India's budget turns investors bearish

The Indian budget for the fiscal year to March 2010 was announced yesterday to a cautiously optimistic reception from specialists, but a resounding thumbs-down from the stockmarket. The euphoria prevailing in Indian stockmarkets since the Congress-led UPA government won a majority on May 18 was quelled as markets lost 6% during the course of the day's trading.
 
The finance budget for the fiscal year followed the railway budget which was announced on Friday. The railway budget seemed designed for popularity as India's railway minister Mamata Banerjee announced no increases in passenger or freight fares.

All eyes were on the finance minister of the new government, Pranab Mukherjee, who is delivering the first budget in the second term of office of the Congress government. Some market observers had hoped, somewhat over optimistically perhaps, that Prime Minister Manmohan Singh would use the opportunity provided by the Congress winning a clear majority to announce sweeping changes.

"The stockmarkets were expecting a miracle, a big bang announcement," said R Venkatraman, co-founder and executive director of brokerage firm India InfoLine. And when the budget unfolded and the miracle did not, investors conveyed their displeasure by turning bearish and pushing the 30-share Bombay Stock Exchange index, the Sensex, down 5.8% by the end of yesterday's trading to close at 14,043. This marked the biggest loss of the Sensex following the six weeks of gains post-elections.

"The Indian cricket team has earned itself the unfortunate reputation that every time they are considered to be in fine form they disappoint," said Venkatraman. "The same thing seems to be happening in Indian politics."

But despite his aforementioned analogy with India's favourite sport, Venkatraman is positive that the budget announcements continue to move the country in the right direction, notwithstanding the stockmarket reaction which he suggests is simply an overdue correction.

"The government had to play to the electorate which voted the Congress back into power and hence the budget is consumption-led," said Venkatraman. Venkatraman also highlighted that the budget has no unachievable targets, something he sees as a positive, and that attempts have been made to address India's pressing issues.

A few specialists don't share Venkatraman's optimism. "The British economist and fiscal doyen, John Maynard Keynes remarked that 'in the long term we are all dead'. Pranab Mukherjee seems to have taken this advice seriously," said Abheek Barua, chief economist at Mumbai-headquartered HDFC Bank. "[The budget] attempts to net some short-term gains by putting more money in the taxpayer's hands and allocating more funds to infrastructure and social welfare programmes [but] the absence of a long term strategy for fiscal consolidation is conspicuous and disappoints."

Among the notable announcements made by Mukherjee yesterday are a focus on infrastructure through public-private partnerships and rural development. Government budgeted spending on highway and railways is up 23%, while the outlay on urban infrastructure is up 87%. Ratings agency Fitch said yesterday it "does not believe that any of the budget proposals would have a material impact on the national ratings that it currently maintains on infrastructure project debt".