Mumbai: Indian markets have never hit a rougher patch in the run-up to the Union budget in the past one decade.
The bellwether Sensex index has fallen 13.7% since January, the worst year-to-date loss in Indian markets in a decade, and any positive surprise in the budget on fiscal consolidation will improve sentiment, analysts said.
Fiscal tightening will ease pressure on the central bank, which has been raising policy rates to fight inflation.
However, if history is any guide, the gains may be limited.
Ahmed Raza Khan/Mint
A Mint analysis of Sensex movements in the run-up to the budget and after over the past decade shows that the gauge has fallen a month prior to the budget on eight of 12 occasions. In past 10 years, there have been 12 budgets, including two interim ones.
The post-budget performance has also not been radically different, with the Sensex declining in the month after the budget on seven of 12 occasions.
The budget’s impact on markets has not been significant in the past decade, Prabhat Awasthi, head of research at Nomura Financial Advisory and Securities (India) Pvt. Ltd, wrote in a note to clients on 24 February.
While the political as well as economic environment is not always the same, markets have usually tended to offer a muted reaction, although recent history is more favourable. The Sensex rose by over 7% in the month after the budget in the last two years.
“The budget does matter, though probably a little less so over the years,” said an 18 February report by Aditya Narain and Rohini Malkani, analysts at Citigroup Global Markets Inc.
The declining role of the government in the economy and the increasing tendency of the government to take policy decisions outside the budget has minimized its impact, although it is still not a non-event, the report added.
Concerns on political uncertainties rising out of graft charges as well as macroeconomic uncertainties relating to inflation and the twin deficits—fiscal and current account—have clouded the outlook on Indian equities this year.
After pumping in a record $28 billion (Rs1.27 trillion) of net investments in equities last year, foreign investors have sold off $1.5 billion worth of equities, net of purchases, so far this year.
Rising food and fuel prices have added to concerns on inflation and raised fears that the government might find it difficult to meet the fiscal deficit target of 4.8% of the gross domestic product (GDP) for fiscal 2012—recommended by the 13th Finance Commission—on account of higher subsidies.
A higher nominal GDP and the buoyancy of revenue as well as one-off events such as the auction of third-generation telecom spectrum are likely to ensure that the actual deficit in fiscal 2011 improves from 6% last year.
The lower fiscal deficit for the current fiscal year is already priced in, Narain and Malkani wrote. Depending on the extent of subsidies, it is likely to be in the 5.1-5.2% range, they added.
The cynosure of all eyes would be the fiscal target for next year and the assumptions that the government makes to achieve that target. An over-riding theme of fiscal consolidation and increased focus on infrastructure projects, necessary to sustain a high growth rate, would definitely be welcomed by the markets, analysts said. The challenge, as always, would lie in execution.
While the government is expected to stick to the 4.8% fiscal deficit target for fiscal 2012, there is a risk that the final deficit might turn out higher than budgeted as rising commodity prices and an adverse political environment would make it difficult for the government to reduce spending or subsidy payments, wrote Singapore-based Leif Eskesen, India economist at the Hong Kong and Shanghai Banking Corp Ltd, in a 24 February note.
“There is clearly a risk that it will only deliver (on the fiscal deficit target) on paper, relying on optimistic growth assumptions and leaving out inevitable expenditure hikes to extra-budgetary sessions later,” said Eskesen.