Budget 2012
Budget 2012 was one of the most watched event. Everyone was trying to guess the way ahead and government stand on fiscal consolidation. He started by saying that we have to be cruel to be kind. In our opinion it will do exactly the same. To simplify GDP
GDP = C + I + G + (EX-IM)
Where
C = Consumption
I = Investment
G = Government Expenditure
EX = Export
IM = Import
In last one year we have seen sharp slowdown in consumption. Most of the corporate are reporting value growth by doing price increases but are not able to do volume growth to that extent. With recent hike in excise duty & service tax by approx 2% which with immediate effect, corporate will find it difficult to pass on this hikes to end consumer. This will also be inflationary in nature and may move inflation in upward trajectory. In our opinion this will keep interest rate elevated for slightly longer period of time. In our opinion very few corporate with strong brands or intellectual property will be able to pass on this hike in taxes.
Investment has slowed down in last one year and due to high interest rate and slowdown it may remain subdued for some more time. Also due to high fiscal deficit, high interest rate and deficit liquidity there is crowding out effect for corporate.
Government is aiming for fiscal consolidation and hence will see slowdown in government expenditure. They may use public sector companies balance sheet and cash surplus to revive growth in public expenditure.
Export has done reasonably well in last one year and India may continue to do well due weak currency & cost advantage. The real challenge for export is weakening European & Chinese growth.
Import has grown at faster pace compared to export due to surge in oil prices & import of gold. Government is trying to curb import of Gold.
If we summarize all of this we can see that India is targeting slow growth to ensure fiscal consolidation.
According to us Joker in the pack is OIL PRICES & imported raw material prices. Any fall in oil prices can bring down (E-I) equation. Which will improve our current account balances. This will strengthen our currency and also bring down inflation at faster pace and improve margins of the companies.
My advice to most of the investors will be show patience and believe in countries ability to come out of crisis. It’s very easy to lose conviction at this time & believe in some other asset class. GRASS IS ALWAYS GREENER ON OTHER SIDE. Most of the investors agree that equities tend to outperform other asset class. But they forgot to mention that returns are made by only patient investors. Equities return for last five years have been zero. This statement should make investor more bullish than bearish. Since GOOD TIMES ARE AHEAD.
