|Monday, 28 February 2011 00:00|
Whatever the government announces in the Budget a few hours from now, the reaction of investors will largely depend upon how the government addresses three major non-NAC concerns of theirs—the National Advisory Council’s food bill, among other proposals, is of course a serious concern as our main column today argues. The first is the fact that interest rates are hardening quite rapidly—coupled with the increased attractiveness of the US as an investment destination for portfolio investors, that will mean animal spirits will take a while longer to return. While IDFC, Power Finance Corporation and L&T Infrastructure have been offering 7.5-8% interest rates on tax-saving infrastructure bonds, retail investors haven’t really lapped them up—SBI, on the other hand, has got a good response to its bonds that are offering 9.75% for 10 years and 9.95% for 15 years. This is bad news for infrastructure as well as for general investments. How the government tackles this will be interesting.
Two, the government’s intent on tackling subsidies will be judged not by what it does in the budget, but what it does afterwards, on increasing prices of petroleum products. Oil PSUs are likely to bear a burden of around Rs 80,000 crore in the current year, and that’s a number that doesn’t get included in the budget numbers—even before the trouble on Arab Street erupted, global oil prices were projected to remain over $100, so the oil PSUs are certain to lose a lot more money in 2011-12. Some lowering of customs duties is likely, but leaves the problem largely untouched—the oil subsidies the PSUs bear are almost equal to the rest of the subsidies, around Rs 1,00,000 crore or so per year.
Three, the government’s attitude towards Cairn-Vedanta. Vedanta’s purchase of Cairn has been held up due to the previous minister’s refusal to allow ONGC to continue to pay royalties on Cairn’s oil production. He wanted Cairn to start paying its royalty share, but Cairn has refused to do so on the grounds that ONGC is contractually obligated to do this—when foreign investors were in short supply, the government wooed them by saying the royalties would be paid by ONGC. And ONGC got a 30% equity stake for doing so. Since the oil ministry doesn’t want to take a decision that appears to be hurting an oil PSU, it has lobbed the decision to the Cabinet—it meets on March 3 to decide. Today’s Budget, and the signals it sends, are important, but investors are looking to more than just words in a Budget speech.