Budget a non-event, Ahmedabad disappoints investors

The budget can be evaluated from the viewpoint of retail investors on four main aspects. One is whether there are any provisions which are likely to improve the economy as a whole.

Two, are there steps which would increase the disposable income of people. Three, whether there are provisions which would help increase corporate profits, and four, whether there are any specific incentives for direct investments in the capital market. It seems that the Budget 2012 falls short on at least three
of the four.

The only direct incentive for investment in the stock market comes in the form of the new scheme announced in the budget - named Rajiv Gandhi Equity Savings Scheme. This is the first time in the history of independent India that a stock market related scheme has been named after a leader. Under this scheme, details of which will be declared later,  investment in the stock market to the tune of Rs50,000 shall be eligible for 50% deduction. The only condition that has been announced on Friday is that to be eligible the assessee should have income of less than Rs10 lakh. The economy is not in the best of health and the increase in excise duty and increase in the scope and rate of service tax will only increase prices. Fiscal deficit target of last year was overshot by as much as 30% and this year’s target may also be difficult to meet.

A large number of taxpayers - those earning more than the minimum taxable limit but up to Rs8 lakh - shall get a tax relief of Rs2,000. This is not even worth mentioning.

As far as corporate profits are concerned, a number of sectors like automobiles and ancillaries, consumer durables, hotels and related sectors are going to be forced to increase the prices of their products immediately. This is likely to slow down the demand for the supposedly luxury goods like cars, air conditioners, refrigerators and the like. In such a scenario, corporate profits may take a hit in coming quarters.

Coming to retail investors, they will benefit from a marginal decline in security transaction tax (STT), but this benefit may be set off by the increase in service tax. So effectively investors will not have the benefit of lower transaction costs. In fact, they will end up paying more transaction costs. Positive provisions for power, aviation, infrastructure, financial services and retail sectors as well as the announcement of exemption of 50% on investment of Rs50,000 in equity are the redeeming features of this budget.

The finance minister has definitely taken serious note of the current travails of the power and aviation sectors because these two sectors have been granted a lot of facilities so that they can overcome the problems they are facing. One only feels that similar approach should have also been taken for many other sectors which are also facing problems but of lower magnitude.

For keen investors in the market, we would recommend stocks in the power sector, efficient units in the fertiliser sector, a couple of aviation stocks and logistics companies. In addition, they should keep an eye on the bigger companies in the retail segment.

To sum up, the biggest negative of the budget is the increase in excise and service tax. The government’s inability to bring in goods and service tax (GST) and Direct Taxes Code (DTC) is also a major negative. The third negative is the retrospective amendment to the  Income Tax Act on the Vodafone tax refund issue.

This can create a crisis of confidence among foreign investors as far as investments in India are concerned. On the positive side, the sectoral benefits are the highlights with the few deductions and exemptions - like exemption of savings account interest up to Rs10,000 - coming a close second.

(The writer is a CA, CS and research head of KIFS Securities Ltd)