Budget 2013: What do markets want?
Budget 2013should reduce subsidies, raise taxes and go big on job generation and infrastructure investment
Aashish P Somaiyaa
For our own good, I am hoping the budget is tough on us as consumers. Let me remind you of that popular adage–spare the stick and spoil the child or one of those Bollywood dialogues–bachpan mein sahi waqt par ek thappad lagaya hota, toh aaj yeh din na dekhna parta. Some ‘thappads’ have indeed come through in the form of fuel price hikes and the high interest rate regime maintained by the RBI; finally the impact is being felt too in auto sales numbers.
Thanks to the global financial crisis of 2008-09 and the loose fiscal policies followed since, the spending power has moved away from the government and in favour of consumers, leading to the government running up deficit. A prolonged consumption boom should eventually result in spurring corporate growth and economic expansion.
When the government has the spending power, it spends on building roads, ports, bridges and airports raising demand for investments – in capital goods, factories, cement and the like resulting in turn in corporate growth too; when the janta has the spending power, one expects them to consume more, resulting in inflationary trends, and that’s what we did. Inflationary trends are best curtailed by making it difficult to consume–so raise taxes and make it difficult borrow. So there you go, higher interest rates means less spending and more saving, higher excise and customs duties, a wider tax net, increased coverage of services tax and the like.
The good news is that we are all part of this one cyclical counter-balance and one must behave counter-cyclically. When consumption comes down, that also reduces the subsidy burden for the government. When taxes are raised, that improves the fiscal situation of the government and curtails the need for it to borrow and eventually create room for RBI to reduce interest rates. The spending power moving to the government would eventually mean more investments in infrastructure and social sectors like health care and education.
So I pray the budget announces an end to the consumption cycle instead of prolonging the fag end of whatever is left now; and it creates the necessary conditions to spur the next big investment growth cycle. Let the government take away some more spending power from the consumer and create spending power for itself and corporate and institutions to be able to invest in capital projects, infrastructure and social sectors. Only if this happens will begin the next consumption cycle; a bigger and better one.
Consumers do not have to worry about deferred purchase of a car or a house or the inability to shop much. Incidentally, when you find it increasingly difficult to consume, is the best time to invest. That’s why 2005-2008 was the best time to make money in stocks, and 2009-2011 was the best time to consume when markets didn’t do much.
I expect the budget to continue to make it difficult to consume; simultaneously improve the government’s fisc by reducing subsidies and raising taxes and go big on encouraging employment generation and investment in infrastructure and social sectors like health and education. If this plays out; one can expect the market to show us the next big boom. But for that, one needs to be invested in stocks first—either directly or through mutual funds.
The writer is CEO,Motilal Oswal AMC
Broaden tax base, improve quality of public expenditure
It may do wonders if the government increases the spend on education and revives investments
I V Subramaniam
A decade or two ago, the budget was an important event for traders or speculators as it allowed them to trade significantly as announcements came in. Fortunes were made or lost, on this day as bets were placed on predicting which companies would do well or which industrial families would do well based on their connections with those in power. Newspapers reports suggested that lobbying, influencing the government or the ministry seeking benefits were common. Competition was killed and competitive wars were fought through budgets. Any increase in indirect taxes had a huge influence on the fortunes of companies, and often it was rumoured that business houses would influence the government to raise indirect taxes for competing products or competitors. Similarly making imports cheaper was a tactic often used to kill competition.
Speculation as to which group or industries would benefit offered huge opportunities for investors to trade in a stock or group of stocks.
In the late 1990s, with the alignment of indirect taxes into a few simple rates as opposed to the myriad different rate slabs we had earlier and reforms to reduce the cascading affect of taxes on raw materials, the chances of speculating have reduced. The budget therefore was an important financial event to look forward to in the past but has become less important in today’s environment. However, the budget continues to be important from a nation building point of view.
If discounted cash flows was the method used to value companies, then minor changes made to some taxes may have little impact on the valuation of the company. This budget would be a dream budget, if it just addresses the following:
(i) Increase the spend on education significantly
(ii) Broaden the tax base and improve the quality of the public expenditure- This should help in controlling the fiscal deficit.
While recognising that fiscal deficit needs to be controlled, we cannot wish it away. It may do wonders for the long run if the government revives investments with a cleaner, non-corrupt environment and improves the efficacy of public expenditures and take steps to reduce the incidence of generating black money.
However this being the last budget before the next elections, I do not expect it to be very reform oriented despite the indications given by the FM. On the other hand it will be a good budget, if it controls the urge to increase populist spending and further affect the fiscal deficits.
I do not expect the fiscal deficit to come down significantly and do expect that it may be relatively high given the need to support large sections of the population. I would view the increased spend on National Rural Employment Guarantee Act (NREGA) as a positive sign, although I recognise that its delivery needs to be much more efficient.
I would term the budget as good if it puts in place a reform in agriculture where the farmers benefit from any increase in prices and therefore respond better when prices go up, compared to the present system where the middle man seems to benefit. It will be a big negative if like last year the government makes an attempt to tax with retrospective effect. While a jugglery with the numbers may make the statistics of debt to GDP look attractive or the fiscal deficit look attractive, I hope it is not resorted to, as the market looks at the credibility of the numbers. To conclude, given the political compulsions, I do not expect the budget to be path breaking and will be pleasantly surprised if it turns out to be one.
The author is CEO & CIO Quantum Advisors
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