Morgan Stanley
The current account deficit was annualising at around 6% six months ago and is now heading for sub-5% for the coming 12 months ? commendable for an election year.
The concurrent benefit on the current account (due to higher savings ? a lower deficit helps lower inflation and lift real rates) is notable.
There are small measures in the Budget to lower the CAD, such as higher taxes on luxury goods and on high fuel-consuming SUVs and measures to boost financial savings ? noticeably, inflation-indexed bonds. That said, we believe tax instruments could have been used more aggressively to boost financial savings given that its share in the GDP is at a 20-year low. If the twin deficit declines, as is our expectation, history suggests that the market multiple will rise.
Effective corporate tax rate rises by 150 bps with a profit impact of 1-1.5 percentage points. However, the Budget does not seem to have marred FY14 growth. If anything, it makes an effort to revive investments by providing extra tax breaks, setting up a road regulatory authority and promising action on coal mining.
The step forward on GST is encouraging. Our view remains that a recovery in the private investment cycle is unlikely until after the 2014 elections, even as the public investment cycle has turned.
A workman-like Budget, a likely bad F4Q GDP print as the estimates suggest a big fall in government expenditure in F4Q/ F2013, the fine print on tax residency certificate and higher gross borrowing hurt the market. Even though history is stacked against the market, we think these concerns are overdone.
Fiscal consolidation should help the RBI to ease. Inflation is headed lower if the seasonally adjusted rate is a guide. Liquidity will likely improve in April as the government lifts the embargo on spending. While the earnings numbers could be tepid for this quarter, we think the worst for earnings is over.