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Historic Budget seen; no big rally/fall before Feb 28: IIFL

The Indian market is consolidating now in the run up to the Union Budget which will be unveiled by Finance Minister Arun Jaitley on February 28. Speaking to CNBC-TV18, Nirmal Jain, chairman, IIFL said it is unlikely to see a big rally or crash in market till Budget. 

He believes the government is moving in the right direction and all circumstances are conducive for a ‘historic’ Budget. Jain also said that Budget is not the only criterion to judge the big-ticket reforms taken by the government. The government is taking lot of efforts to push through the goods and services tax (GST) which is commendable, he added.

Meanwhile, Jain continues to like private sector banks. He is bullish on defence space. If there will be some turnaround in the Budget cement and auto will be the early beneficiaries, he added.

Below is verbatim transcript of the interview:

Q: First a word on the markets that we have seen so afar through the course of the year especially in the last week or two?

A: Market has been consolidating now and till the run up to the Budget there will be uncertainty with one set of people being very optimistic and another set of people who will always say that Budget can not do any magic. Finance minister does not have any magical wand to make things overnight smoother or better.

Also, round level things will take time to show results so market will keep consolidating and I do not see market having a big rally or a big crash from here till Budget. Post Budget whatever cues they get from Budget that will decide the trend for the market.

As of now, we are seeing some corrective phase in this stock that have run up a lot and very select stocks that have got the coal allocation, the power sector which is now coming into limelight because some of the coal auctions have gone through. Other than that market is lack luster and just waiting for the Budget.

Q: How disappointed are you with the earning season that has just gone by and how long can the markets just run up on expectations of reform?

A: The earnings have been disappointing in the last quarter and I don’t think they will improve in a very significant way in next one or two quarters. So, all the long-term investors, in fact most of the FIIs and mutual funds have their own analyst and they can understand things just the way you and I can also do that in most of the sectors you can’t do anything in one or two quarters.

It will take some time till the sentiment improves, the investment improves, the demand improves and then the margins will improve so obviously it will take a while. But things are moving in right direction, people are betting on medium to long-term which indicates they are looking at earnings revival, maybe two-three quarters in some sectors, four-five quarters, depending upon the kind of sector that you are talking about.

Most people are still optimistic, market will never look at the rear view mirror and say that okay this is last quarter’s earnings so let me give this multiple because that is historical, that has lost all its relevance but what will markets say that can these earnings- what is the outcome for next few quarters.

Last quarter or historical earnings are relevant only to the extent that they can give you some peak into future that okay will this trend be maintained, improved or worsen? So, market always looks ahead, looks at future and that is what it is doing.

Having said this, the earnings for this quarter were disappointing, in fact in some cases they were worse than what analysts had expected. The analysts downgraded their forecast to what reality is or how they look at the immediate quarter after.

It might continue for a quarter or more and then we will see things turning around. Just as you see credit ratings, they have already started and now there are more upgrades and downgrades that are happening on the debt rating, equity will take a quarter or two more.

Q: Are your expectations high from this Budget? People have spoken off big thrust on infrastructure may be even at the expense of fiscal responsibility. Others are talking about how to actualise the ‘Make in India’ programme. What are you expecting from this Budget?

A: I have also been hearing that many people are echoing this sentiment that there is enough talk and now we need to see real action. Budget is a key event that we all are looking forward to.

To be fair if you look at coal auctions, if you look at certain other things government has moved, in democratic set up nobody has come up and said this is the thing you could have done faster or differently and the government has done it this way. More or less within the contours of law and democracy they are trying to move as fast as possible.

Let us not forget that they do not have majority in Rajya Sabha and still they have gone and did so many major ordinances despite President cautioning that ordinance is not the route in a Parliamentary democracy. So government seems determined and they are trying to move as resolute manner.

Q: What are you expecting from the Budget this time then?

A: There is a contradictory thing in the Budget, one is that either you maintain fiscal deficit or you pump prime the economy and put growth agenda ahead and say that okay private sector investment is not coming forth. They have not seen good times in last 5-6 years.

They have burned their fingers, their margins are down so the lead has to be taken by public sector investment the capex whether it is road, port and power has to come first from the public sector. Let that create demand which has a cascading impact on the economy and then the private sector will follow. With that it becomes difficult to maintain the fiscal discipline.

In the last Budget finance minister promised that from 4.1 percent he will bring it down to 3.6 percent, this Budget they are little contradictory. However, if the government is courageous and can wait then I think they will go for growth even if fiscal deficit is from 3.6 percent and goes up to 4 percent or thereabout it is still fine but they will put lot of emphasis on growth.

One more bounty that they are having this time is crude oil prices. It is almost about USD 60-65 billion and most of it is not passed on to the consumer. So if you look at the prices at retail level they are more or less similar despite global prices which are less than half.

This is the money that government can put in plan expenditure in creating capacity and not in the populist measure like subsides or giveaways to farmers or lower section of society. If they do that then that will be the trigger for and that should be viewed positively by the market.

Q: Are you saying that you would like to see pump-priming but money for that coming from the savings that they make in subsidy and not at the cost if the fiscal?

A: Largely from trying to curtail subsidy, this government has done well in last eight months. They are trying to cut down by making sure that the leakages are reduced and so, if you don’t do incremental subsidy, the base of GDP keeps growing. Significant parts would come from there and not from fiscal deficit because if you try and increase the fiscal deficit, it increases borrowing, it won’t let the interest rate come down at the pace as they ought to. Obviously, that has negative impact somewhere else.

I would be happy if they try and keep fiscal discipline, give and take a few basis points from the target fiscal deficit but pump-prime the economy and that is the need of the hour. In fact the situation or the back drop is very fortunate. People talk about dream Budget and these are dream circumstances for any finance minister to present a Budget.

You have commodity prices coming down; India is a net importer and consumer of commodities, crude oil prices are coming down. Also, global equity is very benign and in terms of investment destination India is signing out because Brazil, Russia, China all are not doing too well. In fact they are either impacted by commodities and in case of China; there are lots of internal problems. So, things are going in favour and on the way India would want them to be.

It is just a question of how courageous and how innovative you are, how imaginative you are and what is the time frame you take for this Budget. This Budget would be quite a historic Budget to my mind. Circumstances are all very conducive for a strong Budget and let’s see what finance minister does.


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