HIGHLIGHTS For Budget FY2002 - KFL Expectations

- Expect a tough but balanced Budget.

Fury of nature, and political flux leave little room for the Finance Minister to manoeuvre. Fiscal responsibility, announced with much fan fare last year, could be the biggest disappointment. Owning up to failures and path-breaking measures for attracting FDI would be called for, so that episodes like Enron do not recur.

- Expect a further increase on direct taxes and sops for Infrastructure investment

The finance minister has already indicated the introduction of a one-time additional surcharge to partially take care of expenses related to the Gujarat earthquake. Fresh sops for Infrastructure investment could partially offset this, to meet the yawning gap in demand and supply.

- Meager scope for protection of non-competitive sectors and corporate.

WTO regime related rules come into force from 2002, to last until 2005. Globalization is inevitable. Commodity manufacturers could lose the most, unless, they are globally competitive. There could still be valid reasons for the Indian government to protect the agricultural sector, but for other sectors, protection could spell disaster. Rationalization of Customs Duty seems to be on the anvil.

- Overall GDP growth for FY2002 expected at 6.0%

High debt repayment charges, a six-month time lag for expected fresh infrastructure spending would propel demand. Burgeoning defense outlay and subsidy compulsions could cap overall growth momentum of the economy for FY2002 to 6%.

- The new millennium budget could still throw up some surprises, which could be in the form of

Fresh cost control reforms on Budgetary expenses

The thrust in this area is expected to remain similar to that of last year - Plan Expenditure. The added advantage of such a strategy would be the forced restructuring of state governments (notorious for populism), the major contributors to a burgeoning gross fiscal deficit.

Some positive initiatives on the divestment of PSUs

Repeated ad nauseam in the past, disinvestment has become a byword for procrastination. The recent change of stance to strategic sale could turn out to be positive for the Government in the medium to long term, as it could aid in fetching a better price later on. Raising Rs100bn (the target for the past two Budgets), should not pose a major challenge as some of the monopoly companies have the wherewithal to become global leaders. The only catch remains the mode of expenditure of funds so raised - the amount needs to be spent on capital expenses and not for propping the fiscal deficit.

- Overall, it could be another Budget strong on content than commitment, play safe, is our advice.

Historically, over the past ten budgets, only two budgets (FY92 and FY93) have been taken positively by the Capital markets. This has largely been due to Budgets falling short of over-ambitious expectations. So, however good be the Budget, expect some corrections. Sectors, which have posted major rallies, could be prime candidates for profit booking. Take care and see through the hype.