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February 28, 2001                                       Feedback  

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Budget beats expectations

Mukarram Bhagat

Stockmarket expectations on Budget Day were running rather low. Battered by the downslide in the US markets and fears of large broker defaults in momentum stocks, the BSE Sensex slid to mid-January 2001 levels on pre-Budget day.

However, Budget 2001 has now given equity markets a timely shot in the arm with the BSE Sensex up by 4.3 per cent at 4247 post-Budget. The positive stockmarket impact of the Budget emanates from both the fiscal or tax proposals as well as the non-fiscal or economic policy measures contained in it.

Fiscal measures

The major positives are :

1. A cut in corporate tax rates with the abolition of all surcharges on direct taxes (save Gujarat) which could mean upto 3.3 per cent reduction in the marginal corporate tax rate and a significant rise in corporate earnings of highly taxed companies like ITC and HLL.

2. A steep cut of 1-1.5 per cent in the small savings interest rate which should further encourage the flow of retail savings into equities/mutual funds by making alternative debt instruments like PPF, NSS, less attractive.

3. Reduction in the dividend distribution tax from 20 per cent to 10 per cent, which should again reduce corporate tax outflow on distributed profits, enhance dividend payouts and help mutual funds mobilise more resources by offering better returns.

4. Increase in the FII investment cap from 40 per cent to 49 per cent of a company's equity capital and permitting two-way fungibility of ADRs/GDRs i.e. allowing local shares to be reconverted into GDR/ADR subject to sectoral caps, which will now bring India on par with the most liberal emerging markets and augment foreign portfolio flows.

FII inflows have been particularly strong in Jan/Feb 2001 at about $1.3 billion (against $1.6 billion in the whole of calendar 2000) and these should now get a further boost despite the expected lowering of India weightage in the MSCI Emerging Markets index rebalancing to floating stock basis later in the year.

Other measures such as the tax exemption on long term capital gains reinvested in IPOs and liberalisation in the use of GDR/ADR proceeds by Indian companies for investments abroad further reinforce the feel good factor.

Non-fiscal front

The government has decided to:

1. Accelerate PSU privatisation, something the market was looking for and has got. The Budget states that 8 unviable PSUs will be closed down and 27 privatised including VSNL, Air India and Maruti, during FY2002. Even if half of this agenda is achieved next year, it should trigger a significant re-rating of PSU stocks which have hit ridiculously low PE levels reflecting poor market confidence in government intentions/ability to privatise and unlock asset values.

2. Reform the infrastructure/core sectors by levying user charges, especially in power on the mismanagement of which the finance minister dwelt at some length, to more realistic rates and implementing strict internal controls is also a big positive though its implementation will be keenly watched.

3. Begin the much overdue process of downsizing itself by reducing staff and announcing a 2 per cent a year targetted staff reduction programme for the future. The major signal here is that the government accepts that fiscal reforms and expenditure control have to begin at home.

4. Finally, the reduction in direct tax rates including personal taxes, lowering of peak customs duty to 35% with a 3-year commitment to lower it to the east Asian rate of 20 per cent and the reduction in the number of excise slabs to just two reinforces market confidence in the government's long term policy commitment to lower and simplify taxes and align the economy to global benchmarks despite short term hiccups or reversals.

Rediff-CRISIL Budget Impact Analysis: Budget Beats Expectations
Budget 2001

Disclaimer: CRISIL has taken due care and caution in compiling this report. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is also not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of its web site.

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