26th February 2011 Union Budget 2011 Preview

ECONOMIC REPORT
The Indian Finance Minister Mr. Pranab Mukherjee will be presenting the Union Budget for the year
2011-12 on Monday and as far as stock markets are concerned it is slated as one of the most lack lustre
budgets with virtually ‘0’ expectations from the same.

The Key concerns in FM’s mind which could shape his budget accordingly are:

 Managing Economic Growth, since the rising interest rate regime with falling IIP is presenting a difficult
landscape for growth

 Controlling inflation which even the economic survey published yesterday presents as a cause of concern

 Managing deficit, which, as per the street is expected to be in the range of 4.8-4.9% of GDP. Anything
above the mark of over 5% could highly disappoint the market and lead to a possible sell off in the
markets

 Most importantly, Congress with the budget making sure that it should be more like a populist rail
budget because in this fiscal year there are five state elections and politically very important for the scam
tainted picture of UPA

Some of the expectations from the street, related to budget are:

Expectation Sector/Stocks Impacted

Area of
Reform
Some section of the market is expecting a hike in the  Steel, Cement and Capital
indirect taxes like excise duty and service tax, while Goods stocks to highly
others are against the hike. I personally believe that at this underperform if there is a
stage for government to increase excise duty would hurt hike in Excise Duty to 12%
Indirect Taxes the growth even more and also increase the inflation and
hence seems a remote chance of excise hike, however a  ITes, Telecom, Financial
2% hike in the service tax could be on the cards Services

There is high chance that the government will increase the With increase in disposable
minimum tax exemption limits for individual tax payers to income for individuals consumer
help them fight inflation and move towards convergence durable and non durable sectors
with DTC. There is also sum buzz that the government should perform. Stocks like
Direct Taxes would reduce the corporate tax rate to around 28-30%, Videocon Industries, Voltas,
however this looks unlikely. Whirlpool, among others are
likely beneficiaries.

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 There is mounting pressure on the government to provide Sectors specially power,

ECONOMIC REPORT
thrust to the infrastructure sector which is facing severe agriculture and water is expected
slowdown on account of higher interest rates and other to receive major sops in the
regulatory bottlenecks. The government is likely to budget and stocks like IVRCL,
Infrastructure announce higher spending for the sector along with some IRB Infra, JSW Energy, GVK,
Focus key tax considerations for the same. etc. to benefit if the budget
addresses the infrastructure sector.

Government is already behind its FY11 targeted PSUs like SBI, Sail, HPCL,
disinvestment program because of choppy market BPCL and IOC are likely to hit
conditions and will carry out the same in FY12, moreover the capital markets in the coming
in order to tackle the deficit as it can not increase tax at the fiscal year with either an FPO or a
moment, disinvestment is the only left avenue for some Rights Issue, however the street
increase in revenue Hence, in all probability FM will always punishes them on account
Divestment
announce a higher disinvestment program of government coming out with
the issue at a price lower the
current market price. Hence,
nothing concrete can be said for
the PSU stocks direction post
budget.

As already mentioned above, because of the elections in 5 A high increase in socialistic

states in the next fiscal year, government will leave no spending which takes the deficit
Social Spending stone unturned in order to woo the voters and hence a lot of above 5% of GDP could be fatal
increased spending in schemes like NAREGA, JNNURM, for the markets and lead to a
etc. is expected. possible sell off.

Over the last few years, in every budget the street expects Stocks like BEML, Reliance
the government to throw some light on a change in FDI Capital, Pantaloons, etc should
FDI policy and every time have faced nothing but perform if the government
disappointment. This time around also the street is increases FDI norms in there
expecting improved FDI rules for sectors like insurance,
respective sectors.
retail and defence

MPA Analysis:
It’s probably for the first time over the last 4-5 years that the market has not rallied prior to the budget
because of hardly any build up of expectations. If the government surprises even slightly on the
positive side, market could rally up to 5400-5450, or else market’s fate would lie on the crucial 5200
support, which if it breaks could head straight to 45-4600 levels.

Hence, an advice would be to let the budget speech get over and then take the position accordingly.

HAPPY INVESTING…!!!

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 ECONOMIC REPORT
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