The much awaited Union Budget announcement came across as a major disappointment for the investing community. The stock markets have tanked more than 3.84% since the announcement.

However, experts reckon that the Budget should be looked at in the right context. And the context is that of a slowing down of the economy and the burgeoning fiscal deficit used to spur it. And the critical importance to keep the fiscal deficit within controllable limits.

A fiscal deficit, the difference between the government’s expenditure and revenues, is not ordinarily a bad thing. However, a high fiscal deficit (above 5% of the GDP) means that there is a strong change of a scenario of high inflation and interest rates. A high fiscal deficit means that the government cannot fully account for its expenditure, hence it would have to increase its cash inflow.

For that, it could borrow from the open market heavily. And when it does this, it could ‘crowd out’ private sector investments. And create an environment of high interest rates. “At these times, entrepreneurs tend to become money lenders and not invest in enterprise,” said a leading banker in India. And when enterprise is hurt so is the job creation and also what we have is a potential ‘downward spiral’ that pulls the economy down. Moreover, the other impact of a high fiscal deficit is a weaker currency and for an import dominant country like India, it means inflation. So an environment of high inflation and high fiscal deficit is potentially a dangerous one that could pull growth for India by two to three years.

Hence, the government had to focus on reining this in and has now kept an ambitious target for fiscal deficit being 6.85% of the GDP. According to Anand Rathi CMD, Anand Rathi Financial Services, “The media and the markets had raised excessive expectations on several counts and feel disappointed in the short-term due to lack of removal and reduction of STT and specific amounts on divestment, FDI and roadmap of fiscal consolidation.”

Also, overall, the Indian equity markets had rallied the most in the first quarter of FY10, and by gaining 52%, they recorded the second highest gain in any quarter since the 1992 bash when reforms were announced across the board. This time around too there were expectations that the government would do so, especially in the disinvestment area. So in many ways the excesses that traders had built into the system has now given way to some strong pragmatisim.

“Where was the much talked about disinvestment, the word on 3G auctions, the FDI limits, so on and so forth to which the finance minister gave a short shrift?” ask analysts at Unicon Investments.

However, “A government can’t chalk out a comprehensive disinvestment programme in a matter of 45 days only. Hence, it will have to wait for another day when the details are clearly and comprehensively worked out in a manner that is equitable to all parties concerned,” said a very senior bureaucrat, while speaking to FE.

Pain areas

While this is the predicament that the government faces, the markets needed a signal that could tell them some direction on the disinvestment and revenue generation front. “Our view in our pre-budget note was that the probability of disappointment was significantly higher then the possibility of a pleasant surprise. The Budget has disappointed the market on many fronts, but the biggest factor was that the finance minister did not lay out a roadmap for reforms, as was widely expected,” reckon experts at HSBC Equity Research.

The fact that the government has decided to increase the minimum alternate tax (MAT) from 10% to 15% is also seen as a ‘pain area’ and at a time when corporate profitability is being watched and questioned, this move could have a negative impact on the earnings.

Apart from these, the fact that the government did not abolish the securities transaction tax, as was most expected that it would, and give an indication about the foreign direct investment, hurt the market most.

Gain areas

For individuals, even the wealthy, there are several factors to be cheerful about. For one, in the investment scenario, there are likely to be many winners. “If there were winners, Infrastructure would occupy the top step of the podium. There were significant announcements like the increased allocations to flagship programs like NREGA, Bharat Nirman, and NHDP,” say analysts at Unicon.

And the fact that the FM has indicated that, GST will be implemented from April 1, 2010. On the other hand, a new Direct Taxes Code aimed at making structural changes to the tax laws is proposed to be tabled within the next 45 days. Investments- linked tax incentives have been re-introduced in a selective manner. All these can be seen as positive signals.

Moreover, the FMCG sector and those with an agricultural linkage are likely to gain massively. Pranab Mukherjee has increased the target for agriculture credit flow to Rs 3.25 lakh crore for the year 2009-10 as against Rs.2.87 lakh crore in the previous year.

The most important part for individuals is the abolishment of the fringe benefit tax. “FBT on ESOPs has also been abolished. However, the benefit accruing to the employee in the form of difference between the exercise price and the fair value of the stock will now be taxed as a perquisite in the hands of the employee, we opine,” say experts with Pricewaterhouse Coopers.

Most companies were recovering the FBT on ESOPs from the employees. However, with this new provision, tax will be necessarily recovered by the employer as it is now a perquisite in the hands of the employee, they add.

Investments

While there is much brouhaha about expectations, a look at the sectoral impact indicates that most of these sectors have a positive impact and a few have a neutral one. Only a few could have a negative impact. “This is also a far cry from previous announcements where a couple of sectors could end up getting punished. The fact that the excise on cigarettes has not been increased, is a signal on its own,” reckons a representative of an overseas investment firm.

“Post the correction, we expect markets to focus on the evolving fundamentals of the economy and the corporate sector. Factors like monsoons, quarterly results, inflation and economic growth are expected to influence markets,” say analysts at Kotak Institutional Equities.

In the medium term, they reckon that the triggers for the markets would be announcements on FDI, disinvestment, subsidies, etc, if any and the movement in international markets. There is an expectation that the equity markets to follow a longer term trend as and when there is more visibility on corporate earnings growth for second half of the current fiscal and the following year.

Analysts at KR Choksey are of the opinion that while the FM lost out an opportunity for a huge psychological boost, he has laid a foundation for accelerating long term growth potential of the Indian economy to 9%. Also the fact that the government is looking at increasing the public shareholding in listed shares from the current 15% levels to 25%, in a phased manner, also augurs well as there would be increased liquidity.

“By abolishing surcharge of 10% for high income groups, having income more than Rs 10 lakh a year, the FM has surely brought a smile on the faces of the urban upwardly mobile class” say tax experts with PwC. “The FM has brought some more cheer to the high net worth individuals by enhancing the threshold limit of their net wealth that would henceforth be subject to wealth tax from the current limit of Rs 15 lakh to Rs 30 lakh,” they add.

Clearly, the FM has tried out the balancing act.

From an investment perspective, fund houses are expected to focus on infrastructure and rural-oriented themes. Investors could benefit by participating in these. For fixed income investments however, there could be some twists. B Prasanna, MD & CEO, ICICI Securities Primary Dealership reckons, “The bond markets would have to grapple with a higher-than-expected gross borrowing programme of Rs 4,50,000 crore. There is an expectation that all the extra borrowing will be front ended and completed in the remaining three months of the first half when the liquidity is good.”

Hence, there could be some volatility in the ‘short term’ interest rates. Hence, K Ramnathan, head fixed income and structured products with ING Vysya Mutual Fund reckons that investing in short-term liquid funds would be a better idea. “Here again, the investment time horizon should be around a year and not shorter than that,” he opines.

All in all, the market and its experts now grapple with bigger issues like the impact of low monsoon and the fate of corporate earnings. The Budget impact is soon to be put behind. For investors there is more to cheer about than not, unless of course the rain gods play truant.