The Hindu Business Line : Budget strikes the right chord

IN a post-Budget rally, the Sensex, Nifty and CNX Midcap 200 indices touched all-time closing highs last week, after moving in a narrow band in February.

Is this rally a direct outcome of the 2005-06 Budget presented on February 28 or a pure liquidity driven rally by FIIs sitting on the sidelines in the run-up to the Budget? A mix of both, one can safely say. But the Budget's influence on this rally can hardly be ignored.

For a Budget built on the edifice of high expectations, the Finance Minister has delivered on the promise in a large measure. It has struck the right chord with industry, the common man and stock market.

By choosing to remain subdued rather than dramatic in the direct and indirect tax reforms agenda, the Finance Minister has ensured that industrial buoyancy is sustained.

Early in the Budget speech, the Finance Minister acknowledged that all the engines of the economy were running at nearly full speed — business confidence was high, inflation tamed to a large extent, investments were robust and the manufacturing sector was expected to grow at a steady pace. And that set the tone for the rest of the Budget proposals that followed.

The fringe benefits tax proposal has struck a note of discord with the rest of the tax proposals and ruffled feathers in Corporate India, especially among industrialists in the software, pharma and FMCG sectors. This proposal aims to tax all fringe benefits (or perquisites) enjoyed by employees collectively in a certain proportion in the hands of the employer at the corporate tax rate of 33.6 per cent.

But Mr Chidambaram's recent announcement that he would review two or three items, such as travel and sales promotion (including publicity), and ensure that no legitimate expenditure is taxed has allayed some of their fears. The fine-print on this tax, however, is still under debate.

Commendable balancing act

In the run-up to the Budget, the possibility of taxing the corporate sector heavily to finance a plethora of schemes for rural welfare, infrastructure, health and employment generation — the overriding priorities of the Common Minimum Programme — remained a cause for concern. But that, clearly, has not materialised.

Rather than chase the big idea that can transform the rural economy, the Finance Minister has stuck to the basics, balancing political compulsions and populist pressures with a rational and shrewd reforms agenda.

While the rural and infrastructure focus is all too evident in the Budget, if we dig a little deeper, there are a slew of positives for the industrial sector as well. These include:

Strong investment climate created through a host of rural, infrastructure and other projects, with the assurance by the FM that outlay will be tracked with outcomes

Reduction in the corporate tax rate by 3 percentage points to 33.6 per cent; though this has been accompanied by a change in the depreciation rate from 25 per cent to 15 per cent

Lowering of the customs duty structure to ASEAN levels of 15 per cent from 20 per cent last year; excise duty reduced to at least 16 per cent for all goods, except two - auto and aerated water from five items prior to the Budget. Excise duty on tyres, Polyester filament yarn (PFY) and air conditioners brought down to 16 per cent.

Rise in disposable incomes on account of rationalisation of the Income taxes for individuals, especially the middle class families

State level Value Added Tax (VAT) regime to be introduced from April 1 It has also clicked with the stock markets, as the proposals were structured to ensure that there is no immediate need for institutional investors/mutual funds to reallocate or churn their portfolios.

Prudent tinkering with tariffs

Keeping the overall domestic and global dynamics in mind, the Finance Minister has made some prudent changes across different sectors in the economy.

Government-policy-linked sectors: The Budget has removed the inverted duty structure in capital goods and provided the right catalysts through its thrust on rural and other infrastructure projects.

As the focus remains on infrastructure projects such as highways, electricification and housing accompanied by a substantial jump in PSU outlays for different ministries, the capital goods sector has a lot to look forward to.

For oil and gas, the tariff changes proposed in the Budget are likely to leave them revenue neutral, probably with a negative bias for standalone refineries in the near term. The construction has also got the desired boost from the Budget.

Textiles and FMCG: The textile sector, which is ready for the post-quota regime, also got its share of goodies. The reduction in input costs such as PFY or polyester chips; availability of capital subsidy and reduction in the import costs of textile machinery are positives for the sector as a whole.

There is also succour for FMCG companies as the opening up of the rural economy can increase demand and reduction in corporate tax rates is slated to add to the bottomline.

Global price trends: As global price trends of non-ferrous metals such as aluminium, copper and zinc have been ruling firm for the past few months, the Budget has done the right thing by dropping the customs duty by 5 per cent to 10 per cent.

While this is unlikely to significantly affect the pricing power of companies, it has the potential of increasing the competitiveness and protecting the margins of the end-user segments.

Interest rate-sensitive sectors: The Budget has continued to offer a good investment climate for three interest rate sensitive sectors — auto, housing finance companies and banking companies.

The stable interest rates, strong rural thrust and favourable direct tax impact may help most auto stocks.

Given the Finance Minister's policy thrust towards Competition, Consolidation and Convergence and a roadmap for banking reforms, the investment sentiment towards banking stocks continues to remain favourable.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Tax savings — Higher returns, optimal portfolio

Budget strikes the right chord

Chidambaram's different strokes

A fund that could glitter

Equities, PPF and the right mix

Budget 2005: An investor's perspective

SBI Magnum TaxGain: Invest in small lots

Principal Growth Fund: Invest

Dividend galore from funds

Stay invested in ELSS funds

Andhra Bank: Buy