Devangshu Datta: The looming shadow of the Budget

The looming shadow of the Budget will dominate trading decisions. This is the BJP's first full-year Budget and its best chance to articulate a coherent vision. Much of the data suggests slow growth recovery. However, the rebased, new GDP data says that growth is much stronger than anticipated.

Here are some guesses about Budgetary direction. Direct taxes are unlikely to be raised. The blueprint and timelines for the proposed Goods and Service Tax will be clarified. Further easing of foreign direct investment (FDI) regulations is hoped for. The optimists expect goodies on the 'Make in India' front. There is a buzz about opening up defence.

Given good responses to the Coal India divestment and over-enthusiastic bidding in coal block auctions, more PSU stake sales are on the cards. The telecom spectrum auctions are likely to be successful as well. Those revenues, plus windfall savings on the crude import bill, should hold the fiscal deficit to somewhere near the targeted 4.1 per cent of GDP.

Will the Budget kick-start the investment cycle by increasing government expenditure and thereby, risk a higher fisc? Investors will jib if the deficit climbs past five per cent so, that's the headroom for pump-priming. Of course, if the ministry of finance believes growth is chugging along at above 7.4 per cent, it may try to reduce the Fisc instead.

The massive inconsistency between GDP estimates and other data makes it hard to guess where India is, in terms of economic cycle. The ministry of finance will probably go with older data suggesting slow growth. That's simply because most of the Budget would have been drafted before the new series was released.

The new series estimates GDP growth will hit 7.4 per cent this fiscal and it may accelerate past eight per cent in 2015-16. "Supporting evidence" is weak. The Index of Industrial Production was running at 1.7 per cent growth year-on-year in December. An analysis of the Q3 (October-December 2014) results of 2,941 companies shows sales and net profits both contracted y-o-y against October-December 2013.

The Wholesale Price Index contracted between April-December 2014, while the Consumer Price Index ran at six per cent annualised across that nine-month period. January 2015 saw the WPI down 0.4 per cent y-o-y and CPI up 5.1 per cent y-o-y. Merchandise exports also contracted in Q3. Vehicle sales were flat. It is hard to reconcile those numbers in a manner consistent with 7.4 per cent GDP growth.

The land acquisition ordinance will be tabled in this Budget session and so will the insurance ordinance. The BJP is in a minority in the Rajya Sabha and it will try to have ordinances ratified in a joint sitting of both houses. If either can be pushed through, it will boost sentiment. On the flip side, more revelations in the corporate espionage case could be damaging to sentiment, and to the share prices of specific companies, or to the government.

Abroad, 'Grexit' is postponed but not off the table. The new Greek government gets four months more to manage some reform. The ceasefire in the Ukraine might hold. Meanwhile, more European nations are coming to terms with negative interest rates and negative bond yields. Denmark, Switzerland and Sweden have imposed negative policy rates. Among Euro-bonds, German treasuries with tenures of six years and more have traded negative.

In Asia, China continues to struggle. Exports fell 3.3 per cent year y-o-y in January and imports tumbled 20 per cent, and investors are braced for severe slowdown. Chinese real estate major Kaisa rattled debt markets by the late servicing of forex loans and bond coupons.

America is obviously an outlier. The US January payroll data beat upside estimates again. The Federal Reserve's minutes from its last meeting are being parsed by traders anxious to know when it will start raising rates. It will be most entertaining if Grexit coincides with an USD rate hike, but the global financial system might not appreciate that sort of stress test.

Returning to the home front, the RBI is likely to absorb the Budgetary implications before it makes a call on policy rates. It will continue to build reserves regardless, given the guarantees of volatility.

Technically speaking, bulls usually build massive positions prior to the Budget. Historically, there is often some selling post-Budget because expectations tend to be unrealistic. In that respect, Finance Minister Arun Jaitley is on a hiding to nothing since expectations are really high. No matter how good the Budget is, there will probably be some unfulfilled hopes. Also, as the HDFC Chairman Deepak Parekh pointed out, India Inc is getting tired of waiting. If the Budget disappoints, there could be a big correction.