Feb. 27, 2011, 8:50 p.m. EST
Source:
Market Watch
Indian markets set to fall on federal budget
Commentary: Chances are announcement will be negative for shares
By John Satish Kumar
MUMBAI (MarketWatch) — It’s the time of the year when investors are clued into the presentation of the annual budget by the country’s finance minister to lawmakers in Parliament.
Finance Minister Pranab Mukherjee will walk a virtual tightrope Monday, balancing a yawning fiscal deficit with growth amid soaring commodity prices and falling popularity for the incumbent government.
The budget will be presented against the backdrop of runaway crude prices, governance issues, mismanagement on food inflation, low expectations from the government — which has been mired in a series of corruption scandals — and a generally disappointing delivery on reforms.
Mukherjee’s attempt, therefore, will likely be to spruce up the government’s faltering image.
When domestic growth faltered during the global economic crisis, India, like the West, looked to spend its way out. Now, with high growth back on track, Mukherjee might have to further trim the economic stimulus package announced during the slowdown.
Under a fiscal consolidation plan prescribed by an independent finance panel, India is tasked to shrink its fiscal deficit to 4.8% of gross domestic product in the next fiscal year beginning April 1, 2011, and to 4.1% by 2012-13. The deficit was budgeted at 5.5% this fiscal year.
“The most important message from the upcoming budget should be that of fiscal consolidation, which is vital for near-term inflation management and for medium-term fiscal sustainability,” Rajeev Malik, an economist at CLSA, said in a recent note.
High inflation in the country is adding to the urgency to narrow the gaping deficit. Food inflation, which is also hurting the rest of Asia, has remained in double digits for 76 weeks since June 5, 2009.
The government has taken flak for failing to control prices in the economy, which is hurting the spending power of Indians in a country where more than 40% of its 1.2 billion people live on less than $2 a day.
In such a situation, with an eye on upcoming elections in five states, Mukherjee maybe tempted to go the populist route by throwing more money at the inflation issue.
“The path of least resistance, and an easy and politically rewarding one, has usually been to compensate the eroding purchasing power of consumers in the face of high inflation by throwing money at the problem though sops and transfer payments, rather than to undertake meaningful reforms to improve the country’s supply side response,” Nomura Financial Advisory & Securities said in a budget note.
But if the Economic Survey — the finance ministry’s annual postmortem of the Indian economy, released Friday — is anything to go by, the stress will be on sticking to fiscal discipline.
The fiscal deficit is expected to narrow to 4.8% of GDP, the government said in the survey for the year through March 2011.
It also predicted that Asia’s third-largest economy will expand between 8.75%-9.25% in the next fiscal year starting April 1, accelerating from an estimated 8.6% growth this fiscal year.
The survey — a precursor to the federal budget — usually signals the tone of the government, though the finance minister doesn’t have to stick verbatim to its script.
It made a strong pitch for supply-side measures to control inflation, including allowing foreign investment in multi-brand retail in a phased manner. It also justified the central bank pursuing its tight monetary policy at the current pace of growth and price pressures.
The Reserve Bank of India has waged a lonely battle against inflation over the past year, raising key policy rates seven times since March 2010, the fastest pace in Asia, to help contain prices.
The federal government will remain heavily dependent on the bond market to fund its budget, with net market borrowing set to rise to a record 3.96 trillion rupees ($87.7 billion) next fiscal year from 3.45 trillion rupees this year, according to the median estimate of 15 analysts polled by Dow Jones Newswires.
With those proceeds and gross tax revenue expected to rise 16% next fiscal year, the government will continue to spend heavily on education, health care and steps to create jobs in India’s agricultural sector, which employs 60% of the population, said Credit Suisse economist Robert Prior-Wandesforde.
This is despite the fact that expenditure growth in those areas combined is likely to slow to 8%-9% from 19% this fiscal year.
The government is also pushing for a law to guarantee cheap grains to low-income groups to partly shield voters from surging food prices.
It would also seek to further sell stakes in reduce its ownership in 68 state-owned firms, including Steel Authority of India /quotes/comstock/29m!e:sail.eq (IN:500113 158.70, +5.95, +3.90%) and Indian Oil Corp. /quotes/comstock/29m!e:ongc.eq (IN:500312 273.75, +3.10, +1.15%) as part of its divestment program. It has raised 227.63 billion rupees in the current fiscal year, less than the targeted 400 billion rupees.
Corporates, faced with the triple whammy of rising raw material costs, higher wage expense and elevated interest expense amidst waning growth momentum, aren’t likely to be granted any favors.
Mukherjee is likely to lift taxes levied at factory gates by two percentage points, taking back some of the four- to eight-percentage-point cuts it made in 2008-2009. He is also likely to increase the services tax back to 12% from 10%, and include more services under the tax net.
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Irrespective of what Mukherjee doles out on Monday, markets are perhaps resigned to fall.
A Nomura study shows that over the past decade, on average, the Bombay Stock Exchange’s benchmark Sensex /quotes/comstock/29m!sensex (XX:SENSEX 18,447, +623.10, +3.50%) has fallen 2.4% and 1.2% in the week and month after the annual budget, respectively.
Unless, of course, the finance minister pulls a rabbit out of his hat.
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