Uday Kotak on the Budget

“Good afternoon friends and welcome to the Budget simplified session. I am delighted to talk to you on this important day in India’s calendar every year, which is the Budget Day. The Finance Minister presented the Budget today and I do believe that, keeping in mind India's macroeconomic challenges, the Budget is a realistic Budget.

The Finance Minister is facing up to the reality of our challenges and therefore has come out with a fiscal deficit for March 2012, which is 5.9% - significantly higher than what he had estimated for this year last year when he did his Budget, which was 4.6%.So a 1.3 increase in fiscal deficit is a very high increase in our fiscal deficit. In simple language it means, the amount of money the government is spending compared to what it is collecting is gone up to a gap of 5.9% of the total. This has significant pressures because this amount, the Government of India has to borrow in the markets and therefore that puts up upward pressure on government securities market, which tend to make the government securities rates higher.

For the next year, the Finance Minister, against the current year of 5.9%, is budgeting 5.1% fiscal deficit. That is more realistic and though challenging, something which I believe is achievable. But this is again, as I mentioned, leading to high government borrowing for next year as well.

In terms of the steps which the Finance Minister has done on taxation, there is some benefit for individual taxpayers – their limits have been increased to zero tax up to 2 lakhs, 10% up to 5 lakhs, and 20% up to 10 lakhs. Earlier, it was 20% off up to 8 lakhs. So, anybody who is earning up to 10 lakhs a year will pay a maximum tax rate of only 20%. This I think is again, very friendly for the middle class average saver and is important in the context of the Government’s ultimate plan, based on the Standing Committee of the Parliament where they would like to, in the long run, make up to 3 lakhs tax-free.

Second interesting aspect of the Budget is that on savings account. For your interest earned on savings account, up to Rs 10,000 has now been made completely tax-free. So that will enable you to keep up to around a couple of lakhs of rupees – about two lakhs of rupees in your savings account and have virtually zero tax on the interests on that.

For some specific sectors, the Finance Minister has tried to give some benefits, one of which is for infrastructure sector, where he has given concessions for various infrastructure areas including the power sector. But the most important, from the point of view of an average saver again is – there is going to be 60,000 crores of tax-free bonds issued by NHAI, IRFC and other companies, which is double of what was issued in the current year, which was 30,000 crores. So again, you as investors and savers will get the opportunity to buy some of these tax-free bonds in 2012-2013 as well.

Coming specifically to the capital markets, the Finance Minister has recognised the importance of capital markets and has given some specific benefits for that. Number 1 is the Rajiv Gandhi Equity Scheme which means that you can invest Rs. 50,000 out of your income and you will get a deduction of that and invest it in equities, provided that you lock them in for three years. The amount which you have invested, will be allowed as a tax deduction from your income of the current year. This is trying to get new investors. Let me again clarify, this is available for first-time investors into equities. If you have already invested in equities, it may not benefit you. I'm waiting for the fine print, which will give us the exact details of how this scheme will be implemented. But it is importantly a signal by the Finance Minister that he cares for the equity investor.

The second signal which he has given is reduced STT, that is Securities Transaction Tax on every delivery transaction from .125% to .10%  - again a small change but a signal that you'd like to see long-term equity investors in the market. Are these changes material? No, but they are signalling that nothing more but signalling that the Finance Minister’s sensitivity to the markets continues to be there.

Moving from there again, going back to the big picture, in the context of this year's Budget, keep in mind, we have very significant political and macroeconomic challenges as a country. On the political side, the Finance Minister was unable to bring any tough measures of reform, because it would have been difficult for him to get it passed in the parliament.

The macroeconomic side is a worry. We are seeing, besides the fiscal deficit, India’s current account deficit is now at 3.6% of GDP. Normally the level above 3% on current account deficit high. Current account deficit in simple language, is the difference between imports, exports and service income. After that whatever India, in a sense, whatever we earn as foreign exchange versus whatever we pay as foreign exchange - the difference is the current account deficit and 3% is normally a level above which any country has to be careful. And we are now at about 3.6%. the main cause of our deficit is very high imports of oil and second is gold. On gold, the FM in this Budget, has increased import duty from 2 to 4%. For the current year, India is going to import 60 billion dollars of gold. India’s entire current account deficit is 60 billion dollars. So gold imports are taking away a lot of India’s foreign exchange and by increasing import duty from 2 to 4%, the Finance Minister is saying it will help him collect revenues if Indians continue to import so much gold.

On the other hand, what happens this that Indians’ saving surpluses, which otherwise would go into productive investments like equities or debt or anything like that, have been going disproportionately in gold. This is reducing the flow of saving into financial investments but going into an unproductive asset like gold. So by increasing duty, the Finance Minster is trying to kill two birds with one stone,. Number one collect more revenue and number two - reduce the amount of import of gold.

Beyond that, I just want to say that what are my views on the market.  Fundamentally, I think the stock market is, at present, my sense is, going to be range-bound. On a Sensex basis, I think the market will range between 16000 on the lower end to 19,000 on the higher end and it will more or less play within this broad range for a while. Longer term, I think the India story is not about buying the broader stock market. For investors, the smart way of playing Indian equities is to be stock specific. Find individual stocks which are winners rather than trying to buy the broad market and have a fundamental basis of looking at those stocks - looking at the quality of governance of those Companies before you invest in it.

And with that, I want to say thanks to all of you who deal with Kotak and Kotak Securities and I hope you have happy investing through 2012-13 before again we talk about the next Budget. Thank you very much.

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