Thursday, July 30, 2009

Will you let PC algorithms decide what stock you buy?

On vacation in Turkey, I am picked up at the airport by a minibus. It’s past midnight, pitch-black, the driver is speeding around corners. Only one headlight is working. And I have my doubts about the brakes. In my head I’m planning the letter of complaint to the tour company. And then the driver’s cell phone rings, he picks it up and answers it, he has only one hand on the steering wheel. Now I’m mentally compiling the list of songs to be played at my funeral.

That’s rather how I feel when people talk about the latest fashion among investment banks and hedge funds: high-frequency algorithmic trading. On top of an already dangerously influential and morally suspect financial minefield is now being added the unthinking power of the machine.

The idea is straightforward: Computers take information – primarily "real-time" share prices – and try to predict the next twitch in the stock market. Using an algorithmic formula, the computers can buy and sell stocks within fractions of seconds, with the bank or fund making a tiny profit on the blip of price change of each share.

There’s nothing new in using all publicly available information to help you trade; what’s novel is the quantity of data available, the lightning speed at which it is analyzed and the short time that positions are held.

You will hear people talking about "latency," which means the delay between a trading signal being given and the trade being made. Low latency – high speed – is what banks and funds are looking for. Yes, we really are talking about shaving off the milliseconds that it takes light to travel along an optical cable.

So, is trading faster than any human can react truly worrisome? The answers that come back from high-frequency proponents, also rather too quickly, are "No, we are adding liquidity to the market" or "It’s perfectly safe and it speeds up price discovery." In other words, the traders say, the practice makes it easier for stocks to be bought and sold quickly across exchanges, and it more efficiently sets the value of shares.

Those responses disturb me. Whenever the reply to a complex question is a stock and unconsidered one, it makes me worry all the more. Leaving aside the question of whether or not liquidity is necessarily a great idea (perhaps not being able to get out of a trade might make people think twice before entering it), or whether there is such a thing as a price that must be discovered (just watch the price of unpopular goods fall in your local supermarket – that’s plenty fast enough for me), l want to address the question of whether high-frequency algorithm trading will distort the underlying markets and perhaps the economy.

It has been said that the October 1987 stock market crash was caused in part by something called dynamic portfolio insurance, another approach based on algorithms. Dynamic portfolio insurance is a way of protecting your portfolio of shares so that if the market falls you can limit your losses to an amount you stipulate in advance. As the market falls, you sell some shares. By the time the market falls by a certain amount, you will have closed all your positions so that you can lose no more money.


It’s a nice idea, and to do it properly requires some knowledge of option theory as developed by the economists Fischer Black of Goldman Sachs, Myron S. Scholes of Stanford and Robert C. Merton of Harvard. You type into some formula the current stock price, and this tells you how many shares to hold. The market falls and you type the new price into the formula, which tells you how many to sell.

By 1987, however, the problem was the sheer number of people following the strategy and the market share that they collectively controlled. If a fall in the market leads to people selling according to some formula, and if there are enough of these people following the same algorithm, then it will lead to a further fall in the market, and a further wave of selling, and so on – until the Standard & Poor’s 500 index loses over 20 percent of its value in single day: Oct. 19, Black Monday. Dynamic portfolio insurance caused the very thing it was designed to protect against.

This is the sort of feedback that occurs between a popular strategy and the underlying market, with a long-lasting effect on the broader economy. A rise in price begets a rise. (Think bubbles.) And a fall begets a fall. (Think crashes.) Volatility rises and the market is destabilized. All that’s needed is for a large number of people to be following the same type of strategy. And if we’ve learned only one lesson from the recent financial crisis it is that people do like to copy each other when they see a profitable idea.

Such feedback is not necessarily dangerous. Take for example what happens with convertible bonds – bonds that can be converted into stocks at the option of the holder. Here a hedge fund buys the bond and then hedges some market risk by selling the stock itself short. As the price of the stock rises, the relevant formula tells the fund to sell. When the stock falls the formula tells it to buy – the exact opposite of what happens with portfolio insurance. To the outside world – if not necessarily to the hedge fund with the convertible bonds – this mix is usually seen as a good thing.

Thus the problem with the sudden popularity of high-frequency trading is that it may increasingly destabilize the market. Hedge funds won’t necessarily care whether the increased volatility causes stocks to rise or fall, as long as they can get in and out quickly with a profit. But the rest of the economy will care.

Buying stocks used to be about long-term value, doing your research and finding the company that you thought had good prospects. Maybe it had a product that you liked the look of, or perhaps a solid management team. Increasingly such real value is becoming irrelevant. The contest is now between the machines – and they’re playing games with real businesses and real people.

Monday, July 27, 2009

Pharma, mfg, telecom sectors see highest salary hikes for FY10

Pharmaceuticals, manufacturing and telecom sectors are witnessing the highest increase of up to 11 per cent in salaries for FY 2009-10, while IT and financial services got the least hikes.

With the economic downturn impacting the earnings of companies, they were restructuring their salary structures and focusing more on performance and also cutting down on the increments for the current fiscal, experts said.

As per a mid-year survey on 'Performance & Reward Trends' by Hewitt Associates, pharma sector saw the highest salary hike of 11.1 per cent for FY 2009-10, followed by manufacturing (10.8 per cent), telecom (9.5 per cent) and FMCG (9.3 per cent).

However, retail sector has been impacted by the downturn and the salary hikes for the current fiscal might not be as expected by the industry, Thiruvengadam said.

"Firms have been found to implement metrics to determine return on investment on human resources. Investment in proprietary knowledge and technological upgrade is continuing, albeit slower than during boom times.

"Smart firms have turned inward, consolidating operations, rationalising requirements and optimising resources to ride the slowdown," Deloitte Senior Director (Management Consultancy Services) P Thiruvengadam said.

"In the wake of the economic downturn and the current situation that the Indian economy is witnessing the IT, ITeS sectors will be impacted," Thiruvengadam added.

The Hewitt survey revealed companies across industries were strongly differentiating rewards on basis of performance but majority of them were not considering any layoffs or severe salary cuts in the current fiscal.

The sectors to witness least increase in pay packages for the current fiscal are IT (2.8 per cent), ITeS (4.4 per cent) and Financial Services
space (5.2 per cent), the survey stated.

"In IT & ITeS sector, overall salary increases have been kept under control and most companies have reported a stable or marginally reduced pay cost structure in relation to total costs. It reflects the response of a growth economy managing a short to medium term slowdown, while keeping an eye on long term growth," Thiruvengadam added.

Interestingly, layoffs have been generally more prevalent in sectors which hired numbers in the last few years like in the IT, ITeS, and retail sector recently, he added.

The Deloitte survey 'Engaging employees in recessionary times' found that there was an overall decrease in attrition rates. Around 23 per cent of firms surveyed reported attrition figures of less than five per cent and 44 per cent of companies reported figures between five and 10 per cent.

"During these unprecedented times when firms across the world considered options such as mass layoffs and salary cuts, India Inc also considered same measures but with maturity," Hewitt's Performance and Rewards Consulting practice leader in India Sandeep Chaudhary said.
Pharmaceuticals, manufacturing and telecom sectors are witnessing the highest increase of up to 11 per cent in salaries for FY 2009-10, while IT and financial services got the least hikes.

With the economic downturn impacting the earnings of companies, they were restructuring their salary structures and focusing more on performance and also cutting down on the increments for the current fiscal, experts said.

As per a mid-year survey on 'Performance & Reward Trends' by Hewitt Associates, pharma sector saw the highest salary hike of 11.1 per cent for FY 2009-10, followed by manufacturing (10.8 per cent), telecom (9.5 per cent) and FMCG (9.3 per cent).

However, retail sector has been impacted by the downturn and the salary hikes for the current fiscal might not be as expected by the industry, Thiruvengadam said.

"Firms have been found to implement metrics to determine return on investment on human resources. Investment in proprietary knowledge and technological upgrade is continuing, albeit slower than during boom times.

"Smart firms have turned inward, consolidating operations, rationalising requirements and optimising resources to ride the slowdown," Deloitte Senior Director (Management Consultancy Services) P Thiruvengadam said.

"In the wake of the economic downturn and the current situation that the Indian economy is witnessing the IT, ITeS sectors will be impacted," Thiruvengadam added.

The Hewitt survey revealed companies across industries were strongly differentiating rewards on basis of performance but majority of them were not considering any layoffs or severe salary cuts in the current fiscal.

The sectors to witness least increase in pay packages for the current fiscal are IT (2.8 per cent), ITeS (4.4 per cent) and Financial Services
space (5.2 per cent), the survey stated.

"In IT & ITeS sector, overall salary increases have been kept under control and most companies have reported a stable or marginally reduced pay cost structure in relation to total costs. It reflects the response of a growth economy managing a short to medium term slowdown, while keeping an eye on long term growth," Thiruvengadam added.

Interestingly, layoffs have been generally more prevalent in sectors which hired numbers in the last few years like in the IT, ITeS, and retail sector recently, he added.

The Deloitte survey 'Engaging employees in recessionary times' found that there was an overall decrease in attrition rates. Around 23 per cent of firms surveyed reported attrition figures of less than five per cent and 44 per cent of companies reported figures between five and 10 per cent.

"During these unprecedented times when firms across the world considered options such as mass layoffs and salary cuts, India Inc also considered same measures but with maturity," Hewitt's Performance and Rewards Consulting practice leader in India Sandeep Chaudhary said.

Ispat Industries incurs loss of Rs 214.9 cr in Q1

Iron and steel producer Ispat Industries Ltd, promoted by Vinod Mittal, on Saturday announced a net loss of Rs 214.92 crore in the first quarter ended June 30, 2009.

It had earned a net profit of Rs 28.73 crore in the same period last fiscal, Ispat Industries said in a filing with the Bombay Stock Exchange.

Total income of the Kolkata-based company decreased to Rs 1,399.68 crore for the quarter under review from Rs 2,875.78 in the same period previous fiscal.

The company manufactures direct reduced iron, hot rolled coils, pig iron/hot metal, cold rolled/galvanized coils/sheets and colour coated sheets.

ICICI Bank net zooms 21% in Q1 to Rs 878 cr

Extreme cost-cutting and treasury profits enabled the country’s largest private lender, ICICI Bank, beat analyst estimates and post a 21% rise in net profit in the first quarter of FY10 (Apr-Mar), the bank said on Saturday. Net profit stood at Rs 878 cr for the quarter-ended June ‘09 against Rs 728 cr in the year-earlier quarter. The average net profit forecast by various banking analysts was around Rs 820cr.

Besides profits from trading in government securities and equity, the bank was helped by a write-back of provisions made on credit derivatives as sentiment improved on Indian paper.

Profits rose even as the bank continued to shrink its balance sheet, avoiding high-cost deposits and unsecured advances. One reason for the higher profit was the Rs 367-cr savings in operating expenses during the quarter with overall operating expenses dropping 19.22% to Rs 1546 from Rs 1913 cr in the corresponding quarter of the previous fiscal.

“Instead of balance sheet size, we will focus on bringing down unsecured personal loans. We will however grow home, car and commercial vehicle loans on the retail side and working capital and infrastructure loans on the corporate side,” said Chanda Kochhar, MD & CEO, ICICI Bank. The bank’s advances declined by 9.2% while deposits came down by 10.3%.

With the reduction in outstanding loans, net interest income, which is the difference between income from loan and interest paid on deposit, dropped 5% to Rs 1985.28 cr. However, this decline was more than made up by the 35.86% rise in other income to Rs 2089.88 cr. Of this, treasury income was Rs 714 crore compared with a loss of Rs 594 crore in the year-ago quarter.

Despite slowdown in M&A and capital market activity, the bank reported a flat fee income of Rs 1,319 crore. Ms Kochhar said the bank would cut costs further and look at increasing productivity from new branches.

Provisioning rose by 67% to Rs 1323.65 cr but this was due to a one-time restructuring exercise, she added. In a conference call with analysts, NS Kannan, CFO, said that except life insurance none of the bank’s subsidiaries would require capital infusion during the current fiscal. ICICI’s life insurance subsidiary, ICICI Prudential, is expected to break even towards the end of the next fiscal.

“Even though net interest income was slightly lower and provision coverage declined to 51%, we see these as minor negatives. Our main expectations were regarding execution of the bank’s present strategy, which continues to be commendable,” said Vaibhav Agrawal, vice-president, research (banking) Angel Broking.


Fall in deposits

More branches, lower operating expenses and ratio of low- cost deposits improving to 30.4% are quite favorable. We believe by 2010, the bank will be very well positioned to benefit from the improving economic environment,” said Vaibhav Agrawal, vice-president , research (banking) Angel Broking. On Friday, the ICICI Bank scrip closed down 1% at Rs 766.85 on BSE.

The net interest margin was maintained at 2.4%. The decrease in net interest income was mainly due to a decrease in advances by 11.6%. Advances dropped to Rs 1,98,101 cr from Rs 2,24,145.9 cr in the corresponding quarter and Rs 2,18,310.8 cr in the first quarter. Advances on retail loans fell to 47% against 55% in Q1 FY09 as the bank looks at running down its unsecured loans.

Ms Kochhar said that corporate and international advances rose both in absolute and percentage terms to 40% from 35% a year ago.

Deposits fell to Rs 2,10,236 crore from Rs 2,34,460 cr in the year-ago quarter and Rs 2,18,348 crore in the preceding quarter. Ms Kochhar said that savings accounts grew by Rs 3,500 cr from the previous quarter while current accounts dropped by Rs 2000 cr.

She added that the bank had taken high costs deposits in the third quarter of the previous fiscal which it will allow to run down when they mature in the third quarter of the current fiscal. Current account and savings accounts ratio improved to 30.4% from 27.6% last year and 28.7% in the preceding quarter. Capital adequacy ratio stood at 17.38% against 13.42% last year.

SBI projects a net profit of Rs 11,000 crore this fiscal

The country's largest lender, State Bank of India, has told the government that it would earn a minimum profit of Rs 11,000 crore in the current fiscal, 21 per cent more that what it achieved in the previous fiscal.

In its statement of intent submitted to the government recently, SBI indicated that the bank would post a minimum net profit of Rs 11,000 crore in the current fiscal, sources said.

The bank has given the estimate of its likely earnings, sources said, adding that depending on the pace of economic recovery the bottom line could improve significantly.

SBI's net profit increased 36 per cent to Rs 9,121 crore during 2008-09 against Rs 6,729.1 crore in the previous fiscal despite the global financial meltdown hitting the Indian economy. The economic growth during 2008-09 slipped to 6.7 per cent from over nine per cent in the previous three years.

However, the expected profit numbers for the current fiscal could not be officially confirmed from SBI.

According to a filing with stock exchanges, the bank will announce its earnings for the its first quarter (April-June) of the current fiscal on July 30, 2009.

After announcing 2008-09 numbers in May, SBI Chairman O P Bhatt had said advances and deposits were likely to grow by 25 per cent each during the current fiscal.

Friday, July 10, 2009

A Budget for India

Few documents affect more people than India’s government budget. Some of them are investors, dismayed by Finance Minister Pranab Mukherjee: his budget speech sank the Sensex index by 6 per cent. But while the budget does little to inspire, their alarm is overdone.
Observers huff about a budget deficit at 6.8 per cent of gross domestic product, more than double the 2.7 per cent of the 2007-08 fiscal year. But this is not a shock, nor much to get worked up about. The government was already in the red by 6.1 per cent of GDP in 2008-09 because of a fiscal stimulus it is now continuing. This is the right policy while global demand remains frail – and it is hardly excessive
In the longer term, of course, the government must keep the deficit under control and eventually stabilise and reduce its debt. Fiscal discipline is not India’s forte. The fiscal rules put in place in 2003 coincided with an improvement in public finances, but mostly because the boom obligingly boosted tax revenues. The government must now strengthen its commitment to reduce indebtedness and identify a plan for doing so. It need not be all that painful: as long as its growth rate stays high, India can grow its way out of debt faster than most.
Mr Mukherjee is therefore right that expanding the economy is the top priority. Growth clocked in at 6.7 per cent last year – respectable, but less than in previous years and not as impressive once population growth is taken into account.
To restore and maintain fast growth, India must press on with the reforms that have advanced its economy since the 1990s. But the Congress party is disappointing those who hoped it would capitalise on the recent landslide to divest from state-owned dinosaurs and make India more hospitable to foreign investment. Mr Mukherjee made disturbingly complimentary nods to statist policies of the past.
The budget does take a stab at important obstacles to India’s economic well-being. Increasing rural incomes and credit is a sensible way to support domestic demand and alleviate the poverty that mires much of India’s people. Improving the subcontinent’s infrastructure can boost growth. But until governance improves drastically, these policies risk the waste and abuse that mark much of Indian administration.
To be fair, beyond a proposal to rationalise taxes – which should be adopted – the budget is no tool for solving the governance problem. That does not, however, relieve the government of the duty to solve it.

Godrej to merge consumer goods biz

The Godrej Group is on a drive to consolidate its consumer goods business to cut costs and push efficiencies across its three consumer product companies. The move will bring about synergies within the group’s flagship FMCG company, Godrej Consumer Products (GCPL) and two of its joint ventures — Godrej Sara Lee (GSL) and Godrej Hershey’s (GHL).

The group is looking to consolidate on three different levels. First, on the distribution front — all the three businesses will sell as one entity, starting this month to modern trade. “We will be selling as a single entity to modern trade, which will be Godrej from now on. This will ensure the advantage of scale and give us better margins,” GCPL managing director Dalip Sehgal said.

The group is also going to consolidate its supply chain, which will result in a common warehouse for all its consumer product companies. This will mean lesser operational costs for the group. Besides, distribution and supply chain, the company will also bring together its businesses focussed on the rural market. “If we synergise all our businesses, we will be able to get bigger volumes in the rural market,” added Mr Sehgal.

Currently, 38% of its sales come from the rural market, but the company expects that to go up to 50% in the next three years. “We are increasing our distribution reach in villages by increasing the number of stockists and sub-stockists,” said Mr Sehgal.

To rev up the FMCG business, the group had set up an FMCG cell to focus on growth and leverage from synergies across the three consumer goods companies. In another move to consolidate operations, GCPL merged two group entities — Godrej Consumer Biz and Godrej Hygiene Care — with itself. Following this, GCPL holds 49% stake in GSL.

Union Budget 2009-10: Mobiles, TV cos to benefit from Customs tweaks

Cheaper TVs, life saving drugs and coral baubles... that’s what the Customs duty tweak in the budget brought home. The government’s decision to lower Customs duty on LCD panels, some life saving drugs and corals will benefit domestic television manufacturers, the pharmaceutical sector and the gems & jewellery industry.

But the bigger benefit came from what the finance minister chose not to do. The government’s decision to stick to the current level of 10% peak Customs duty on non-agriculture products —though entirely expected—comes as a big relief for industry which is having a tough time fighting cheap imports and surviving the slowdown in global demand.

The increase in Customs duty on gold and silver—unpopular with both makers and consumers of gold jewellery—was long overdue as duties last went up in 2005. Gold prices have, since then, more than doubled from Rs 5,000 per 10 gm to Rs 11,000 per 10 gm. The fact that the government expects to gain Rs 800 crore from the move adds further legitimacy to it, as Customs duty collection this fiscal is expected to be substantially lower that the budgetary estimates for the year before.

India has been steadily cutting peak Customs duty with the objective of bringing it down to Asean levels (4% to 5%) by 2010. Duties, which were as high as 150% in 1991, came down to 10% in 2007-08. However, given the current demand sentiment, the government has deferred further lowering of duties.

Sectors which got a reprieve due to the government’s decision to continue with the 10% peak duty include domestic appliances like vacuum cleaners, microwaves, food grinders & shavers, audio & video tapes, CD & MP3 players, ceramic products, metals like iron & steel and metallic products, among others. All these products attract a Customs duty of 10% and will have to take a cut once the peak duty goes down further.

While reduction of import duty on LCD panels from 10% to 5% will bring down prices by up to Rs 3,000 per LCD TV set, the re-imposition of 5% duty on set-top boxes might increase prices, although the long-term objective of the government is to encourage domestic value addition.

The cut in Customs duty from 10% to 5% on influenza vaccine and nine specified life-saving drugs and the bulk drugs used to manufacture them, will serve the dual purpose of making the imported versions cheaper and domestic industry more competitive by reducing input costs.

The government has also decided to continue giving full 4% CVD (counervailing duty) exemption on accessories, parts and components imported for the manufacture of mobile phones for another year. This should help keep mobile phone prices in check.

To incentivise ‘green’ technology, the government has reduced basic Customs duty on permanent magnets—a critical component for wind-operated electricity generators—from 7.5% to 5%.

Reliance Digital to invest Rs 110-cr to set up 31 stores

Reliance Digital, the consumer durables arm of Mukesh Ambani-led Reliance Retail, plans to invest about Rs 110-crore in the current fiscal to roll-out 31 stores across India.

The company, which resells Apple products through its iStore chain, will open 10 outlets by March 2010 along with 21 Reliance Digital outlets, Reliance Retail's President and Chief Executive (Consumer Durable, IT & Telecom), Ajay Baijal, told PTI here today.

Presently, Reliance Digital has a 14-strong network and 10 iStores pan-India in destinations such as Mumbai, Hyderabad, Bangalore, Chennai, Ahmedabad, Vadodara, Ludhiana and Jaipur.

"This year, we plan to take the total number of stores (Reliance Digital and iStore) to 55. Each Reliance Digital store requires an investment
of about Rs 4-5 crore, while an iStore takes up to Rs 40-lakh," Baijal said.

The company is currently scouting properties for its expansion plans, Baijal said.

While iStores are spread over 1,000-1,500 sq ft, a Reliance Digital store is much bigger, covering 10,000-40,000 sq ft.

The company today launched its tenth iStore in the metropolis and will roll out one more in Chennai next week.

Banks ask RBI to ease provisioning norm that clumps together loans

Amid rising delinquencies, leading banks have asked the Reserve Bank of India (RBI) to relax provisioning norms for home loans and other assets.

A lesser-known accounting norm requires banks to provide for the entire exposure to a borrower if one of the loans given to her turns bad. For instance, if a customer defaults on credit card dues, the bank will have to classify not just the card outstandings, but also the home and auto loans taken by the same borrower as non-performing assets (NPAs). This is despite the fact that the borrower may have been regular in paying EMIs for home and auto loans
.

Banks have now asked the RBI to delink the bad loan and good loan for the purpose of asset classification and provisioning. A higher provisioning boils down to lower income for banks.

This was suggested by CEOs of large banks during a recent meeting with RBI governor D Subbarao. The move comes at a point when banks are battling a slowdown in credit growth. With loan demand from corporates failing to take off, some large banks are giving a new push to retail loans.

RBI norms stipulate that if a borrower defaults on any loan facility, all other facilities taken by this borrower should be treated as bad loans. Once a loan is classified as a bad account, the bank has to set aside 10% of the outstanding loan as a provision. This not only hurts the bank’s bottomline, but also enlarges the ratio of bad loans — a stigma on a lender.

Banks have told RBI that if a borrower fails to service a particular loan facility, all other facilities should not be classified as substandard provided the borrower makes regular payments on them. “This happens very often, when a customer has taken both a credit card loan and a home loan from the same bank. At times, due to a dispute on credit card payments, a customer may not pay card dues for some months, but may continue to service home loan dues,” a senior banker said, on condition of anonymity.

In fact, some banks also suggested that a similar relaxation be granted for loans to corporates.

In the case of corporate loans, if a borrower fails to pay the interest component on working capital, the term loan or any other facility taken by the corporate is classified as an NPA. At present, an exception is made only in the case of financial institutions, whereby provisioning is linked to the facility taken by the borrower.

Some banks also suggested that even if a home loan borrower does not make EMI payments for 90 days, they should be allowed to treat the account as a standard asset if instalments have been paid for earlier periods. At present, the RBI follows a 90-day norm, wherein an instalment not paid within 90 days from the due date has to be classified as an NPA on the 91st day.

For instance, a loan instalment due on April 1, and the remaining unpaid till July 1, has to be categorised as a bad loan. “A bank with a large retail home loan portfolio suggested to the RBI that so long as a borrower pays instalments due in, say, February and March in the April-June quarter, RBI should allow banks to classify the loan as a standard asset,” said a senior banker who was present at the meeting.

RBI may hike rates in early 2010: Goldman Sachs

Goldman Sachs expects the central bank to hike rates in early 2010 as economic activity picks up in the second half of 2009/10 financial year and inflation gathers pace, it said in a note on Friday.

India's industrial output grew for a second successive month in May as strong domestic demand offset faltering exports, which analysts said added weight to a view the central bank would not cut rates further.

The Markit Purchasing Managers' Index (PMI) showed earlier this month that manufacturing activity expanded for a third straight month in June.

Goldman Sachs said the positive fiscal stimulus in the budget and expectations of an upturn in the investment cycle in second half of 2009/10 may keep domestic demand robust, despite the prospects of a poor monsoon and a weak external environment.

It also maintained its gross domestic product forecast of 5.8 per cent for 2009/10, which is still lower than the government's forecast of 7 per cent. Goldman Sachs also said it expects inflation to rise to 6.5 per cent by March 2010.

The Indian rupee may appreciate against the dollar as a stable government ands domestic demand will attract foreign portfolio flows and a narrowing trade deficit turns the balance of payments positive.

The rupee may gain to 47.3 per dollar in three months, 46 per dollar in six months and 44.7 per dollar in a year, it added.

At 3:57 p.m., the Indian rupee was trading at 48.91/94 per dollar from its previous close of 48.72/73.

Gammon India March qarter net profit at Rs 72.63 cr

Construction company Gammon India on Friday said its net profit for the quarter ended March 31, 2009 stood at Rs 72.63, while it had a net profit of Rs 21.29 crore in the same quarter ended March 2008.

The financial statements include the amalgamation of the company with the erstwhile Associated Transrail Structures Ltd (ATSL). Hence, the figures for the current year and the last quarter ended March 31, 2009 are not comparable with those of the previous year, Gammon India said in a filing to the Bombay Stock Exchange (BSE).

Net sales rose to Rs 1,905.84 crore for the quarter ended March 2009, against Rs 821.61 crore in same period last year.

For the year ended March 31, 2009, the company has posted a net profit of Rs 140.47 crore, however it had a net profit of Rs 86.15 crore in the same period previous year.

Further, the board of directors has approved to allot 1.60 crore convertible warrants to three promoters of the company on preferential basis.

The company has alloted 30 lakh convertible warrants to Pacific Energy, 65 lakh convertible warrants to First Asian Capital Resources and 65 lakh convertible warrants to Devyani Estate & Properties, the BSE filing added.

The warrants are convertible for cash at a price of Rs 90.20 per share, the filing said.

Infosys net profit up, guidance down; faces pricing pressure

Technologies expects prices in the fiscal year to March 2010 to drop by 5% as its overseas clients battle slowing econ-omy,key officials said during its first-quarter results announce-ment on Friday. “Pricing environment continues to be challeng-ing. There are ongoing negotiations with clients,” the technology outsourcing major’s chief operating officer SD Shibulal said.

Infosys, India’s second biggest software exporter by revenues, beat street forecasts by posting a 17% jump in year-on-year net profit for the quarter to June, 2009 but economic challenges, pricing pressures and lower technology spend by major clients pushed the tech bellwether to lower its quarterly and annual revenue guidance.

While the broader market remained flat, Infosys’ scrip opened lower and then zipped up by nearly 4.8% -- trading at Rs 1,749 (previous close Rs 1,676 crore) nearly at close of Friday’s ses-sion.

Net profit for quarter ending June was Rs 1,527 crore, 17% higher than Rs 1,302 crore in the same period a year ago. How-ever, it was down 5.3% against March quarter levels of Rs 1,613 crore.

The expectations were, however, tempered by a revised earnings guidance for fiscal 2010, which the firm said would range be-tween Rs 21,416 crore and Rs 21,747 crore, reflecting a year-on-year decline of 1.3% to a growth of 3%.

It reported a 2.9% sequential fall in net income to Rs 5,472 crore for the quarter ended June 2009. While net sales for the March 31, 2009 quarter was Rs 5,635 crore, sales year-on-year was higher by 12.7% on Rs 4,854 crore posted in June 2008. Says In-fosys CEO Kris Gopalakrishnan: “We believe that in the short term, the global economic environment will continue to be chal-lenging.”

The firm, while adding 27 new clients this quarter, had 569 ac-tive customers this quarter, down from 579 in the previous quar-ter. To boot, revenue contribution from one of its marque cleints, slipped to 4.5% from 5.7% in the current quarter. Shibu-lal says Infosys had 19 $50-million plus clients for the June quar-ter. He pointed out that employee utilisation rate had come down to 70.9% against 74.5% in the March end quarter.

Operating profit margin improved by 50 basis points quarter-on-quarter to 34.1% in June 2009 against 33.6% in March 31, 2009. The IT major though expects FY10 operating margins to be around 31.5% and CFO V Balkrishnan sees operating margins coming down by 150 bps instead of the earlier 300 bps.

One of the reasons could be that the company’s employee strength declined by 945 during the last quarter to 1,03,905 with an attrition rate of 11.1% in the first quarter against 13.6% in the corresponding period of previous fiscal.

Agrees an analyst with Kotak Securities: “The improvement in margins came in due to the reduction in number of employees quarter-on-quarter. The sequential drop in number of employees came in after several quarters and was a surprise. The company has probably aligned costs to the expected revenue outlook.


Experts like James Friedman of Susquehanna International Group (SIG) said that while Infosys is gaining new business, fur-ther compensation increases and visa costs, though selective, could create incremental operating margin pressure. “Finally, the potential lower utilisation impact resulting from additional trainees hired could aggravate operating margin pressure,” he said earlier this week.

Earnings Per Share (EPS) increased to Rs 26.66 during the Q1, up 17.2% from Rs 22.75 in the same quarter of the previous year.

Revenue guidance for the September ending quarter was in the range of Rs 5318 crore-Rs 5413 crore, a year-on-year decline of between 1.9% to 0.1%. Explains Balakrishnan: “The global cur-rency market continues to be volatile and during the quarter, the rupee appreciated against the dollar. We continue to focus on margins while making the right investments to accelerate growth.”

In dollar terms, revenue guidance for the full year was between $4.45 billion and $4.52 billion, a decline ranging between -2.6% and -3.3%.

Meanwhile, financial brokerage firm Stifel Nicolaus downgraded Infosys stock to ‘sell’ from ‘hold’. “Lower guidance could be driven by slower ramp up of new work, higher tax rate, higher-than-expected pricing pressure (revenue), pressure from pricing, currency, and continued hiring, and increasing conservatism on Infy's part in giving guidance/outlook,” it pointed out

Monday, July 6, 2009

Budget Analysis 2009 - 2010


INCOME TAX
Individual Positive
Standard DeductionExistingProposed
IndividualUp to Rs.1,50,000Up to Rs.1,60,000
Individual (Woman)Up to Rs.1,80,000Up to Rs.1,90,000
Senior CitizensUp to Rs.2,25,000Up to Rs.2,40,000
  • To remove Surcharge of 10% on Personal Income Tax.
  • Section 80DD of IT to be hiked to Rs.1 lakh.
  • New Pension System Trust not to attract Income Tax, STT & DDT.
Corporate Neutral
  • No change in Corporate Tax
TAX - OTHERSPositive
CTT to be abolished
FBT withdrawn
CENVAT reduced
GST to be introduced from April 1, 2010
MATNegative
  • MAT rate to be increased to 15% v/s 10% of book profit.
  • Carry forward tax credit on MAT to 10 years v/s 7 years.
AGRICULTUREPositive
  • Target for agriculture credit flow set at Rs.3,25,000 crore for the year 2009-10 v/s Rs.2,87,000 crore in 2008-09.
  • Interest subvention scheme for short term crop loans up to Rs.3 lakh per farmer at the interest rate of 7% per annum to be continued.
  • Additional subvention of 1% to be paid from this year, as incentive to those farmers who repay short term crop loans on schedule.
  • Time given to the farmers having more than two hectares of land to pay 75% of their over-dues under Debt Waiver and Debt Relief Scheme extended from June 30, 2009 to December 31, 2009.
  • Allocation under Accelerated Irrigation Benefit Programme (AIBP) increased by 75% over budget estimate (B.E.) of 2008-09.
  • Allocation under Rashtriya Krishi Vikas Yojana (RKVY) stepped up by 30% in B.E. 2009-10 over B.E. 2008-09.
  • Subsidy regime for fertilizers to change to nutrient- based rather than price-based.
  • Direct transfer of subsidy to farmers being worked out.
EDUCATIONPositive
  • The overall Plan budget for higher education is to be increased by Rs.2,000 crore over interim B.E. 2009-10.
  • Full interest subsidy for students taking courses in approved institutions.
  • Provision for the scheme ‘Mission in Education through ICT’ substantially increased to Rs.900 crore and the provision for setting up and up-gradation of Polytechnics under the Skill Development Mission enhanced to Rs.495 crore.
  • Rs.827 crore allocated for opening one Central University in each uncovered State.
  • Rs.2,113 crore allocated for IITs and NITs which includes a provision of Rs.450 crore for new IITs and NITs.
  • Rs.50 crore allocated for Punjab University, Chandigarh. Plan allocation for Chandigarh to be suitably enhanced during the year to provide better infrastructure to the people of Chandigarh.
INDUSTRIES
Automobile and AncillariesPositive
  • Specific component of excise duty applicable to large cars/utility vehicles of engine capacity 2,000 cc and above to be reduced from Rs.20,000 per vehicle to Rs.15,000 per vehicle.
  • Excise duty on petrol driven trucks/lorries to be reduced from 20% to 8%.
  • Excise duty on chassis of such trucks/lorries to be reduced from ‘20% + Rs.10000’ to ‘8% + Rs.10000’.
Banking & Financial CompaniesNegative
  • Scheduled commercial banks allowed to set up off-site ATMs without prior approval subject to reporting.
  • A sub-committee of State Level Bankers Committee (SLBC) to identify and formulate an action plan for providing banking facilities in under-banked/unbanked areas in the next three years.
  • Rs.100 crore set aside as one-time grant in-aid to ensure provision of at least one centre/Point of Sales (POS) for banking services in each of the unbanked blocks.
  • Exemption from service tax (leviable under Banking and other financial services or under Foreign exchange broking service) being provided to inter-bank purchase and sale of foreign currency between scheduled banks.
  • Loans at a subsidized interest rate of 6% for farmers who pay their dues in time, which is 1% less than what others would get.
  • Time given to the farmers having more than two hectares of land to pay 75% of their over-dues under Debt Waiver and Debt Relief Scheme extended from June 30, 2009 to December 31, 2009.
  • Full interest subsidy for students taking courses in approved institutions.
  • No change in FDI limit in insurance
Consumer DurablePositive
  • List of specified raw materials/inputs imported by manufacturer-exporters of sports goods which are exempt from customs duty, subject to specified conditions, to be expanded by including five additional items.
FertilizerPositive
  • Direct transfer of subsidy to farmers being worked out that will unshackle fertilizer companies.
  • Subsidy regime for fertilizers to change to nutrient- based rather than price-based.
  • Excise duty on naphtha to be reduced to 14%.
FMCGNegative
  • Investment-linked tax benefits for gas pipelines, cold chains
  • Concessional customs duty of 5% on specified machinery for tea, plantations to be reintroduced for one year, up-to 06.07.2010.
Gems & JewelleryNeutral
  • Excise duty on branded articles of jewellery to be reduced from 2% to Nil.
  • Tax holiday for exporters extended until 2011.
  • Custom duty on Gold & Silver increased.
HealthcarePositive
  • Allocation under National Rural Health Mission (NRHM) increased by Rs.2,057 crore over Interim B.E. 2009-10 of Rs.12,070 crore.
  • All BPL families to be covered under Rashtriya Swasthya Bima Yojana (RSBY). Allocation under RSBY increased by 40% over previous allocation to Rs.350 crore in B.E. 2009-10.
  • Customs duty on 10 specified life saving drugs/vaccine and their bulk drugs to be reduced from 10% to 5% with Nil CVD (by way of excise duty exemption).
  • Customs duty on specified heart devices, namely artificial heart and PDA/ASD occlusion device, to be reduced from 7.5% to 5% with Nil CVD (by way of excise duty exemption).
  • Adjustment assistance scheme to provide enhanced Export Credit and Guarantee Corporation (ECGC) cover at 95% to badly hit sectors extended upto March 2010.
  • Interest subvention of 2% on pre-shipment credit for seven employment oriented export sectors extended beyond the current deadline of September 30, 2009 to March 31, 2010.
  • Tax holiday for exporters extended until 2011.
Infrastructure & EngineeringPositive
  • 1 lakh dwelling units for paramilitary forces personnel to be constructed
  • IIFCL (India Infrastructure Finance Company Ltd.) to evolve a Takeout Financing Scheme in consultation with banks to facilitate incremental lending to infrastructure sector.
  • IIFCL to refinance 60% of commercial bank loans for PPP projects in critical sectors over the next 15 to 18 months.
  • IIFCL and Banks are now in a position to support projects involving total investment of Rs.1,00,000 crore.
  • Allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) increased by 23% over B.E. 2008-09.
  • Allocation for Railways increased from Rs.10,800 crore in Interim B.E. 2009-10 to Rs.15,800 crore in B.E. 2009-10.
  • Allocation for Bharat Nirman increased by 45% in 2009-10 over B.E. 2008-09.
  • Allocations under Pradhan Mantri Gram Sadak Yojana (PMGSY) increased by 59% over B.E. 2008-09 to Rs.12,000 crore in B.E. 2009-10.
  • Under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), allocation increased by 27% to Rs.7,000 crore.
  • Allocation under Indira Awaas Yojana (IAY) increased by 63% to Rs.8,800 crore in B.E. 2009-10.
  • Allocation of Rs.2,000 crore made for Rural Housing Fund (RHF) in National Housing Bank (NHB) to boost the resource base of NHB for refinance operations in rural housing sector.
  • Full exemption from excise duty to be provided on goods of Chapter 68 of Central Excise Tariff manufactured at the site of construction for use in construction work at such site.
IT/ITESPositive
  • Custom Duty on LCD panels cut from 10% to 5%
  • Tax holiday for exporters extended until 2011.
  • Sunset clause for Software Technology Parks of India extended by 1 year
  • FBT abolished
Media & EntertainmentNegative
  • Customs duty of 5% to be imposed on Set Top Box for television broadcasting.
  • Customs duty on LCD Panels for manufacture of LCD televisions to be reduced from 10% to 5%.
Oil & GasPositive
  • Investment-linked tax benefits for gas pipelines, cold chains
  • SEC 80IB benefit extended to natural gas.
  • Blueprint to be developed for long distance gas pipelines leading to a National Gas Grid to facilitate transportation of gas across the length and breadth of the country.
  • Outlay for Assam Gas Cracker Project stepped up suitably in B.E. 2009-10.
  • Government to set up an expert group to advice on a viable and sustainable system of pricing petroleum products.
  • Duty paid High Speed Diesel blended with up-to 20% bio-diesel to be fully exempted from excise duties.
PowerPositive
  • Cuts customs duty on wind power equipment by 2.5%.
  • Allocation under Accelerated Power Development and Reform Programme (APDRP) increased by 160% to Rs.2,080 crore in B.E. 2009-10 over B.E. 2008-09.
  • Customs duty on permanent magnets for PM synchronous generator above 500 KW used in wind operated electricity generators to be reduced from 7.5% to 5%.
  • Excise duty on naphtha to be reduced to 14%.
PSUNeutral
  • While retaining at least 51% Government equity in Public Sector Undertakings, people’s participation in disinvestment programmes to be encouraged.
  • Public Sector Enterprises such as banks and insurance companies to remain in public sector and will be given full support including capital infusion to grow and remain competitive.
Real EstateNegative
  • Interest subsidy for homes for loans up-to Rs 1 lakh
TelecommunicationNeutral
  • Full exemption from 4% special CVD on parts for manufacture of mobile phones and accessories to be reintroduced for one year.
TextilePositive
  • Tax holiday for exporters extended until 2011.
  • Adjustment assistance scheme to provide enhanced Export Credit and Guarantee Corporation (ECGC) cover at 95% to badly hit sectors extended up-to March 2010.
  • Interest subvention of 2% on pre-shipment credit for seven employment oriented export sectors extended beyond the current deadline of September 30, 2009 to March 31, 2010.
  • Customs duty on cotton waste to be reduced from 15% to 10%.
  • Customs duty on wool waste to be reduced from 15% to 10%.
  • Excise duty on manmade fibre and yarn to be increased from 4% to 8%.
  • The scheme of optional excise duty of 4% for pure cotton to be restored.
  • Excise duty for man-made and natural fibres other than pure cotton, beyond the fibre and yarn stage, to be increased from 4% to 8% under the existing optional scheme.
MARKET REACTION
IndicesOpenAt 1:00 PMChange (%)
Nifty4,429.604,245.25(4.16)
Sensex14,962.1214,324.55(4.26)
BSE Midcap Index5,211.325,057.77(2.95)
BSE Small Cap Index5,857.545,710.23(2.51)
BSE Bank Ex Index8,540.837,972.96(6.65)
BSE Power Index2,953.982,815.74(4.68)
BSE PSU Index8,288.567,903.25(4.65)
BSE Reality Index3,460.623,300.78(4.62)
BSE Metal Index11,243.5410,762.61(4.28)
BSE Capital Goods Sector Index13,142.4812,585.89(4.24)
BSE Oil & Gas Index9,664.719,308.71(3.68)
BSE Auto Index4,627.364,479.99(3.18)
BSE TECk Index2,656.952,578.42(2.96)
BSE IT Sector Index3,346.923,266.68(2.40)
BSE Health Care Sector Index3,641.363,589.95(1.41)
BSE FMCG Sector Index2,296.372,303.940.33
BSE Consumer Durables Sector index2,992.633,016.410.79
Markets reacted negatively , plunged more than 4% at around 1 PM (IST)

Domestic markets were trading under huge selling pressure (at around 1 PM) as investors were disappointed after Union Budget 2009-2010 did not contain any major reforms such as a roadmap to increase FDI in infrastructure & insurance, decontrol fuel prices and any clear roadmap on divestment. A surge in fiscal deficit target to 6.8% added to the market's woes. Sensex slipped below the 14,400 mark and Nifty fell below 4,250 mark. The significant selling pressure witnessed among Banking, Power, PSU, Realty and Metal stocks. The broader market indices were also under pressure as both BSE Midcap and BSE Smallcap indices traded with a loss of more than 2% each.

However, markets opened higher today ahead of the Union Budget. Sensex crossed the 15,000 mark and Nifty jumped above 4,450 mark in the early trade. All the sectoral indices were trading in green.

With the budget focusing on the common man rather than the economy as a whole, Sensex touched lowest level of 14,147.80 and Nifty fall to as low as 4, 195.40 level (at around 1 PM).

Shares of companies that run insurance business fell after the Union Budget 2009-2010 did not include any measures to hike foreign direct investment limit in the insurance sector. Reliance Capital ,ICICI Bank, HDFC, Bajaj Finserv, SBI, Aditya Birla Nuvo and Max India fell by between 3-7%.

PSU stocks fell as government bypassed announcement of divestment in public sector companies. Central bank of India, Hindustan Copper, MTNL, State Trading Corporation, Bharat Heavy Electricals, Power Finance Corporation fell by between 2-5%.

Some of the Positives from the budget are:

  • GST will be implemented from April 1, 2010
  • FBT abolished
  • CTT removed

While, disappointments are:

  • Divestment in Insurance and Banks
  • Fuel policy
  • FDI in Infrastructure

Budget silent on edible oils tax, trade upset

The budget left import duty on edible oils unchanged on Monday, disappointing local industry that had been rooting for at least a small increase.

"There is no news for the edible oil sector. We are little bit disappointed as nothing has been announced to promote domestic oilseeds production," said B.V.Mehta, executive director of the Solvent Extractors' Association of India.

The market expected the government to impose a nominal tax on crude palm oil imports and marginally raise the levy on refined oils.

India allows tax free imports of crude variants, while levies a 7.5 percent tax on refined imports.

With soaring stocks of imported edible oils at Indian ports, the government was under pressure to slap duties on new cargoes.

An analyst said the decision to leave the tax regime unchanged indicated the government was still assessing the monsoon's progress.

India, the world biggest edible oil consumer after China, mainly buys palm oil from Indonesia and Malaysia, and small quantity of soyoil from Brazil and Argentina.

"Imports of edible oil will continue to be higher in coming days as the global prices are at comfortable level," said Veeresh Hiremath, senior analyst with Karvy Comtrade.

He said local prices of oils and oilseeds would decline.

Govt expects 497.50 bln rupees from state-run firms

The budget expects to generate 497.50 bln rupees from dividends and profits of state-run firms in 2009/10 and estimates food subsidy at 524.90 bln rupees during the fiscal year ending March 2010.

The budget also said the government would issue 103.06 bln rupees in bonds to oil firms.

Mahindra Satyam open offer gets poor response

Indian software services firm Tech Mahindra Ltd (TECHM.NS : 707.3 -44.8) said on Monday its open offer to the shareholders of Mahindra Satyam (SATYAM.BO : 73.9 -3.65) received less than 0.1 percent of the outstanding shares.

A total of 420,915 shares were tendered in the open offer, it said in a statement. Tech Mahindra intends to subscribe for 198.66 million additional shares at 58 rupees each, it said.

The company, which is 31 percent owned by BT Group, won an auction in April for a controlling stake in fraud-tainted Satyam Computer Services, now rebranded as Mahindra Satyam.

After the open offer is completed, Tech Mahindra will own 31.04 percent of Mahindra Satyam, formerly Satyam Computer Services Ltd.

Budget 2009-10: Experts' analysis and opinions

TAKAHARI OGAWA, ANALYST, STANDARD AND POOR'S RATING AGENCY

Ogawa said the size of the country's fiscal deficit was within the expected boundary, after India announced its fiscal deficit would widen as it outlined increased spending. However the lack of details about fiscal consolidation and privatisation was disappointing, Ogawa told Reuters in an interview.

SEBASTIEN BARBE, HEAD OF EM RESEARCH AND STRATEGY, CALYON, HONG KONG

"The government was elected on a pro-growth and pro-poor programme so I don't think they are going to make a big move in terms of reducing the fiscal deficit in the short term.

Beyond the short term outlook for the fiscal deficit what could be of interest is whether or not the government suggests some sort of precise and detailed roadmap to come back to a more controlled fiscal deficit. If they commit themselves to reduce the fiscal deficit in the next, say, 3 years to something closer to 3.5-4 percent of GDP, the market is likely not to be too harsh on the government. A large fiscal deficit is already priced in.

If they just announce a large fiscal deficit without a committment to a control in fiscal performance, there is a risk of a sovereign downgrade. But if they take strong commitments, I am not sure there will be a downgrade."

S. SRINIVASA RAGHAVAN, TREASURY HEAD, IDBI GILTS, MUMBAI:

"The budget is not up to the expectations and disappointing, too. They are saying that the fiscal deficit is manageable, but we have to wait and see how they are going to do that.

"The federal borrowing for the fiscal year at more than 4.5 trillion rupees, coupled with the state governments' share is going to be a huge burden for the market. Bond prices have come down already and we can expect some more falls."

JIGAR SHAH, SENIOR VICE-PRESIDENT AT KIM ENG SECURITIES IN MUMBAI

"The budget is good if we view it against the prevailing economic scenario, in India as well as globally. The budget is directed towards increasing demand, by leaving key tax rates unchanged. It was silent as to policy actions like (how to) increase foreign investment and stake sales in government units. That aspect isdisappointing."

KIRAN MAZUMDAR-SHAW, CHAIRMAN AND MANAGING DIRECTOR, BIOCON LTD

"It's not a bold budget. It's not such a great budget which will give a fillip to the industry. I was expecting many bolder reforms would be announced. There should have been much larger outlay for infrastructure and power. I am also disappointed that the budget had nothing substantial for the healthcare sector."

DEEPAK JASANI, HEAD OF RETAIL RESEARCH, HDFC SECURITIES, MUMBAI:

"There is a mismatch between market expectations and what was delivered. There were hopes the government would be bolder, but it has only gone for spending route and expecting things to take care of themselves.

"On most counts, there are a lot of general statements of intent, without any specific targets or timelines.

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI:

"The budget is more on the populist side and seems to address immediate rather than longer-term problems. Both the expenditure overrun and relief on the direct tax front, especially on personal income taxes, are ahead of our expectations."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

"The real concern emerging from the budget is that it has not given confidence as to how the government will go about the fiscal consolidation process, after hiking the fiscal deficit target.

"While the thrust on agriculture, infrastructure, etcetera augurs well from a long-term growth perspective, the fiscal profligacy is quite obvious in the near term and hence the markets have also reacted negatively."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK (YESBANK.NS : 136 -6.8), MUMBAI:

"The budget is clearly focused on maintaining the growth drivers, that is, the rural economy and infrastructure, which is a strong positive for retail segments. Overall concerns do remain on higher expenditure as that would translate into higher fiscal deficit."

HARISH GALIPELLI, HEAD OF RESEARCH, KARVY COMTRADE, HYDERABAD:

"By pushing banks to lend aggressively to farmers, we can expect an increase in the productivity of agricultural produce. With incentives for exporters, export-oriented commodities like cotton and spices may rule firm."

KRISHNA BIR CHAUDHARY, PRESIDENT OF BHARATIYA KRISHK SAMAJ, NEW DELHI:

"The announced higher allocation for the irrigation sector is too little as 60 percent of the country's farm land is still rain fed. We expected more."

MARKET REACTION:

* The BSE Sensex (^BSESN : 14103.03 -810.02) tumbled as much as 5 percent as budget unfolds on concerns over how government will fund ballooning deficit.

* The partially convertible rupee falls nearly 1 percent to 48.33/35, versus 47.88 before the budget speech began and compared with Friday's close of 47.89/91. It traded later at 48.30/32.

* Yield on benchmark 10-year bond spikes 16 basis point to 6.99 percent. Most traded 2014 bond rises to 6.48 percent on the government's higher borrowing plan from 6.40 percent.

BACKGROUND:

- India could see growth of around 7 percent this year and more in coming years if it makes sweeping reforms including removal of subsidies and speeds infrastructure development, a government report said last Thursday.

- Bonds have jumped this year to factor in a massive increase in government borrowing. The market had priced in expectations that the deficit will swell to between 6.25 percent and 6.5 percent of GDP.

-Last week India unexpectedly raised gasoline and diesel prices by as much as 10 percent, passing onto consumers some of the recent rise in global oil prices and easing some of the pressures on the budget from subsidies.

- India fiscal deficit widened to 6.2 percent in 2008-09 as the government unleashed stimulus spending to insulate the economy against the global downturn.

- If the government fails to present a plan to bring the deficit back under control in subsequent years, the country's credit rating could come under pressure.

- India's shoddy infrastructure is considered by many foreign investors as the Achilles' heel of the economy that prevents the sort of double-digit growth seen in China

- The current fiscal year of 2009/10 runs until the end of next March.

Budget 2009-10: Key Points

OTHER KEY POINTS:

* Infrastructure spending

- allocations for highways, urban renewal to rise sharply

* Energy sector

- to develop long distance natural gas pipelines for a national grid; to set up panel to review domestic fuel prices

* Agriculture spending

- to provide additional 10 billion rupees over interim budget for more irrigation; to offer direct subsidies to farmers

* Government asset sales

- aims to raise 11.2 bln rupees from stake sales, 350 billion rupees from 3G telecom spectrum auction

* Growth

- 2008/09 GDP growth seen at 6.7 pct; government aims to return economy to high growth path of 9 pct/yr at the earliest

Budget hikes spending, deficit 6.8 pct/GDP

he new government said it will hike spending to spur growth, pushing the 2009/10 fiscal deficit to a much higher than expected 6.8 percent of GDP, slamming local stocks and pushing bond yields higher.

Financial markets had been expecting the fiscal deficit in the 2009/10 budget unveiled on Monday to rise to as high as 6.5 percent of GDP, from a previous government target of 5.5 percent.

The government's gross market borrowing is expected to rise to 4.51 trillion rupees, versus 3.95 trillion rupees in a Reuters poll.

Finance Minister Pranab Mukherjee pledged the government would return to fiscal responsibility targets "at the earliest". He also vowed to return the country to a higher growth rate of 9 percent a year as soon as possible, from an estimated 6.7 percent in 2008/09.

Total spending in the 2009/10 budget will rise to 10.2 trillion rupees, up 36 percent from 2008/09.

India's BBB-minus sovereign rating, placed on negative outlook in February, does not face any significant rating pressure, Standard & Poor's analyst Takahari Ogawa said after the budget was released.

Budget 2009-10: Taxes

Service tax levied on law firm
Custom duty on gold re-imposed
Customs duty to be reduced on drugs for heart treatment
No new tax on edible oil imports
4 per cent excise duty on cotton products restored
Customs duty on bio-diesel reduced
Life saving devices on heart contidion exempted from custom duty
Small business exempt from advance tax
To maintain overall customs and excise duty structure
Tax holiday to natural gas extended
Tax slab raised
MAT hiked to 15 per cent of book profit
Commodity transaction tax abolished
New pension scheme
Tax holiday for exporters extended untill 2012
Personal income tax exemption hiked by Rs 10,000
Abolish fringe benefit tax
Tax holiday extended for textile units
Goods and services tax from April 1, 2010
Share of direct taxes has increased to 56 per cent in 2008-09
Federal Tax/GDP ratio is 11.5 per cent
No surcharge of 10 per cent on personal income tax
Increase in exemption slab for senior citizen
No change in corporate taxes
Hike in IT exemption for women to Rs 1,90,000
Govt committed to tax reforms
Increase automation in direct tax collection
New tax code in 45 days
Centralised processing center at Bengalooru to streamline taxation
Income tax forms should be user friendly
Tax system should be such that it shold encourage voluntary compliance
Saral form 2 will be introduced