With a BE in Industrial Engg. and a PGDBM in IIM (B), Mr. R. Sukumar was the Head of Research (1990-94) in the Indian Opportunities Fund jointly managed by Martin Currie and Indbank before shifting to Pioneer ITI Mutual Fund, which was subsequently bought over by the Franklin Templeton Investments.

Mr. R. Sukumar is the Senior Vice President and Chief Investment Officer (Franklin Equity) and will be based out of Chennai.

Pfn: What is your initial reaction to the Union Budget? On a scale of 1 to 10, with 10 being the highest, how would you rate the budget?

Mr. Sukumar : The budget has been a growth-oriented one with renewed emphasis on infrastructure, agriculture and structural reforms and has bettered expectations. We believe that it has been a balanced budget given that state elections are currently under progress and expect the budgetary proposals to have a positive impact on the economy as well as corporate India when fully implemented. I would rate the budget at 7.

Pfn: How do you think the budget will impact the stock markets? Which are the sectors you see doing well?

Mr. Sukumar : The removal of dividend tax (in the hands of the investor) and long term capital gains tax along with the cut in small savings rate make equities an attractive investment proposition. Over the short term, the “feel good” factor of the budget should help bolster sentiment,. However, the direction will continue to be determined by the geopolitical events. The budget should have a positive impact on

• Automobiles : Car and utility vehicle manufacturers to gain substantially due to demand growth on account of the cut in excise duties

• Software : Should benefit from continuation of 10(A) and 10 (B) benefits and extension of the same in case of mergers. Removal of 10% tax on offshore profits should also help bottomline

• Pharma : Proposals such as a) reduction of duties from 25% to 5% for reference drugs b) no duties for drugs used for clinical trials c) reduction in excise duties on medicines using alcohol d) excise duty exemption for life saving drugs …are definite positives

• FMCG : Reduction in excise duties to help bakery and confectionery segments

Pfn: Post budget, has the attractiveness of equity funds for retail investors increased? In your opinion, should the retail investor consider investing in equity funds now?

Mr. Sukumar : Equity as an asset class has been attractive even before the budget was announced given the undervaluation in the market and strong fundamentals. The proposals announced in the budget enhanced the “attractiveness” of equities. The various measures announced which could have a positive impact on equities are -

• Cut in small savings rate and PPF
• Removal of long term capital gains tax
• Dividends from equity mutual funds made completely tax free
• Abolishment of RBI Relief Bonds

• Proposal to exclude single premium policies (i.e. insurance policies having the amount of premium more than 20% of the actual capital sum assured) from the ambit of Section 10(10D). This will impact the attractiveness of such schemes which were being positioned as “savings products”

With returns from traditional savings instruments on a downward trend, investors need to look at other avenues, which offer a good risk-reward ratio in order to overcome the impact of inflation on their investments. The budgetary measures combined with attractive valuations prevailing in the equity markets do make investments in diversified equity funds with a good track record, attractive. However, we would recommend that investors make investment decision after carefully analyzing the needs, risk profile and time horizon. A carefully analyzed financial plan is a must for investors and short-term events should not sway their emotions. Investors who are comfortable with the movements in equity markets should certainly consider fresh investments. The short-term ride could be bumpy, but the long term story is attractive.

Pfn: What are the primary concerns do you have which could delay a recovery in the stock markets? What is your worst-case scenario for the stock markets?

Mr. Sukumar : As far as the course of the possible war on Iraq and its impact on the global economy are concerned we are in terra incognita. The markets are expecting that the war, when it happens to be short and quick. However, a prolonged conflict in Iraq and high crude oil prices could have a negative impact on our economy and market sentiment.

Pfn: In light of the economic survey, and the presentation of the budget, how do you see the Indian economy performing in the coming year?

Mr. Sukumar : Most of the recent economic data have indicated that the cyclical turnaround in the economy continues. We expect the impact of last year’s delayed monsoon to be marginal. However, sustained levels of high crude oil prices will bring inflationary pressure on the economy.

Pfn: Any other issue that you feel could have been addressed (or addressed better) in the budget?

• No action on fiscal consolidation: The budget reflects little government concern to reduce the fiscal deficit. There was no reference to the status of the fiscal responsibility bill, which has been awaiting the approval of the Parliament for more than 2 years.

• Labour Reforms: No action taken on this front

• Kelkar recommendations not fully implemented: The budget has gone against the grain of the recently released Kelkar committee recommendations, which aimed to reduce the cost of risk capital - i.e., equity - and treating all factors of production on a par.

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