If you're looking for a chance to enter the Indian stock market, the time is now. Make that call, send that email, tell your banker to break that NRI fixed deposit and put your money in stocks or, better still, channel your savings into a systemic investment plan (SIP) in mutual funds from now on. You can't lose unless India loses, and if you win, it will be big. That's the message Indian Finance Minister Pranab Mukherjee has for you in his surprise 2010-11 budget. One reason why there's hope of new sizzle in the India growth story is that most economists, merchant bankers, fund managers and corporate honchos, in a rare show of unity, give Mukherjee a 7.5 rating on a scale of 10 for his budget. Of course there are better reasons in some of the budget's fine print but it's beyond the scope of this column to piece them all together for a more detailed picture of what the future could possibly hold for your prospective investments. Furthermore, as Denzil my trusted stock broker never fails to remind me, it's so much more stress-free and effective to keep your eye on the big picture and make your investment calls accordingly. So here's the big picture. New Delhi has bravely taken the fiscal consolidation path with a partial pullback of stimulus measures and a clear roadmap for reducing the troubling fiscal deficit of 6.8% in 2009-10 to 5.5% in 2010-11 and 4.8% in the next year. This means that by capping domestic government debt, the government will free up more funds for the private sector's financing needs. The budget draws up a clear road map aimed at raising GDP growth from between 7.2% and 7.5% in the current financial year (ending March 31) to 8.5% and 9% over the next two years and, if all goes well, double digits in the following year, ahead of even China's growth rate. Mukherjee's tax cuts will put more money in the hands of the common man, further accentuating the pecularity of the Indian growth story that's based on rising domestic consumption and savings. For the stock markets, this means not only higher spending power for the population but also better chances of tax savings gettings converted to investments in equities like mutual funds over the medium to long term. There are clear sectoral winners in the budget despite a 2% increase in excise duties (after a previous reduction by 6%), a 10% rise in taxes on petroleum products and an increase in the Minimum Alternate Tax (MAT) rate from 15% to 18%. These include banking, infrastructure (46% of the total plan outlay), power, oil & gas, metals, cement, capital goods, automobiles, health (pharmaceuticals, education (schools), FMCG, and tourism (hotel industry). Furthermore, Mukherjee expands welfare and social services and allocates 35% of development funds to rural India (agriculture) where most of the country's poor live. Then again, if a better monsoon arrives this year, it will trigger a 3-4% growth in agriculture, which would give the GDP a further boost. Mukherjee has also put Plan B in place to step up the economy's growth potential in the medium and long terms. This involves a roll out of the long awaited general sales tax (GST, expected to be introduced in parliament's winter session), finalizing and introducing the direct tax code (DTC, only in 2011), further opening up of the banking sector, and bringing about subsidy reforms with better targeting through the Unique Identification Number program. Also, the budget has ambitious targets of generating up to Rs400 billion ($8.69 billion) through disinvestment and additional Rs360 billion ($7.82 billion) from auctioning 3G spectrum licences for the telecom sector. So much for the pretty, big picture. The ugly side is that the tax cuts and rise in fuel prices will, in all probability, worsen inflation and force the Reserve Bank of India to introduce interest rate hikes – perhaps as early as April this year, the start of the new fiscal year – which would put pressure on the short-end of the equities yield curve. The inflation rate rose to 8.56% in January from a year earlier, while wholesale food prices rose 17.58% in the week ended Feb. 13. With the opposition already out on the streets in protest against the fuel price hike, the government faces a severe challenge. Global cues will continue to affect the Indian markets, especially from the sovereign debt crisis in the Eurozone. Another niggling problem will be the monthly reports of corporate earnings and jobless rates reflecting the health of the developed economies. And it's quite another story whether New Delhi can achieve what the budget ambitiously projects. Bear in mind that this outlook is solely on the budget's potential impact on the markets (India Inc.) and not on the country's broader socioeconomic problems. No doubt there are serious negatives in the budget's fine print. Yet, the markets opened Tuesday after a three-day post-budget holiday with a spike suggesting initial popular endorsement of Mukherjee's politically risky moves for fiscal consolidation in the long term. Denzel, my very seasoned and conservative broker, says budgets will be problematic if you look deep enough into them, and stock markets will more often than not behave illogically no matter what the calculations of the economists. Mood, he maintains quite righly, drives the market. And on this score Mukherjee appears to have stirred up some optimism on India's determination to bring about high and sustainable long-term growth. – SG Feedback: [email protected] __
