Markets expect FM to focus on deficit, stimulus withdrawal

Every year, as the Union finance minister prepares the Budget, the market expects the world from him — reduction in taxes, sops for industry, and so on — and begins discounting these expectations.

However, this year is different as top brokerages and fund houses do not have much hope from the Budget. The result has been that the benchmark indices, Sensex and Nifty, have moved in a narrow range this month.

Market participants say the focus of Finance Minister Pranab Mukherjee will be on fiscal deficit, more so in the wake of the recent debt crisis in some Europeon countries. The general consensus among them is that the fiscal deficit has to be in the region of 5.5-5.8 per cent of the gross domestic product. “The government should also talk about the roadmap for achieving the fiscal deficit target for next year,” said Pankaj Vaish, managing director and head of equities (India), Nomura Financial Advisory & Services.

A clear message on fiscal deficit could change the mood at bourses. “The markets can see a good potential upside if the government sends a strong message of fiscal prudence. The fiscal deficit is on top of the mind for most long-term investors” said Kaushal Aggarwal, managing director, Avendus Capital.

One way to check the deficit will be to withdraw the fiscal stimulus given to sectors such as automobiles, cement and fast moving consumer goods, besides raising service tax by 2 per cent. The market is also expecting a 2 per cent rise in excise duty. But, if these measures are announced, there may be only a marginal impact as the market has already discounted these measures.

“The stock market will react only if there is a substantial increase in excise duty,” said Nirmal Jain, chairman, India Infoline. However, Rashesh Shah, chairman, Edelweiss Capital, does not think the government will cut the fiscal stimulus by much. “The markets are expecting a slight increase in excise duty,” he said.

There is also an expectation that the Budget will focus on spending in some sectors. “The Budget is largely expected to focus on infrastructure and give some sops to the power sector,” said Jain of India Infoline. This will benefit construction, road, power and equipment companies.

Disinvestment of public sector companies is also expected to be on the agenda. “We can expect disinvestments to the tune of Rs 300 billion (Rs 30,000 crore) in financial year 2010-11. Large public sector undertakings as divestment candidates will be talked about,” said Ved Prakash Chaturvedi, managing director, Tata Mutual Fund. But, Vaish of Nomura thinks the government may avoid putting large numbers in the Budget in terms of the amount sought to be raised.

Some think there will be no major impact of the Budget on stock markets and it will be business as usual. “The Budget is not likely to have any major impact on stock markets this year. The government has limited resources this year to come out with market-friendly measures,” said Samir Arora, fund manager at Singapore-based Helios Capital Management. He said stock markets in India could remain weak post Budget and track global cues.

Madhusudan Kela, chief investment officer at Reliance Mutual Fund, says the markets do not have many expectations from the Budget. “It is likely that the government will maintain momentum in terms of policy initiatives and there may not be any negative surprises,” he said.

“The government should talk about the roadmap for achieving the fiscal deficit target for next year”
Pankaj Vaish
MD and head of equities (India), Nomura Financial Advisory & Services

“I do not think the government will cut fiscal deficit much. The markets are expecting a slight increase in excise duty”
Rashesh Shah
Chairman, Edelweiss Capital

“The stock market will react only if there is a substantial increase in excise duty”
Nirmal Jain
Chairman, India Infoline

“The government has limited resources this year to come out with market friendly measures”
Samir Arora
Fund Manager, Helios Capital Management