• Home
• |
• Careers
• |
• Site map
• |
• Contact us
• |
• Kotak group site

Home > Media > Market reacts against "pragmatic" Indian budget

Media

Market reacts against "pragmatic" Indian budget
Portfolio Adviser
6th July 2009

By Alroy Lobo
Global head of equities, Kotak Group

The Government of India has delivered a pragmatic budget keeping in mind the 9% GDP growth target it has set. The budget is a testimony to the recent election victory for the Congress Party which has been called a mandate for continuity, stability and prosperity as well as inclusive development and equitable growth by the Prime Minister, Dr. Manmohan Singh.

The markets have reacted negatively, but in our view, they were ahead of the reality. Markets were looking for steroids but what long-term sustainable growth needs is medicines, which is what this budget has provided. In fact this correction is a good opportunity for medium-term investors who invest on fundamentals to enter the Indian markets.

While some may be disappointed that the budget wasn’t more aggressive in reducing the fiscal deficit, we believe the economy still requires the support of a fiscal stimulus. In fact, the 6.8% fiscal deficit (ahead of the 6.2% projections of the interim budget) has a positive aspect as a lot of the tax rates are unchanged and additional tax benefits - Fringe Benefit Tax is abolished as is the surcharge on personal income tax - provide a significant step to stimulate domestic demand.

This was a budget for the common man, a budget having inclusive growth as one of its focus areas. There has been a paradigm shift in the government’s approach to inclusive growth, with the creation of legally backed entitlements to provide opportunities for all. The increased allocation to the National Rural Employment Guarantee Program Act (NREGA) of 2006 which has so far provided incomes to 40.47 million households in India, has been increased to Rs.3910m (£50m), an increase of 144% over 2008-09, which is a significant announcement.

Overall, the budget has focused on one key aspect of the Indian economy – domestic consumption. Most measures announced, including the proposed taxation changes, have the ability to boost consumption by ensuring more money remains in the hands of the consumers.

What the budget did not touch upon was Foreign Direct Investment (FDI) and reforms in the banking and insurance space. But foreign investors should not be too disappointed with the exclusion of FDI, as the budget is not the only forum to present these reforms.

The government has recognised highways and railways as key development areas and has increased the allocation to highway development by 23% and to railways by Rs.50 bn (£640m). While infrastructure will be a beneficiary, with plans to increase investments to 9% of GDP by 2014 and increasing flexibility of IIFCL (a Special Purpose Vehicle) to fulfill this mandate, overall the announcements on infrastructure were lower than expectations.

Contact Us