BUDGET 2008:PC's Black Magic leaves markets confused

As expected 'Budget 2008' has kicked off the Election campaign of the UPA Govt. It is a politically correct budget, but is it economically correct too? Let's examine.

• The Budget has addressed the most immediate need to boost consumption demand in a gradually slowing economy. The Corporate sector may be disappointed at not getting any direct tax relief, but it needs to greet the huge bonanza in the hands of the individual tax payers to stimulate consumption demand, which augers well for corporate India. Excise duty cuts also will help boost demand in sectors directly impacted by the slowdown, viz. Consumer durables, Automobiles.


• The direct tax collections have exceeded the indirect tax collections for the first time in the country. The FM has expressed his gratitude by sharing a part of the tax buoyancy with the middle class individual tax payers. A part of this will go towards saving and part of it will go towards boosting consumption. In both cases it is going to benefit corporate India, directly or indirectly.


• Eduacation and Health sectors have been the major beneficiaries of increased outlays. This augers well for the future of the economy. The launch of the 'Skill Development Programme' on the Public Private Partnership model is a step in the right direction. The govt. has provided Rs.1000 cr. as initial investment for this programme.


• The budget has been more or less market neutral but for two announcements: Hike in short term capital gains tax from 10% to 15%, and the treatment of STT for brokerages. Both these steps have not been taken kindly by the market players leading to the negative market sentiment, post budget. These measures would lead to fall in volumes in the near term. But in the longer run the markets will take the measures in its stride. Infact the hike in short term capgains would result in more people holding the stocks for longer periods, reducing the volatility in the markets. So this step need not bother the long term investors.
• The announcement of the 'Farm loan waiver scheme' has evoked a lot of interest in this years budget. Infact this announcement as a part of the budget sounds inappropriate as no budgetary provision has been made for the scheme. It does make sense to provide relief to the distessed farmers, but could have been handled in a better manner. There is no dispute on the quantum of relief, but the broader ramifications of the scheme for the future of 'sound lending principles'. All said and done, it will have a mixed effect on the balance sheets of PSU banks. On the one hand they will be able to write off their NPA's, and on the other hand will get liquidity in the long run. The details of the scheme will be awaited by the banks with cautious optimism.

What lies ahead for the markets?

It is now being accepted by a majority of analysts that global slowdown is a reality, and India has not decoupled fully from the global markets. The FM has also hinted on economic slowdown in India. The steps taken in the budget will help overcome the slowdown with a time lag of 4-6 months. Till then our markets will follow the global market trends. Elections are very likely to be held in the last quarter of this year, after the monsoons are over.

In the above circumstances, market moving towards the January highs seems remote, given the ensuing political uncertainty. But the chances of economic growth being sustained by the Indian economy remain intact. The bull run is likely to remain in abeyance till the end of calender year 2008. Still the recovery that has started from the lows of 15332 on the sensex in January 2008 may continue for a while, after the budget is fully digested by the markets. Levels of 18700-19200 on the sensex may be used for some profit booking, before the onset on election season in India.