FOR THE PAST COUPLE OFmonths, markets and gover-nance have been reeling under a negative sentiment. ThisBudget can prove to be a senti-ment changer.

The biggest surprise is the fi-nance minister’s attempt to con-tain fiscal deficit at 4.6% in FY12.The bounty of 3G receipts inFY11, at `1.1 lakh crore, has be-en used astutely to help controlnext year’s deficit. The currentyear’s deficit, which most ana-lysts were expecting to be at4.7%, has jumped to 5.1%. This isdue to the lower roll-over of sub-

sidies and some advancement ofexpenses to this year. Further, hehas bet on continued robustgrowth to drive tax revenues, theway it has been in the currentyear. Although the market senti-ment for the past few weekswould make one feel nervousabout the `40,000-crore disin-vestment target, it could be easily surpassed if the senti-ment changes.

The government borrowingprogramme, at ̀ 3.4 lakh crore, agood 15% lower than market ex-pectations, will ensure privateinvestment is not crowded out and growth momentum is sustained.

Despite experts sermonisinghim to compromise growth andcontain deficit and inflation, theFM has refrained from increas-ing excise duty and service taxrates. This will help maintainthe tempo of domestic con-sumption, which is the key to

sustaining growth.Allowing a sharp rise in FII in-

vestment limit in corporatebonds in the infrastructurespace to $25 billion from $5 bil-lion will not only spur invest-ments in the sector, but will alsohave a cascading impact on oth-er sectors.

Other measures like the reduc-tion in excise by 7.5% on largerpower plants will make localplayers more competitive.

While the finance minister hasdisappointed insurance and re-tail sectors by not allowing moreFDI flow, there was a pleasantsurprise in the form of direct FIIinvestment in mutual funds. Hehas also moved forward onGoods & Service Tax and DirectTaxes Code.

Those who would not be happywith the Budget are SEZ playersand iron ore exporters. Units inSEZs will be subject to MAT,which can impact tax liability.

FM Goes Easy on Service Tax,Excise to Keep Up the Tempo

Big Push� Attempts to cut

fiscal deficit to4.6% in FY12

� Rise in FII invest-ment limit in corpbonds in infra

Fast Lane� RReedduuccttiioonn ooff sur-

charge on domes-tic companies

� Focus on infra-structure and ru-ral development

A few sectors prepared for excise increase have been pleasantly surprised.For instance, cigarettes, diesel cars, etc, making investors in ITC, Maruti and M&M smile.ITC | MARUTI | MAHINDRA & MAHINDRA

STOCKS TOWATCH OUT FOR

Nirmal JainChairman, India Infoline

Expert Take

I HAD BEEN DREADING THEpossibility of an aggressive roll-back of the stimulus package, giv-en last year’s experience and oth-er initiatives during the currentyear. But the finance minister haschosen not to do so, making MrMarket relieved and happy.

He has retained the standardrate of central excise duty at10%. Even on the direct taxfront, the FM has chosen tomaintain a benign environ-

ment. The reduction of sur-charge on domestic companiesis a positive step. The exemptionlimit for individual tax payershas also been raised. The Budgetis growth-oriented — the FMused the word ‘growth’ 21 timesin his speech. He is aiming for9% real GDP growth in FY12,with an ambitious gross tax rev-enue increase of 24.8%. But heseems confident of reining infiscal deficit at 4.6%. The bank-ing sector remains one of ourfavourites, especially given thereined-in fiscal deficit.

The government’s focus on in-frastructure and rural develop-ment is clear from the increasedallocations. The enhancement ofFII limit for investment in cor-porate bonds issued by infra-structure companies will boost

flow of funds to the sector.Inflation was a key theme of the

speech, and understandably so.The recognition that there areshortcomings in distribution andmarketing systems and the gov-ernment’s resolve to take correc-tive measures are key positives.

On the reforms front, DTC andGST now appear set for imple-mentation. RBI has proposedamendments to the BankingRegulation Act and will issue theguidelines for licences duringthis fiscal. The FM has also leftindirect taxes largely untouched,which is good for many sectors.While one might be tempted tosay there is nothing new in theBudget, one did not expect much,to begin with.

(The author, through indirect

investments, holds shares of SBI)

Growth’s Back on the Agenda, and Markets are Happy, Relieved

M&M and Bajaj Auto in the automotive segment, ITC in the consumer space, SBI and ICICI Bank in the banking segment, and L&T and Bhel in the infrastructure sector. SBI | ICICI BANK | L&T | BHEL

STOCKS TOWATCH OUT FOR

Motilal OswalCMD, Motilal OswalFinancial Services

Expert Take

Markets

investorimpact on

Banks told to lend moreto minority communityborrowers. Target at 6%of total PSU bank loans

Banks will have to lend `1 lakh cr more tofarmers. Total loans totouch ̀ 4.75 lakh cr

A new company will guarantee home loans taken by poor borrowers

RBI to sell stakes inNabard, NHB to govtfor ̀ 1,430 cr & `450 cr, respectively

UNION BUDGET 2011-2012

The government once again uses state-run banks as tools to push its social agenda 3

THE ECONOMIC TIMES | TUESDAY | 1 MARCH 2011

FOR A BUDGET THAT BEATthe rather low expectations ofmost analysts, the market’smuted reaction indicates justhow difficult Indian authori-ties’ work will be in the com-ing year.

Investors were intensely fo-cused on the government’s finances before the Budgetspeech and to their surprise, fi-nance minister PranabMuhkerjee seemed to chart apath of fiscal responsibility byincreasing total spending amere 3.4% and projecting a 5%reduction in the government’sborrowing programme.

But the financial marketswere not impressed by theBudget arithmetic as theydoubt whether the govern-ment can keep spending onsuch a tight leash and cut the subsidy bill by the prom-ised 12%.

Doubts also prevail overwhether the government willbe able to meet its revenue tar-gets, with the increase in taxreceipts based on an econom-ic growth assumption of 9% infiscal year 2012.

An inadequately appreciatedaspect of the country’s growthresilience, following the glob-al financial crisis, is that both

fiscal and monetary stimulusplayed a major role.

The stimulus effects are nowbeginning to fade. In order forIndia to achieve its ambitiousgrowth target, the private sec-tor has to pick up the batonfrom the government.

The high investment ratio hasbeen propped up by govern-ment spending of late, ratherthan a major pick-up in privatesector capital outlays.

After many years of rapidgrowth over the past decade,aided in part by the boomacross emerging markets,there is a sense of complacen-cy that India is destined togrow at a trend rate of 8-9%,come what may.

Policymakers have had littleincentive to carry out mean-ingful economic reform whengrowth seemed to chug alongat 8%, as was the case formuch of the past decade. Butin recent months, cracks have

begun toshow up inthe much-touted ‘Indiastory’ with in-flation surfac-ing as a majorissue and theprivate sectorshowing mo-re inclinationto investabroad than

at home.By not carrying on with its

streak of populist announce-ments, the government didshow greater sensitivity in itsBudget to the changed eco-nomic environment where in-vestors are more circumspectabout India’s growth profile.

But the less-than-remarkablereaction from the internation-al community shows that a lotmore economic reform musthappen for the bid to comeback into India’s markets.

More ReformsNeeded to JuiceUp Markets

After manyyears of rapidgrowth, thereis a sense ofcomplacencythat India is destined to grow at atrend rate of 8-9%

RUCHIR SHARMAHEAD, EMERGING MARKETS,MORGAN STANLEY

By Invite

Stocks to Trail Gold, BondsNVESTORS MAY HAVEto brace for more turbu-lence in the stock marketnext financial year, asunyielding inflation cou-

pled with rising interest rates couldslow economic growth and spark cor-porate earnings downgrades. Whilevolatile stock market conditionswould give value-hunters an oppor-tunity to identify winners for the nextthree years, investments in short-term bonds and gold would help in-vestors beat the possible gloom in thestock market this year.

“Equities look vulnerable from aone-year perspective, but investorsshould take advantage of this to buyquality stocks from a two or threeyear perspective,” said AshishKehair, head, wealth management,ICICI Securities.

The benchmark Sensex closed 0.7%higher on Monday, before giving up on early gains as the UnionBudget proposals for 2011-12 did nothave enough steps to lift the sagginginvestor sentiment.

“There wasn’t much in the Budgetfor us to change our view that therecould be another 10-15% correction inthe Sensex over the next threemonths,” said Saurabh Mukherjea,equities head, Ambit Capital. “Thiscorrection will be driven by uncer-tainty on the political front, a growthscare in the fourth quarter of FY11and compression of corporate profitmargins in 2011-12 because high inter-est rates and input costs remain majorconcerns,” he said.

The Sensex has fallen about 16% sofar in 2011, led by foreign institutionalinvestors selling equities worth ̀ 8,900crore. Hopes of a rebound in the USeconomy, worries about a slowdownin India’s economic and corporateearnings growth and corruptionscandals involving ministers in theruling coalition and top companiesprompted foreign investors to pullmoney out of India after investingaround $29 billion in 2010.

Fund managers and brokers warnthe worst may not be over for Indianstocks as further spike in crude prices,in the event of more instances of po-litical instability in oil-producing re-

gions, could trigger more sell-offs.Nandkumar Surti, chief investment

officer at JP Morgan AssetManagement India, said, equitieswould continue to be exposed to ex-ternal challenges such as the USgrowth and rising oil prices. Crudeoil prices hit a two-and-a-half-yearhigh of $119.79 last week.

India, among other emerging mar-kets, has been struggling to containinflation, driven by higher food andcommodity prices, forcing theReserve Bank of India to raise policyrates seven times since March 2010.Finance minister Pranab Mukherjeesaid, in his Budget speech onMonday, inflation continues to re-main a concern.

Ambit’s Mukherjea recommendsstocks of companies in consumergoods and durables, tobacco andpaint sectors, which are less likely tobe impacted by rising prices andwould benefit from the government’srural spending. His least preferred

stock picks are in me-dia and entertain-ment, power genera-tion and distributionand construction sec-tors. Wealth man-agers, including ICICI Securities’Kehair, advises in-vestors to stay away

from stocks or bonds of real estatecompanies. Firm interest rates andhigh prices may force property buy-ers to defer purchases that may im-pact companies’ earnings.

Investors should increase allocationto gold, but should not hope for greatreturns, Mr Kehair said. “It should beto hedge the portfolio against infla-tion,” he said.

Most wealth and fund managers rec-ommend locking money in short-term mutual fund debt products, suchas fixed maturity plans, to benefitfrom higher interest rates. “Investorscan park lumpsum money in fixed in-come schemes of shorter tenure andavoid long-term bonds. But, if oilprices fall, long-term bonds may ap-pear attractive,” Mr Surti said.

TEAM ET

Expertsrecommendlockingmoney inshort-termMF debtproducts

Stocks may take a further hit as spike in crude prices could trigger more sell-offs, warn fund managers

Foreign inflows took a toll in the latter part of 2010 due to scams & inflation.FM promised to cut fiscal deficit, but will he be able to deliver on it?

OVERCOMING FISCAL CHALLENGE

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*ETMUPM10311/ /03/C/1*ETMUPM10311/1R1/03/C/1

CMYK

WWW.ECONOMICTIMES.COM

Investment Manager: Canara Robeco Asset Management Co. Ltd.Construction House, 4th Floor, 5, Wa lchand Hirachand Marg,Ballard Estate, Mumbai 400 001.Tel.: 6658 5000, 6658 5086 Fax: 6658 5012 /13. www.can ararobeco.com Toll Free No : 1800 20 2726ICRA Mutual Fund Awards 2011 : Canara Robeco Income has been ranked as a 7- Star Fund in the category of ‘Open Ended Debt - Long Term’ schemes for its 3 yearperformance till December 31, 2010. 7-Star Gold Award indicates the best performing fund amongst the 5-Star Funds, provided the scheme size is a minimum Rs 100crore or greaterthan the category average asset size, whichever is lower.The rank is an outcome of an objective and comparative analysis against various parameters ,including: risk adjusted return, fund size, company concentration and portfolio turnover. The ranking methodology did not take into account loads imposed by the Fund.There were 26 schemes considered in ‘Open Ended Debt - Long Term’ categoryfor the ranking exercise. The rank is neither a certificate of statutory compliance nor anyguarantee on the future performance of Canara Robeco Mutual Fund. Ranking Source 1, Publisher: ICRA Online Limited. CNBC TV18 — CRISIL Mutual Fund Awards 2011:Canara Robeco Income (Category - Income Funds) Canara Robeco Income won the CNBC TV18 - CRISIL Mutual Fund Awards 2011 in the Income Funds category. In total25 schemes were eligible for the award universe. Schemes present in all four quarterly CRISIL Mutual Fund Ranking were considered for the award. The award is basedon consistencyofthe scheme ’s performance in thefour quarterly CRISIL Mutual Fund Rankings released during the ca lendaryear2 olo. The individual CRISIL Mutual FundRanking para meter scores ave raged forthefourquar terswere further multiplied bythe parameter weights as perthe CRISIL Mutual Fund Ranking methodologyto arriveatthe final scores. A detailed methodology ofthe CRISIL Mutual Fund Ranking is available atwww.crisi l.com.Past performance is no guara ntee of future results. Rankingsand Award Source: CRISIL FundServices, CR1511 Ltd. Investment Objective : Canara Robeco Income (open ended debt scheme) : To generate income through investmentin Debt and Money Market securitie s of different maturity and issuers of diffe rent risk profiles. Load Structure ; Entry Load ; Nil, Exit Load; 0.5% - if redeemed/ switchedout within 6 months fro m the date of allotment. Nil — if redeemed / switched out after 6 Months fro m the date of allotment. Statutory Details: Canara Robeco MutualFund has been set up as a trust under the Indian Trust Ad, 1882. Asset Management Company: Canara Robeco Asset Management Company Ltd. Sponsors: CanaraBank, Head Office, 112, J C Road, I3angalore 560 002; Robeco Croep NV , Loolsingel 120, �O11 Rotte rdam, Netherlands. Risk Factors: Mutual Funds and securitiesinvestments are subject to market risks and there can be no assurance or guarantee that the objectives of the Schemes will be achieved. As with any investment insecurities, the NAV of the units issued under the Schemes may go up or down depending on the factors and forces affecting the Capital markets and Money markets.Past performance of the Sponsors/AMC/Mutual Fund do not guarantee future perforrriance of the Schemes. Canara Robeco Income is only the name of the scheme anddoes not in any manner indicate either the quality of the scheme, itsfuture prospects or returns. The Sponsors of the Fund are not responsible or liable for any loss orshortfall resulting fromthe operations ofthe Schemes of CRMF, beyond the initial contribution of a sum of�10 lactowardsthe setting up of CRMF. Investors should readthe Scheme Information Document for Scheme specific risk factors and other details before investing.