Pre-Budget Expectations 2013–2014

Economic policy reforms has for some years now mostly been taking place outside of the Union budget. This year is not likely to be different. However, the budget this year assumes critical importance in the context of (1) fiscal consolidation to facilitate lower inflation and interest rate cuts and (2) policy measures and incentives to direct savings towards infrastructure and industrial investment to boost non-inflationary economic growth. Steps towards fiscal consolidation and boosting investment would also be important to attract foreign capital inflows to finance the high CAD.

Investors would also seek some roadmap for major economic reforms like GST, DTC, land acquisition bill, FDI in insurance and pension.

To achieve the objective of fiscal consolidation, the Budget is likely to concentrate more on boosting revenue growth and containing lesser productive expenditure without hurting growth. While the government could go for a populist measure like a food security bill ahead of the elections, this is likely to be countered with rationalisation of unproductive expenditure.

To induce efficient allocation of household savings away from non-productive assets like gold into financial assets for funding infrastructure and industrial investment and ease CAD issues, the budget could:

• Introduce inflation linked bonds

• Offer tax-saving incentives in insurance beyond the current one lakh limit under section 80C and extend tax exemption limits for medical insurance

• Reintroduce tax saving infrastructure bonds.

These measures would not only boost investment but also promote consumption through lower incidence of tax and consequently higher disposable income for the middle class.

For healthy growth of the economy, the health of the capital market is important. Expect the budget to spell out measures to improve the depth of the markets. This could lead to some rationalization of STT and steps to deepen the corporate bond market and improve the regime for foreign capital flows. Scope for RGESS is expected to be widened and made more attractive for the common man.

The budget could be a good trigger for the markets if it lays out a credible outline for fiscal consolidation and boosting investment. In this note, we present a list of expectations of the Union Budget 2013-14 and what implications it could hold for various sectors and stocks. We have selected 6 stocks which we believe could be beneficiaries of the budget’s attempts to enhance economic growth through fiscal consolidation and boosting investment.

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