It is not everyday that the entire country looks ahead with bated breath for the Union Budget announcement to be made by the finance minister. So when July 6 dawns, a large number of people would line up to hear the speech Pranab Mukherjee would be making.

And rightly so, the Congress has won the elections and now has a clear majority and this means that it can take radical steps and get reforms back on track. Also, with the economy slowing down, all the sectors of the economy are looking forward for an impetus to get the high growth trajectory back. Individuals are looking out for ways and means to increase their wealth and protect their plans in an atmosphere of uncertainty. Given the backdrop of the slowdown, global recession and the hope injected by a rally in the equity markets, ?the environment is pregnant with expectations,? as a senior bureaucrat recently mentioned in Mumbai.

Now is the time when change is required and now is a time when it can actually be brought across, seems to be the overriding theme. And there are debates all around. However, one thing is clear, not many people will stand to lose from this Budget announcement, there would be something in it for all.

?India?s new finance minister will present a full-fledged budget after a gap of 16 months and under a different set of circumstances. In February 2008, India was entering a phase of lower growth trajectory. On the other hand, current data suggests that, the economy is likely past the worst and improving.

The focus of the FM will continue to be on sustaining and improving the rate of GDP growth and that too, equitable (inclusive) growth,? says SA Narayan., managing director, Kotak Securities. To sustain growth at a time when the fiscal deficit, the gap between the government?s expenditure and earnings, and the economy is slowing down, the government will have to take some radical steps. And when it takes these steps it would be for the larger good of all.

Key factors

The government will have a tough task balancing fiscal prudence on one hand and the need to stimulate growth. The concern for fiscal discipline remains foremost. ?The fiscal deficit, which has already touched 27% of Budget Estimates as of May 2009, needs to be curtailed in the near term, the stage for which needs to be set today. While the government has already justified the slip off of the Fiscal Responsibility and Budget Management (FRBM) Act, it remains a cause of concern,? says Asit C Mehta, a Mumbai based broker. The reasoning is that once it gets out of control, a whole load of economic evils, like inflation, high interest rates and high taxes, will be unleashed onto the economy. Hence the government is likely to focus on getting this straight.

Inside of this objective, the one clear opportunity that comes is the disinvestment of public sector undertakings. ?The government will have to garner around Rs 30,000-35,000 crore from disinvestment to bridge the fiscal gap by at least 0.5% and will also have to specify the modus operandi,? say analyst at Enam Securities. Hence, there is a strong possibility that you could get attractive investment opportunities. Historically, even considering bad market conditions, investors in PSU initial public offers (IPO) have not lost out.

According to Edelweiss Securities, ?PSUs in which the government?s stake is significantly higher than 51% may be the ones where stake sales will be pushed through first. Thus far, a majority of the amounts raised from divestment have come in from sale of minority stakes in companies, rather than strategic sale and residual sale. This suggests that the government is likely to lean towards divestment of minority stakes in PSUs through the IPO route. However, strategic sales in loss-making companies too may be considered.?

Then the government will also be looking at the 3G telecom auctions to generate Rs 25,000 to 40,000 crore. However, the direct impact on your wealth creation or protection cannot be ascertained at the moment.

Other gains

There has been a strong indication that the tax slabs could be raised and the exemption limits for investments in mutual funds could be increased. According to Gaurav Mashruwala, CEO, ACE and a certified financial planner, ?I hope this budget will give enhancements on interest rates on home loans, under section (24), as I feel that Rs 1,50,000 is hardly sufficient, especially now with the cost of property going up. I would want a major, major enhancement on this limit, or if it?s a first house, even a total waiver. Secondly, I feel, in section 80 (c) now there are too many categories, so either increase the limit for section 80 (c) or one should have separate sections for spending and investments.?

Then there is a strong change that the contribution to the New Pension Scheme (NPS) would get better tax treatment. ?The NPS, designed to provide financial security to millions of Indians in their old age, but which at the same time can become a powerful domestic investor. To make it succeed, the NPS should be moved immediately from an EET structure to an EEE one and the entry and maintenance charges should be reduced substantially,? suggests Prithvi Haldea of Prime Database. And with the PFRDA, the pension regulatory body lobbying hard with the government this is another likely possibility. If this is implemented, the NPS would become an attractive retirement planning solution. Something your financial planner will not have to think hard to include in your retirement plan.

There also have been demands that the Fringe Benefit Tax (FBT) be done away with or be restructured. According to Meera H Sanyal, country executive ABN AMRO Bank India, ?FBT may be reviewed. However, given its revenue potential of over Rs 10,000 crore, FBT may not to be done away with in this year?s budget.?

Market reaction

With the impetus also being on growth, there will obviously be several sectors that stand to gain, ?Keeping in mind the track record of the UPA government and its focus areas, infrastructure, rural and the export segment are expected to be key beneficiaries? says Mehta.

However, there could be a negative reaction in the market in the short run. ?An analysis of pre- and post-budget market movement suggests that over the past 18 years, the market has corrected 14 times post-budget. Excluding the outlier of 1992, the average fall is 4.3%. This time as well, given the higher expectations and strong rally subsequent to the election results, a post-budget correction appears likely,? say analysts at Religare Hichens Harrison.

However, investors should look at the macro signals more carefully and in case of a correction, buy into the market at good rates for the long haul. There is still a lot left in the India story.

“As far as the budget impacting peoples financial plans and strategies, Mudholkar felt, ?The budget does help people make their financial plans better and is a major event for them. However, one must keep in mind that a good financial plan should not be the function of taxation planning,” concludes Ranjeet Mudholkar, principal advisor, Financial Planning Standards Board of India.

Investor survey: Expectation of stock market performance

•As per the ICICI Securities investor survey, conducted to comprehend expectations from the imminent Budget , it is seen that the outlook is fairly muted, implying that probability of the Budget by itself being a strong negative trigger for markets is low.

•While 90% investors think that potential positives from the Budget are already factored-in, 80% expect the markets to move between +5% and (20%) over the next month. There is considerable scepticism about fiscal prudence and measures to boost FDI ? Any measure on these fronts could provide significant upside. Surprisingly, the Securities Transaction Tax (STT) issue does not appear to be relevant for investors.

•Focus on fiscal prudence could create positive surprise. For sectors, while minimum-alternate-tax (MAT) exemption for Infrastructure could positively surprise, directed lending (PSU banks), lack of increased incentives for housing, withdrawal of excise stimulus for FMCG, lack of tax-exemption extensions for IT (small-caps) and under-provisioning of fertilizer subsidies could offer negative surprise. Low expectations from the Budget notwithstanding, ICICI Securities expects markets to be range-bound from current levels in the near-term, with downside risk.