Will the Budget make the bulls see red?

Four days from now, Finance Minister Palaniappan Chidambaram will present the last effective Budget in the second term of the United Progressive Alliance government (UPA).

Having come across as a pro-equity market finance minister (this will be his seventh Union Budget), Chidambaram, stepping into the finance ministry six months ago, and the series of steps taken to try and correct the macro imbalances, have led to the re-rating of the Indian equity market. Compared to six months ago, the mood on the Street is much better than the ground reality.

After a sharp run-up, the markets are now showing signs of nervousness ahead of the Budget. History suggests that the Budget leaves a trail of underperformance in the month after. However, the probability of this happening comes down sharply if the market has not risen prior to the Budget, as may turn out this time.

Since early this month, the stock markets have beaten a retreat (nearly one-third of the scrips have suffered an erosion of over 20 per cent of market capitalisation).

Having stolen his own thunder by announcing a slew of measures outside the Budget, the FM’s main task would be to avoid a downgrade. Any downgrade will be catastrophic (politically) for the government. The threat of one rules out the possibility of the Budget being more populist than what it can afford to be.

Fiscal consolidation will be the key message of this year’s Budget. And, if one goes by his address to foreign investors earlier this month, there is a distinct possibility of the fiscal deficit target for FY14 being pegged at 4.8 per cent.

And, even as we have a stagflation-type environment (high inflation coupled with decelerating GDP growth), the FM exudes confidence that he will be able to successfully use the Budget as an exercise to build the confidence of all concerned that restoration of economic growth remains the government’s focus. Also, the finance minister knows that if his party has to come back to power next year, kick-starting the economy is a big necessity.

Chidmabaram had been credited in 1997 for having presented a ‘Dream’ Budget. Can he repeat it this time, despite the odds being stacked against the Indian economy? While the challenges are many, the probability of a repeat ‘Dream’ Budget cannot be completely ruled out. At the cost of being termed an ardent optimist, it would make sense to point out that the finance minister is aided in this arduous task by some of the best financial brains in India (or the world?) and has full support of Prime Minister Manmohan Singh (pioneer of economic reforms in India), besides having the political blessings of the Congress chief.

So, will the bulls see red? Is a new high possible for the Indian markets in 2013? While most analysts have reversed their view and have been sounding increasingly sceptical over the last two to three weeks, I would like to believe (the US fiscal cliff and the Euro zone problems resurfacing, notwithstanding) that we could be at a new high this calendar year. And, the Budget could be an important trigger for this to happen.

After all, India and its politicians have a history of successfully bouncing back when all seems lost. It happened in the early 1990s. Fingers crossed.

The author is principal and head (PCG), Nirmal Bang Securities Pvt Ltd