The finance minister has delivered a neutral budget to Dalal Street. Easing off funding for stressed sectors through the ECB route, lower/ nil customs duty on mining equipment and increase in personal tax slabs have cheered the markets. However, lack of clear steps on fiscal consolidation, on subsidies and strong reforms to bring India’s growth to 8 per cent have raised investors’ concerns. Further, the across-the-board increase in indirect taxes by 2 percentage points, though good for the exchequer, will worsen the already-high inflation and lower savings.
Crisil Research estimates 7 per cent GDP growth in FY13. After a weak start in the first half of FY13, the economy will recover in the second half, led by growth in the services sector. Inflation is expected to decline to 6.2 per cent in FY13 as compared to average inflation of 9.1 per cent so far this fiscal. Moderating inflation and growth concerns will lead to reversal in the RBI’s hawkish monetary stance. The recent cuts in cash reserve ratio (CRR) rates, totalling 125 bps, is an initial signal for the same. We expect the government to shake off policy inertia which, combined with moderating interest rates, will revive the capex cycle.
On the global front, S&P expects Europe to fall into mild recession in the first half and then recover, while the US is expected to continue to show signs of growth. The slowdown in global growth is expected to stabilise commodity prices which is expected to keep costs under control and improve profitability of Indian companies. Also, excess liquidity created out of market operations by European Central Bank and Fed to keep interest rates low to support growth, is expected to flow to emerging markets such as India.
We expect corporate earnings to grow by 15 per cent and 11 per cent in FY13 and FY14, respectively. We believe, last year’s valuation of Nifty factored in most of the domestic concerns with P/E multiple contracting to 11.3x. We expect Nifty to enjoy 13x multiples (a low-end median multiple the Nifty commanded during the recovery phases in the past one decade) to