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Life after Budget 2009-10


The budget per se wasn’t bad but the lack of certain announcements have spooked the markets enough to warrant a FII selloff of close to half a billion dollars in the last 2 trading sessions. The fact that FM announced that the fiscal deficit will be at 6.8% of GDP may have prompted this move as an increasingly weak fiscal situation means a threat to India’s sovereign ratings. Please note that S&P had downgraded us to “BBB-” long term, i.e negative from stable in February 2009 reflecting that “We expect general government deficit, including off-budget measures such as oil and fertilizer bonds, to increase to 11.4 per cent in the fiscal year ending March 31, 2009 from 5.7 per cent in the previous fiscal year”. A further downgrade would mean that FII’s may have to prune their India exposure.
However, there may be some very positive indications that the markets altogether ignored and may become drivers for the markets going forward :
·         Increased focus towards rural demand stimulation and consumption. My take :  If we can extend the economic dependability to more cities on the map, then perhaps it can be our biggest and the most revolutionary achievement since it will rationalize the real estate and costs in the rest of the economic centres( Mumbai, Delhi, Bangalore etc)
·         Mention that public shareholding will have to upped to 25% from the current public float at 15%. Interesting to note here will be that free float in India is one of the lowest in the world at 50% . ( US : 95%, Japan : 84%, UK : 88%), this makes it increasingly vulnerable to capital flow thus volatile.
·         23% increase to NHDP budget and 87% increase to the JNNURM
·         Allocation to Accelerated Power Development and Reform Programme increased by 160%
·         Setting up of a committee to de-regulate the oil prices; Committees may have been set up previously also but I have a feeling that this time it may be different and even if we achieve partial deregulation of the oil prices( at least of petrol and diesel)  it will contribute significantly towards improving the deficit.
·         Increased money in the hands of upper end of the society (with the removal of 10% surcharge on annual income of 10 lak +) as these are the people who are most likely to invest in the stock markets.
·         This coupled with the fact that 2009-10 will , in all likelihood, be the year where the oil prices will stay sub $70 level and commodity prices will be benign.
The markets are disappointed with the lack of clarity on a clear plan on how the govt is going to lower the deficit, its complete silence on the much expected FDI reform for some sectors and its disinvestment horizon. The budget may have been an appropriate platform to at least spell out the above mentioned reforms but nonetheless if the pointers are anything to go by, I feel that this time the FM has been conservative and hasn’t over committed and this makes him more likely to spring pleasant surprises going forward.
PS : I don’t agree that investors should shy away from interest rate sensitives ( as a forewarning that increased govt borrowing will prop the interest rates up) as the govt should be cognizant of this fact and if they do that, it runs contrary to the whole theme of the badget which is supportive of growth over fiscal consolidation.