Union Budget 2011: FM could definitely roll back stimulus, says Punita Kumar Sinha, Blackstone Asia Advisors

In a budget exclusive, ET Now talks to Punita Kumar Sinha, Senior Managing Director, Blackstone Asia Advisors, on her expectations from Union Budget 2011 and the current scenario in the Indian equity markets.

What is really your big budget expectation? Are you in a sense hoping for much in this budget?

I am not hoping for a lot in the budget, but I do think that the focus should be on increasing revenues. Because even if the government announces expenditure cuts and restrains its expenditure, I think there will be enough leakage in the system over the next 12 months that these forecasts on expenditure cuts may be hard to meet. So I would like to see focus on the revenue side. Very potentially there could be rolling back the stimulus like other countries have done, there could be because economy is growing very healthy at 8.8% and GDP is strong and this is likely to remain strong. So I think they could definitely roll back the stimulus.

They could actually raise excise duties which they cut in the stimulus. Then there has to be some reform on the taxation side because the direct taxes in India are while I know they are high compared to the Asian economies, compared to developed economies taxation in India is actually quite low so there is room there, but I am not sure that the government will do anything on that front.

What is your own expectation really as far as the markets are concerned?

I would like to believe that it is a bull market correction, but there is a risk that we could go into a bear market. If the budget is just like another budget and there are not a lot of bold measures or certain concerns - that are outlined earlier - are not announced and inflation continues and infrastructure keeps seeing delays and commodity prices keep rising, then earnings will actually continue to remain weak.

If all of those things happen, then there is a risk that we could go into a bear market. Right now I would like to believe we are in a correction which is a healthy correction and the multiples are not demanding. So any positive news could help the market and I would expect and hope that by the second half, some of these measures will have worked out and that the second half the market valuation - because they are not demanding - would potentially see a much better second half.

Historically if you go back and look at years where flows have been very strong, we have seen very strong flows in the last 2 years, then generally - following those years of high inflows from foreign investors - any negative news means that you tend to see more outflows and rotation out of India. That is what we are seeing. So to bring those for equity markets to resume a rally, you need to get back certain amount of flows and for that the conditions have to be good. So I do not think we might go into the summer and winter, but spring probably will come again.

4.8% for FY11. May be 5.5% for FY12. What is your number?

Yes, India is a growth economy and therefore it definitely is going to have generally speaking high levels of fiscal deficit because the focus is on growth and that means there has to be certain amount of expenditure. Also, India’s biggest strength is its demographic dividend and to bring the broader population and raise the standards of living for all of them you would potentially need to continue with certain amount of populist measures or subsidies to improve the health of that segment of the economy.

So I think while we are going to continue to see high fiscal deficits, what would be concerning is if oil prices continue to shoot up a lot, then I think the fiscal situation will look worse. Also if no bold measures are announced to rein in the fiscal deficit, then also there will be concerns because it crowds out private sector investment because you got to maintain high levels of interest rates. As it is we are facing a situation where the investment cycle is weak and we need to recover that and I think that might not happen if you have a high fiscal deficit.

Then obviously it hurts the ability of Indian companies and Indians to raise debt and equity because your debt ratings can get impacted and generally speaking equity markets would not like to see a fiscal deficit that is going in the wrong direction. I am less concerned about the absolute number, but I am more concerned about the direction and right now the direction has been much more on the wrong side. So as long as we can see certain positive measures on that front, I really think that on the revenue side there can be a lot that can be done and we should do that because on the expenditure side there is so much leakage in the system that even if he announces lots of cuts, I am not sure that will be implementable.

Now reform is obviously something that the markets are watching out for. What is your expectation really as far as the balancing act is concerned?

I think growth at 8-9% is a very good growth. So the focus should be on as an equity investor. I think the focus right now should be on managing inflation and while you cannot manage inflation related to commodity prices, whether it is oil or agri commodities, you cannot manage that but what you can manage is the India-specific inflation which is supply-side related and that can be managed.