Year 2012 begun on very positive note for the Indian markets and the Indian investor after extremely volatile and testing times witnessed last year. The optimism currently witnessed is validated by the superlative performance of the Indian markets which has seen a commendable rise of 22% in a period of just six weeks from a fall of about 25% last year.
In 2011, markets were impacted by the numerous scams and bribery accusations that stalled effective functioning of the Indian government and impacted policy making and investment. Inflation also remained very high, directly affecting interest rates and subsequently, also impacted liquidity, profitability and valuations of corporate India. That coupled with the ongoing global recession and economic crises of developed economies, the depreciation of the Rupee vis-a-vis the US Dollar, affected domestic and foreign investment inflows into the Indian market landscape
Also read: Union Budget
So what can we expect in the lead up to the Union Budget coming up in March 2012?
Expectations are high from this year's Budget speech as India looks forward to returning to the high growth trajectory our economy had achieved in earlier years. Key points that market watchers and corporate leaders expect are - fiscal consolidation, implementation of the Direct Tax Code which has been in abeyance for the last two years, and an added impetus on growth by introducing the next generation of reforms focusing on domestic infrastructure as well as increasing foreign direct investment across sectors.
Simply put, this would mean that, while the markets could remain volatile ahead of the budget, it would be a pro-growth, pro-investment, market friendly budget that could drive markets back to higher levels. Market watchers are also optimistic about the outcome of the current Assembly Elections (especially in Uttar Pradesh); political equations are expected to change and, in a best case scenario (such as a majority for Congress), lead to more facilitating policy scenario at the Centre. The monetary policy to be announced in March is also expected to be less stringent with a cut in interest rates and lastly, the Union Budget is expected to effectively balance and promote fiscal consolidation leading to increased investor confidence - both domestic and global.
To better understand the Union Budget expectations, we would need to understand the markers that would define and decide the course of investments in its aftermath. Key among them are -
Simply put, fiscal consolidation means balancing government expenditure with its revenue to ensure lowering current shortfalls or deficits. The government is expected to do this by increasing its avenues of revenue mainly by raising tax rates, bringing more services under taxation, and aggressive disinvestment in public sector units. Implementation of the long awaited Direct Tax Code (DTC) and the Goods and Services Tax (GST) will bring uniformity in tax structures across the country and will do away with multiple duties that tax payers are expected to pay currently. This will simplify the tax structure and widen the tax net. However, this will not be a simple job and the government has to move slowly in order to ensure that fiscal consolidation would not adversely aggravate levels of inflation, which could happen in cases where higher taxes result in increase in prices.
Expectations are high that the Union Budget 2012 will finally usher in the long awaited replacement for the archaic Income Tax Act 1961 and the indirect tax acts currently prevalent in the Indian taxation system.
As per recent interviews given by the Finance Minister and in the foreword to the Tax Code, Pranab Mukherjee has explained that the aim is to eliminate misrepresentations prevalent in the current tax structure, introduce moderate levels of taxation, expand the tax base, improve tax compliance, and simplify language and lower tax litigations.
The new tax code seeks to simplify taxation laws by reducing levels of personal income tax and widening the taxable populace - both individual and corporate. It also aims to promote long term investment planning by promoting relevant instruments as tax free. As investors, the introduction of the Direct Tax Code, will lead to reorganizing our investment portfolios to reflect long term systematic planning and investment gains. Simply put, the new code would enable us to save on tax now, while reaping the benefits of a simplified tax regime over an extended period of time.
Also read: Highlights of Union Budget 2019
In a bid to reverse last year's slowdown, the government is also expected to renew its focus on increasing economic growth at the earliest. To do this, the first thing that would merit attention would be to increase the pace of reforms, especially in important sectors like infrastructure.
Key reforms are expected especially in Foreign Direct Investment and increased focus on infrastructural growth especially in roads and highways. According to industry analysts, the growth target for the next financial year is likely to be around 7.5 percent, while inflation could hover at 6-6.5 percent. The figures imply a nominal GDP growth of 13.5-14 percent for the year ending March 2013, lower than that the current year's figure of 16.1 percent.
Increased FDI inflows are expected to increase market liquidity, curb inflation, strengthen the rupee and also positively affect sectors that need fresh capital. Thus far, we have seen nearly USD5billion coming to the equity markets from FIIs and the cash segment in the first six weeks, validating the faith in Indian investment instruments and a positive outlook from the expectations that market watchers have from the Budget and their belief in these expectations being met satisfactorily when the Budget is announced.
In summary, markets are currently buoyant in expectation but have also realistically discounted key factors that may adversely impact its current growth path. Hence, there will not be a sharp correction expected in current rates and levels. As investors, subject to any unexpected negative event globally and assuming the Government delivers on growth expectations, we can expect financial instruments, including equity markets, to provide positive returns in the long term across product segments. All in all, 2012 shows promise in being a good year for growth and increased returns all around.
Also read: Union Budget 2019 vs. 2018
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