The markets have been starved of good news in the past few months. So it’s not surprising that they were quick to latch on to the lower-than-expected targets set by the finance minister for the fiscal deficit and net market borrowing for 2011-12. The markets had estimated a fiscal deficit of 4.8-5% of GDP for FY12, while the budget estimates put it at 4.6%.
The National Stock Exchange’s Nifty index rallied by as much as 3% from its intra-day lows on the back of this positive news. Traders were also enthused about the fact that the concessional excise rates for the automobile industry weren’t discontinued. Besides, the minister paved the way for foreign investors to directly invest in domestic mutual funds, which fund managers and portfolio managers have described as a big positive.
But by the end of the day’s trading session, the markets gave up almost all of these gains. What gives? By the time the finer details of budget became public it became apparent that the minister had under-provided for some expenses. Total non-Plan expenditure, for instance, is estimated to decline marginally in FY12. According to a fund manager with a domestic life insurance company, it’s highly unlikely that these expenses will decline next year. He points to the fact that in the past five years, non-Plan expenditure has risen at an annual average rate of 17.5%. Also, in this fiscal year, based on the revised budget estimates, non-Plan expenditure has turned out to be about 12% higher than the original budget estimates.
One of the main reasons for the drop in this expense item next fiscal is because of lower provisioning for subsidies by about 12.5% as compared with FY11. Unless crude prices correct in the next fiscal year, or unless the government bites the bullet on oil price deregulation, it seems unlikely that the total outgo on account of subsidies will be lower. The fact that the finance minister has budgeted for a lower outgo means that the chances of slippage on the expenses front are rather high. As the fund manager at the insurance provider puts it, there is therefore no sanctity to the fiscal deficit and net borrowing numbers presented in the budget.
It’s no wonder that the rally in the markets fizzled out by the end of the day. The stocks that benefited the most on budget day included ITC Ltd and TVS Motor Co. Ltd, simply because excise rates in these sectors were left untouched. Meanwhile, among the worst affected were retail stocks which were pricing in some progress in allowing foreign direct investment.
On the whole, the budget doesn’t do anything to change the course of the market in the near term. At the same time, it is heartening to note some initiatives in financial reform such as the proposal on direct transfer of cash subsidy to people living below the poverty line, and enabling the entry of foreign investors directly into the Indian markets through the mutual fund route.