Union Budget 2012-13: Hats off to FM for not yielding to populism

By: Bharat Iyer, ED & Head India Equity Research, JP Morgan

The equity markets went into FY12-13E Union Budget with a fair bit of caution. After all the government had its back to the wall. Slowing growth, stubbornly high inflation, a weak performance in the recently held state elections and friction with some key allies in the coalition. Populism was expected.

But to the finance minister’s credit he has not succumbed to the temptation. And that is a big positive from the market’s perspective.


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Fiscal consolidation and reviving the investment cycle are obvious priorities and the finance minister has attempted to address both. The fiscal deficit is sought to be reduced by a substantial 80 bps to 5.1% of GDP. Subsidies budgeted for food and fertilisers appear more realistic.

But the same cannot be said for the fuel subsidy, unless there is a sharp increase in auto fuel prices. The 30,000 crore receipts from divestments and the 56,000 crore revenues from the telecom sector will also likely be under a lot of scrutiny.

A fair bit of resolve has been shown in curbing expenditure, with non-plan expenditure budgeted to increase a moderate 9% and outlay for NREGA scheme down 18%. Financials and infrastructure are key beneficiaries, given the focus on fiscal consolidation and reviving the investment cycle.

Consumption appears to be rolling over and the increase in excise duties coupled with lower outlay on non-plan expenditure will likely accentuate the trend.

Among global sectors, steel should benefit from the increase in import duties but the energy sector will be adversely impacted by the increased cess on domestic crude. We believe gains of another 8-10 % are likely for the broad market.

Valuations at about 13.5xFY13E earnings are not demanding, the earnings downgrade cycle is showing signs of bottoming out and policy is turning more supportive. But the gains are likely to come at a more measured pace and investors will have to contend with considerable volatility.