Union Budget 2010

Overall, we view the government’s FY11 Budget proposals in positive light. Key positives are: i) the distinct message on policies and reforms; ii) a clear roadmap towards fiscal consolidation; iii) the continued move towards a simplified tax structure and removal of exemptions; iv) treatment of the earlier stimuli offered, in terms of lower excise duties, was calibrated and just about right (excise duties were raised 2%). Market expectations were low in the run-up to the Budget and fears on issues such as capital gain tax increases or a complete rollback of stimulus did not materialise. Global market volatility will likely impact India; except this, the Budget boosts our comfort with broader markets for ’10 and we continue not to expect any significant downside from current levels. We believe that the banking sector, which has been one of our preferred investment ideas, has emerged even more attractive post the Budget announcement.


· A distinct message on policies and reforms...We view the Budget as high on policy, with the finance minister sounding confident on implementation of the Direct Tax Code and the Good & Services Tax by April ’11, and having taken steps to simplify the corporate tax structure and reduce exemptions (Minimum Alternate Tax-MAT was increased to 18% from 15%; exemptions for software export units were not extended; and surcharge was reduced to 7.5% from 10%); also, there were statements on the direction on petroleum product pricing. Personal tax was reduced somewhat, with the broadening of tax slabs. Earlier excise duty reductions were rolled back 2% (to 10% from 8%), exactly in line with market expectations.
· …and a clear roadmap towards fiscal consolidation. The government targets fiscal deficit of 5.5%, 4.8% and 4.1% for FY11, FY12 and FY13 respectively (this includes “off-balance sheet” items such as oil subsidies). We believe that the 5.5% target for FY11 was in-line or better-than market expectations. If the aforementioned targets are met, the fiscal deficit (as a percentage of GDP) would have effectively halved in four years (from 7.8% in FY09). Revised FY10 deficit estimate is 6.9% versus the budgeted estimate of 6.8%.
· Key surprises. Overall, the fiscal deficit expectations soothed the markets, in our view. The increase in MAT was a negative surprise, though the impact on corporate earnings is not very large and was fairly offset by a reduction of surcharge. A steep increase in excise rates on cigarettes was a negative surprise. The fine-print on items included within the ambit of service tax has also negatively surprised – real estate and rail freight are examples. We think that the Budget is positive for the financials as the expected government borrowing has not been a negative surprise and concerns of an impact on credit growth were belied. ITC will be hurt by our estimated 17% effective excise hike. Real estate, particularly commercial, will be hit by the inclusion of lease rentals, construction activity and land rent under service tax. MAT and increase in MS & HSD excise duty will hurt RIL.

Google: good or evil?

It's been a difficult week for Google, which has been at the centre of antitrust investigations and a controversial Italian court case. Is the search giant's halo slipping, or does the 'Don't be evil' mantra still hold true? 

In August 2009, it was hard to move around Beijing without seeing an advert for Google. China was awash with the logo of a company whose motto is “Don’t Be Evil”, and the scale of the investment was a palpable endorsement of China’s vital importance to the economics of any global company.
Skip forward to January this year, and an official blogpost announced summarily that the censored results that China demanded from google were no longer compatible with the company’s philosophy. Off the record, employees said the company would pull out of China imminently. 

So did the search giant really decide to eschew profits in favour of a defence of free speech? Or did it realise it would never be the biggest search engine in China and simply cut its losses? The question that matters is simple: what does Google stand for? It’s launched a social network that made everybody’s address books effectively public, and has this week been in trouble in an Italian court for hosting (completely legal) videos of a young boy being bulled. Is the halo slipping, or do large companies inevitably find themselves in tricky situations? 

To be fair, there can be no doubt that Google is alive to the fact that its business depends on the trust of its users – that means people must believe that search rankings cannot be bought, that their emails won’t be passed willy-nilly to governments or advertisers and the company isn’t using its dominant position in industries from search to video for malevolent purposes. There is a good business case for doing the right thing.
Consumers, however, are becoming sceptical about whether the company is living up to its Don’t Be Evil motto – a straw poll anywhere in the country will provide evidence of that growing problem. It is, however, of Google’s own making: like Tony Blair, they promised they’d be whiter than white, and then moved from underdog to leader. The practical problems of living up to ancient promises are thorny.
So as Google has moved from trendy west coast start-up to major corporation, so it has started to behave like a major corporation. Its engineers have solved problems computer science had long since filed away under “too difficult”, but the resulting services are now so popular the company must wrestle with European antitrust regulators.
Nate Elliott, principal analyst at Forrester Research, points out that Google has “always put itself on a pedestal – so people hold it to unrealistic standards. But the founders didn’t drop out of school to give back to the world; they set up Google to make money, and they have.”
In the process, however, the needs of millions of consumers have very effectively been met: Brussels’ bureaucrats may not like it, but the public votes with its mice every day, and Google is the number one search engine across Europe, taking up to 90 per cent of the search market. Protesters who say Google knows too much about us, meanwhile, can look at the company’s Privacy Principles: “use information to provide our users with valuable products and services” is point one on a list that also observes that transparency and stewardship are also vital.
And indeed that service focus is the key to Google’s success. But as Elliott adds: “There’s always been something of a dichotomy. Consumers have always loved Google, but competitors never have. Google is a business and when it can take advantage of its position to make money, it does.” Thus it is a massive business that, still, is standing up for consumers against other businesses. It’s hard to envisage a more disruptive business model. No wonder a forthcoming book about the company, by New Yorker writer Ken Auletta, is subtitled “The End of the World as We Know It”.
Even so, Gartner analyst Whit Andrews points out that “Globally, Google’s brand is one of the most positively viewed in the world. Yes, there are ebbs and flows in the way certain people view it but it’s clear from the company’s growth that the vast majority of users and advertisers believe Google is taking care of their needs.”
Back in China, meanwhile, protesters have set up websites asking Google to reconsider, and Google’s operations in that country have yet, in fact, to be altered at all. Negotiations with the Chinese government are continuing, behind closed doors. That means that, six weeks after the announcement was made, the champion of the free web is still talking to a previously hostile superpower. Sources close to the negotiations say there is real movement, but that Google’s position remains clear. Maybe – just maybe – the company will end up effecting a real shift in China’s attitude. So is Google influential, enormous, profitable, occasionally naïve and sometimes ruthless? Surely. But evil? Not yet.