Indian link

29 April 2010

The market is responding to India’s budget news positively. We saw strong foreign institutional investor inflows into the Indian market of about $2bn within eight to nine trading days since the budget was announced.

On the other hand, we also saw local institutional funds selling about $1bn. Overall, the Indian market rose by about 10 per cent following the budget announcement.

The main focus of the budget is to trim the fiscal deficit. The government’s medium-term plan is to reduce the deficit to 5.5 per cent of GDP for the fiscal year ending March 2011, from the current level of 6.8 per cent.

The government still forecasts that the economy will grow by 7.2 per cent for the fiscal year ending March 31, moving up to 8.5 per cent in 2011 and 9 per cent in 2012.

Going ahead, the focus will now remain on how the government implements some of its plans.

For the medium term, there will be the tax changes, such as GST, or the goods & services tax, and the direct tax code in April 2011.
The direct tax code is designed to reduce the headline rate of tax but to remove exemptions.

In India, a lot of companies enjoy many tax exemptions and, according to the government, the direct tax code will be revenue-neutral to them on the direct tax side.

Basically, higher-taxpaying companies will benefit as a result of the direct tax code, whereas low-taxpaying companies will lose out in general.

Typically, the Indian market has tended to correct following the announcement of the budget but the 10 per cent rally was possibly because expectations were low ahead of the budget.

Following the rise, the market will be in a wait-and-see mode. We would keep a core India position and then look to top-slice or bottom-fish, depending on how the market evolves.

If the market rallies by another 5-10 per cent, we would look to trim holdings and take some money off the table around the core positions and vice versa if the market comes down.

The sectors that will benefit are the consumption-oriented areas because of the income tax cuts, which will more than override the increase in excise duties. Other areas of consumption revolve around discretionary, auto and housing, even though the service tax will affect construction cost and housing prices.

Homebuyers are set to face higher prices due to the imposition of service tax on construction and sales of real estate, as well as an increase in the cost of various inputs such as cement.

There have been no changes to the portfolio as such because of the budget. We continue to add to domestic sectors. We have been adding to financials and real estate, and we are looking for more consumption-oriented stories. In addition, we retain our focus on the industrial sector and are looking for opportunities to add to this area.

During February, there was what we considered an attractively priced issue by the Rural Electrification Corporation, which is engaged in the financing and promotion of electricity in rural India.

I think most of the market expects the company’s share price to slump. But we subscribed to that company in size. The company is under the infrastructure finance sector. This is a key position that the fund has added over the past month or so and the share price has performed quite strongly since.

Sanjiv Duggal is manager of the HSBC GIF Indian equity fund

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