WEB EXCLUSIVE: Budget impact on markets

The key worry is with regard to oil prices, which may keep FIIs away.
 
The Finance minister Pranab Mukherjee restricted the fiscal deficit  in the Union Budget for 2011-2012 to 4.6% or Rs 4,12,817 crore. The net market borrowing will come to Rs 3.43 lakh crore with an additional Rs 15,000 crore financed through treasury bonds. This was significantly lower than the 5% levels expected by economists and analysts.
 
On the face of it, the lower projected fiscal deficit and government borrowing was the perfect formula for a market trigger but there is a fair bit of skepticism as to how the government will go about implementing this. The expenditure cut looks dramatic on the face of it, according to BNP Paribas banking analyst Vijay Sarathi. The key worry is with regard to oil prices with pressures coming through on sustained levels above $120 per barrel, which is expected to keep FIIs away.
 
Crisil Chief Economist, D K Joshi, sees the fiscal deficit target as riding on two things. Firstly, the 9% GDP growth estimate; and secondly, conservative subsidy projections, below previous year levels. Given that the Middle East crisis has pushed oil prices to significantly higher levels than in FY11, he expects the subsidy bill to be higher than estimated. The rising interest rate cycle will also restrict GDP growth (8.3% Crisil estimates) which could compound the impact of subsidy slippages and this could see the deficit settling higher to around 5% levels, he adds. He labeled the budget as positive but thinly spread.