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March 1, 2001                                       Feedback  

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'The markets are expected to remain buoyant, vibrant and rise'

Ajit Sanghvi

Budgets are usually bearish in their impact. Only three times in the last decade has the market responded favourably to the Budget. One can call this the 'Oliver Twist syndrome'. No matter how many concessions the FM announces, the market always expects/wants more. This time though, expectations were not very high. So we may not see the bear slide. To galvanise the markets, the finance minister has taken major bold steps -- reduction in corporate taxes, divestment, strategic sale, privatisation, downsizing which can create impact on the markets in the New Millennium.

We are drowned amongst the debris of lots of negatives like massive destruction in the earthquake, the country's credit rating downgrade, weak Nasdaq, falling ADR & GDR prices, fuel price hike, lower economic growth. However at the same time, a 6% growth is not small, and we are amongst the top ten countries growing at this rate in the world today.

From the capital market's point of view, the government has done a lot for the IT industry:

1. Increase in FII investment limit to 49%. Beneficiaries: Infosys, Satyam.

2. Acquisitions Abroad Facilitated. Beneficiaries: Infosys, SSI, Wipro.

3. ADRs/GDRs proceeds allowed to be kept abroad. Beneficiaries: Wipro, Infosys, Satyam.

4. Onsite services will be considered export earnings.

Our markets have not seen a major allround boom in the last eight years. The 2000 point upsurge in the BSE Sensex in 2000 was mainly in the technology sector. We are almost close to the Sensex 10 years back. Investors have greeted the concessions in dividend tax on corporates, reduction in surcharge on corporate tax and wide spectrum of reforms and concessions for various sectors. Strategic sale, privatization, divestment in PSUs could create magic both on government finances and the markets. The markets are expected to remain buoyant, vibrant and rise.

Income tax salaried payers below an income of Rs 1 lakh stand to gain by higher 30% deduction u/s 88 (last year was 20%). However the major loss is reduction in small saving, i e provident fund interest rates. Recent government reduction in the interest rate on PF from 11% to 10% has very severe consequences for employees. Prima facie a 1% reduction can substantially erode lifetime savings.

The government has already reduced interest rates last year from 12% to 11%. A person who starts working at 20 and retires at 58 -- if his annual contribution to PF is a nominal Rs 1,000 pm, he will get Rs 43.69 lakhs at 10% instead of Rs 56.46 lakhs at 11%. A person contributing a nominal Rs 1,000 per month stands to lose enormously -- Rs 12.77 lakhs. Taking into account the company's contribution, capital accumulation will be less by Rs 25.54 lakhs.

Yesterday (Tuesday) the mood was so gloomy at the BSE that most people I met were not sure whether they be solvent today. But the FM has done the trick. I think the BSE has a strong lobby.

Ajit Sanghvi, director, Malini Sanghvi Securities

Budget 2001

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