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February 27, 1999

BUDGET 1999-2000
BUDGET 98-99
BUDGET 97-98

'A fine balancing act, but not very optimistic for the economy or the markets'

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U R Bhat

I think the Budget is a fine balancing act between the necessity to address the fiscal imbalance and the requirement of the Budget being voted on the floor of Parliament, especially the Rajya Sabha. While one would have liked the finance minister to address the long-term nature of the fiscal imbalance by reducing the four most important constituents of revenue expenditure, viz. interest payment, defence, administration and social services cost as also subsidies, these issues need widespread political consensus, which might be difficult at this point in time, given the charged political ambience in Parliament obtaining now.

There is not much scope for optimism, whether on the economy or on the Sensex, given the state of affairs. But the stock market expected new levies on the IT sector, on other items like cigarettes etc, which did not happen. In addition there has been some mention in the Budget about diluting drug price control. Hence, there has been some buoyancy in the market, which I believe could change once the Budget is interpreted by a host of analysts and commentators over the weekend.

I do not expect the market to continue to remain buoyant over the year, except for periodic buoyancy in fits, giving traders good opportunities to do whatever they are good at.

As far as the primary market is concerned, I think over the last couple of years there have been certain irreversible and dramatic changes in terms of investor perception to new issues. I do not see a return of the 1994 buoyancy in the primary market. But new issues by well-known promoters, which are reasonably priced, can always be sold in the primary market without much of a problem, whether to retail or wholesale investors.

I am yet to know of an FII (foreign institutional investor) that has consistently earned positive dollar returns since 1993, when FIIs were first allowed to invest in India. Given this reality and the general disinterest in Asian emerging markets, I do not expect FIIs to fall over one another in directing their investments to India.

In 1998-99, in the first nine months, FIIs have reportedly withdrawn nearly US$ 632 million from their US$ 8.5 billion investment in India. I have a feeling that this US$ 8.5 billion is worth less than US$ 5 billion today. This is not exactly going to set Dalal Street on fire, as it were.

I would be happy if FIIs do not, on a net basis, withdraw money from India in 1999-2000, given the economic and political situation in the country and the unwillingness to carry through the difficult part of the reform process.

The earnings growth in the market is expected to be just about 10%+ in FY2000, whereas the market is discounting these earnings at above 11 times. This does not represent great value for a serious investor, even though there are specific segments of the market, which might offer reasonable value.

NRIs should be satisfied with the government's effort to issue them Indian passports even if they already hold the passport of another country. Other than this, which was of course not part of the Budget, I don't think there was anything specific for NRIs. But they can look forward to getting their mutual fund certificates faster, because there is no requirement now to get prior RBI approval to export such certificates. Not much of a comfort, I presume.

As for foreign direct investment, between approvals and actual FDI inflow there is quite a chasm. The budget has mentioned something about a Foreign Investment Implementation Board or something to that effect. We will really have to see how bureaucratic or otherwise this new creature is going to be.

In quite a few cases, FDI approvals, which basically represent investment intentions, do not get implemented because of lack of a regulatory apparatus, especially in the power, insurance and telecom sectors. Since there is some development on this front we can remain hopeful about FDI intentions getting translated to actual inflows.

I think the IT sector in India will do a great job as long as the government keeps itself off their backs. I do not think they need any further sops.

The finance minister has made income from investments in open-ended equity funds tax-free. This should enable small investors to come in large numbers to mutual funds. In addition he has reduced the long-term capital gains tax on investments to 10% from 20% with indexation benefits. I am not sure that with the reduced level of taxation, indexation benefits will still be available. That's it for small investors. Mutual funds, I am sure, are less cold than they were before the Budget.

The pros of the Budget are:

  1. Efforts to rationalise excise and custom duties
  2. Initiatives on development of the housing sector
  3. Efforts to abolish stamp duty on debt securities, even though I am not very sure how this can be implemented, given that this is the domain of state governments.
  4. Efforts to mobilise gold for productive purposes.
  5. Efforts to promote a market in municipal bonds.
  6. Promise to review the regressive drug policy.
  7. A small step taken towards reducing the size of government.
  8. An effort to lend some credibility to government statistics.
  9. An effort to create a corpus to maintain the network of roads and railway lines.
  10. An effort to make investments in mutual funds attractive.
  11. Some clarity on the tax treatment of share buybacks and employee stock options.
  12. Effort to bring residents and NRIs on par as far as long-term capital gains are concerned.
  13. A feeble appreciation of the need to address the fiscal time bomb.
The cons are:
  1. The inability to come out with a long-term fiscal policy that will impart some confidence for entrepreneurs to invest for the long term.
  2. Some inconsistencies in the budget figures -- while revenue receipts are expected to go up by 16%, the total expenditure is expected to go up by 0.7%. This falls flat over what we have experienced over the last 50 years of Budget-making, without a detailed action plan as to how this will be achieved.
  3. The inability to address the central issues in fiscal management -- reducing the size of government, given its role dilution post-reforms, a detailed plan to reduce the debt burden, a detailed plan to reduce subsidies, specially the 'non-merit' ones.
  4. Efforts to increase the level of protection to Indian industry, six years after the onset of liberalisation.
  5. Not addressing micro issues like graded increase in tariffs between raw materials, intermediate goods and finished products.
  6. The absence of a categorical statement on the spectre of continuing indulgence in cross-holding of shares of PSUs, despite a dramatic fall in the market capitalisation of these companies.
  7. Reversing the path of reducing taxes to generate more revenues for the government.

    Overall, I would rate this budget at 6 out of 10.

    U R Bhat is director and chief investment officer of Jardine Fleming India.

    Budget 1999-2000

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