Pranab’s Union Budget has shorted the Market !

Ironically It’s Reliance Group Founder’s Dhirubhai Ambani’s Death Anniversary today… Arguably the Father of Indian Equity… He was the King in Capital Formation through Equity….. we probably need him to resurrect… to resurrect our Markets !… he build his flagship on scaling up a Domestic Consumption Story… we need to stimulate the same today… his vision, experience, inspiration, motivation, ideas and leadership would have helped…. You can corelate our huge Fiscal Deficit with Dependency on Oil Imports and being victimised by the huge surge in Oil last year to US $ 145/barrel…. Reliance continues to lead the way in the Private Hydrocarbons Sector in building World Class Refineries and Exploration of Oil and Gas…. Clearly it was Dhirubhai’s Vision to help make India a World Class Country and less Dependent on Oil Imports… His guidance in aiding the Government in Capital Formation through Equity would have been invaluable… He would have had the crucial retail Investors support too.

And how in the Hell did Planning Commission’s Montek Singh Ahluwalia keep stating, in the past few days, on the media to millions that the Union Budget will be Popular !

Was he deliberately misleading, like many of our market operators do, or is he as inarticulate as Finance Minister, Pranab Mukherjee !?…. ‘Popular’ Indeed !… Market has Popped !… Sensex has closed down 870 points at 14043, having breached 14000 earlier… It’s down over 1000 points from Intra day Highs of over 15000 just before Pranab began his ‘to be popular’ Budget Speech… Nifty closed at 4166, down 259 points

And come to think of it even our Finance Minister had told us to Wait for the Budget !… and so we waited… and now we’re worried and those who bet long are even wailing !

It’s not just a coincidence I’m wearing ‘Red’ today !… my past blogs would support this T-Shirt colour code for today !… you thought I was wearing a Red Shirt, did you !?

I do hope to wear ‘Green’ soon though !

I thought I would have to repeat Benjamin Franklin’s Quote “Well Done is better then Well Said “… I had quoted this for Mamta Banerjee’s Railway Budget a few days ago

But Pranab Mukherjee’s Union Budget Speech was not even Well Said !

No Clarity or Roadmap on Disinvestment, Deficit Control and Deregulation… Clearly a ‘Left’ Hangover yet lingering, perhaps !

As I had blogged earlier, I don’t see Pranab as a Visionary or even a great Orator…. yet, I had expected him to seize this great opportunity and reveal some Intellectual Framework of Great Forward Thinking and Vision for India going Forward…… He began his speech on this note saying we have a Young India, restless, but ready to seize opportunities…. I expected the speech to unfold on this Vision… Instead he kept droning on and on and relished quoting sections and subsections in his proposals….. more strategic vision needed to be articulated

Pranab Mukherjee began his Budget Speech with strong and forward looking objectives laid out… he ended it over an hour and half later quoting Mahatma Gandhi and stating we need to build a Brave India of our Dreams….. but everything else in between was simply a Droning

He could have spelled out the roadmap even more clearly as to how India is planning to tackle the High Fiscal Deficit of 6.8 % projected for FY 10 and how the Infrastructure Spending will cross over 9% of GDP… How is he planning to fund both ?…. There was a fear he would do so partially through raising Taxes… but as he said, his Direct Taxes Proposals is Tax Neutral and his Indirect Taxes Proposals are just Rs 2000 crs incremental… So where are the Monies going to come from ?…. a little pat for FII and FDI Investors would have inspired them to scale up their Inflows fast… enough monies are waiting to flow into India

And how will our GDP regain the 9% Growth rate ?… where’s the stimulus for this going to come from ?

I’m trying to read between the Lines here…. Market is not even going to try this… they want it to be stated bluntly and simply and the reaction is bound to be immediately negative… It had dropped over 700 points from intraday Highs as I blog this.

It would be a great chance on any significant correction to enter the markets… It’s at 14350 levels now just past 1 pm.. It had surged to over 15000 just as Pranab Mukherjee had started his speech.. Sensex had gone ahead of realities that I have spelled out repeatedly in earler blogs… It’s now in correction mode…. It will, however, recover in the medium term…but don’t be in any hurry yet to Buy… wait for correction and consolidation

Wonder at what Price would Mahindra Holidays get listed, shortly ! ?… It was issued at Rs 300

And I see Interest Yeilds breaking 7% now…. Not Good News for Equities in the Short term

No Disrespect,but we find ourselves sandwiched on this weekend between two Bong ‘JEE’ Budgets

From Friday’s Narrow and Metre Track Railway Budget by Mamta Baner’JEE’ , we move to Monday’s Broad Gauge Union Budget by Pranab Mukher’JEE’….gauge reference is  in context of scale and content both.

Yesterday, i.e. Friday,we had Trinamool Congress’ Mamta Banerjee,Railway Minister in this UPA Government, presenting her Railway Budget….Don’t see her as a Visionary…more aggressive and acerbic and whose acoustics and antics display asperity…all alliteration intended…I do concede she was pleasantly more mature in her delivery in the Lok Sabha yesterday…less of a Firebrand and a Firecracker that can erupt any moment…a reputation she has cultivated for herself. 

All that I can say on her Railway Budget Pronouncements yesterday is that she too, like her predecessor,succumbed to playing State Politics…from one ‘B’ to another…from Bihar to Bengal…fine print reveals the the largesse to Bengal,her Home State

All I can further opine is to quote Benjamin Franklin ” Well Done is better than Well Said “

Now we await Monday and the Union Budget… exceptional Hope and Hype precedes this day as Pranab Mukherjee will enjoy a clear mandate this time and the reforms process should be put on a fast track…However,I don’t see him too as a Visionary…more a legendary Party and Family loyalist and lackey and therefore his Latitude being lassoed by this constraint…all alliteration again intended…..Well Respected veteran columnist ,Kuldip Nayyar highlighted this in his column last week when he commented on Pranab Mukherjee’s loyalty to Prime Minister,Indira Gandhi during the 1975 Emergency imposed in India…one of the darkest periods in our Democracy.

So Pranab Mukherjee may announce some very forward looking pronouncements on the three ‘D’s…Disinvestment,Decontrol and Deficit Controls

Yet,all of you can expect me to repeat Franklin’s Quote

Oh Yes ! Sensex may zoom towards 16000 instantly in immediate reaction to such pronouncements…Sensitive Indices are designed to do this !

Just don’t get too carried away by all the Generous and Flattering Comments that you will inevitably hear on the Media Channels from Anchors,Experts,Business Heads,Politicians from the UPA,Bankers,Economists etc…Many have already drafted some cliche ’phrases and quotes’

Valuations at 17 times earnings,Less than Normal Monsoon forecast,supply of IPO Paper and deteoriating financial and economic crisis in ,especially,USA (what green shoots !?) will weigh down markets here after any post budget euphoria…and be careful…all Hope and Hype may already be reflected in Share Prices

Pranab Mukherjee,after 25 years,yet again announced our Interim Union Budget this morning….It was a fairly drab speech and clearly as general elections are fast approaching he lacked the mandate to announce big ticket reforms…..Nevertheless I was searching for some economic stimulus or some forward thinking on challenging issues…I was dissappointed….Our Political and Bureaucratic leaders simply lack that quality of  leadership and vision to take us forward 

Below is the Union Budget at a Glance…as was the fear,the revised estimates for the Fiscal Deficit in the Current ongoing year FY 09 has simply flown out of the Window…At Rs 326515 crs (US $ 67 Billion) It’s 6% of the GDP,against an earlier estimate of a controlled Rs 133287 crs (US $ 27 Billion) or 2.5% of GDP…that’s around 145% over earlier estimates…this is because of Oil surging to a high US $ 147/barrel in August 2008 from levels of below US $ 70 earlier in 2008…India Imports over 100 Million Tonnes of Crude Oil every year and the depreciating Rupee (20% in 2008) compounded the problem

But what really worries me is that the Estimates given for FY 10 show that despite Oil dropping to lows of US $ 40/barrel now,in absolute terms the Fiscal Deficit is shown as Rs 332835 crs (US % 68 Billion) and still high at 5.5% of the estimated GDP

This Fiscal Deficit is a Hungry Pig,eating away our resources…no amount of Lipstick is going to make a Pig attractive !…and though we say,sweat like a Pig,Pigs don’t actually sweat !…but we do ! when we look at this Pig of a Rising Fiscal Deficit ! 

This led me to questioning why ? was it because of escalating Non Plan Expenditure ?…Yes…but which Component ?…Defence,Interest Payments or Other Revenue Expenditure of Subsidies (Fertiliser,Fuel and Food)…..Interesting Revelations followed that throw up a few questions

• Despite Borrowings shooting up by nearly 145 % from earlier estimates of Rs 133287 crs in FY 09 to Rs 326512 crs,why has Interest Payments shot up merely by less than 1 % to Rs 192694 crs from Rs 190807 crs ?
• Borrowings as a % of Total Receipts has shot up to 36.24% against earlier estimates of just 17.75% in FY 09…Even in Estimates for FY 10 the Percentage stays a High of 34.92% …What are the Implications ? 
• If Interest Payments have not gone up then what component of Non Plan Expenditure has gone up ?…as Non Plan Expenditure shows a surge of 21.77 % in FY 09 Estimates from earlier Rs 507498 crs to the revised Rs 617996 crs
• We know Borrowings have surged but specifically how has this increase of 145% in Fiscal Deficit revised estimate for FY 09 been financed ?

The brutal fact is that India has played into the hands of Oil Speculators in 2008…Oil Companies are carrying huge Inventory losses as they had booked Oil at high prices over US $ 100 for long term contracts….The Government and the Corporate Sector simply did not read the Oil Price Rice Bubble Scenario…India is paying a heavy price for this…It’s Rupee has weakened 20% against the US $ in 2008 as a direct consequence…Ironic really as the US $ itself is facing challenging times with USA grappling it’s worse financial and recession crisis in a hundred years

So how has this Fiscal Deficit Increase been financed ?…well we can see that Borrowings have surged…when I dived into the Borrowings I found that the Components of Market Loans and Short term Borrowings has surged from earlier estimates of FY 09 of Rs 100571 crs and Rs 12429 crs respectively to revised estimates of  Rs 261972 crs (up 160% !) and Rs 57500 crs (Up 363% !) respectively

Then why has Interest payments not gone up ???…Anybody???and if they have not then what has ! in Non Plan Expenditure…we compute that Other Revenue Expenditure,read as Subsidies and Defence has shot up by 43% in FY 09 from earlier estimates of Rs 257545 crs to revised estimates of Rs 369096 crs…a day or two ago I blogged on the huge and specific increase in fertiliser subsidies

In fact revised Defence Revenue Expenditure Estimates for FY 09 are Rs 73600 crs ,up from Rs 57593 crs…they move higher to Rs 86879 crs for FY 10

Revised Estimates for Subsidies for FY 09 are now Rs 129243 crs,up from Rs 71431 crs….they move lower to Rs 100932 crs for FY 10

Special Securities ,in lieu of Subsidies,of Rs 75942 crs and Rs 20000 crs have been issued to Oil Marketing Companies and Fertiliser Companies respectively in FY 09

Revised Estimates for pension,police and social services expenditure too have shot up significantly for FY 09  

The worry is that these Non Plan Revenue Expenditures,other than Interest, continue to be estimated as High as Rs 374225 crs in FY 10,despite Oil dropping to below US $ 40/barrel…This could possibly mean that we are carrying high inventory costs into FY 10…truly became suckers in the 2008 Oil Price Rise Bubble…Our Market Loan Borrowings too are estimated to increase to Rs 308647 crs in FY 10

This is the worrying factor…Higher Expenditure….Lower Revenues….and the deficit funding through increased Borrowings….Clearly the next government after the forthcoming general elections has it’s hands full….they will have to find some way of replacing deficit funding through Borrowings with Equity….Clearly building up a strong case for further Privatisation,Pension and Insurance reforms and IPOs of PSUs

One more Pointer…to stimulate the economy,you would want to stimulate consumption too…..interest rates will be eased…so expect rate cuts in CRR and SLR too  

If you observe the lower %s of  Primary Deficit as a % of GDP,you can gauge the impact of Interest Payments on the Fiscal Deficit…all the more reason to control and reduce Borrowings…but as I have stated before we have a peculiar situation that when borrowings have surged through market loans and short term borrowings the interest payments as part of non plan expenditure have not 

The Writing is on the Wall….2009 and even ,I daresay,2010 are going to be very challenging years for the Indian Economy….Coalition Era Politics will continue to make decision making all that more tough and not unanimous, at the Centre,regardless of who will form the government after general elections two months down the line

Equity Markets will continue to be range bound,and despite short rallies,will maintain a downward bias