profits. The norms for built-up area of shops and other commercial establishments in housing projects is also proposed to be relaxed to enable basic facilities for their residents. DLF (up 6.53%), Indiabulls Real Estate (up 8.96%), Unitech (up 8.15%) gained.

Index heavyweight Reliance Industries (RIL) rose 3.29%. As per recent reports, RIL has no plans to increase its bid for bankrupt chemicals maker LyondellBasell Industries after creditors rejected a $14.5 billion offer.

India's largest private sector housing firm by net profit ICICI Bank rose 3.44%. The bank has raised auto loans by 25-50 basis points for different tenors and segments, effective from 5 March 2010. The bank has also discontinued its special home loan rate of 8.25% for two years. The bank will now charge 8.75% for loans up to Rs 30 lakh, 9% for loans of Rs 30 to Rs 50 lakh and 9.5% for loans over Rs 50 lakh.

Auto stocks rose as the government hiked the excise duty by 2% to 10% from 8% earlier. This came as a relief as the industry feared a 4% hike. A thrust on infrastructure and higher rural spending also augur well for the auto sector. A spurt in February vehicle sales also supported auto stocks.

India's largest two-wheeler maker Hero Honda Motors rose 4.74%. The company on Tuesday reported a 16.13% increase in its sales at 3,82,096 units in February 2010 over February 2009, the best-ever reported by the company for the month of February.

India's largest tractor maker by sales Mahindra & Mahindra rose 6.8%. The company's total vehicle sales surged 39.51% to 27,894 units in February 2010 over February 2009.

India's largest commercial vehicle maker by sales Tata Motors rose 11.85%. The company's total vehicle sales rose 58.46% to 69,427 units in February 2010 over February 2009.

Bajaj Auto gained 4.66%. The total vehicle sales surged 75% to 2.68 lakh units in February 2010 over February 2009.

TVS Motor Company rose 7.18%. TVS Motor Company has reportedly increased the prices of its vehicles by Rs 350 to Rs 1,500 across various models effective 1 March 2010. The hike follows an increase in excise duty by 2% in the union budget announced on Friday, 26 February 2010.The company's total two wheeler sales rose 31% to 1,40,544 units in February 2010 over February 2009.

But, India's largest car maker by sales Maruti Suzuki India fell 0.44%. The total vehicle sales rose 22% to 96,650 units in February 2010 over February 2009. The company has raised vehicle prices by Rs 3,000-Rs 13,000 following increase in excise duty in the Budget

Another minor positive for auto companies was higher slabs for personal income tax that would leave more finance in hands of individuals.