Hope is a dangerous thing, as investors found out on Monday. If finance minister Pranab Mukherjee was guilty of presenting an insipid Budget that was low on the detail that the market wanted, investors were also perhaps guilty of expecting too much, too soon.
That doesn’t absolve Mukherjee of a Budget that is low on ambition, boldness and vision, but at least it teaches investors to not hope for the moon going into a policy event.
The real damage was done when the finance minister spelt out the 6.8% deficit number, implying a large market borrowing programme with little detail on how he would get back on the fiscal responsibility and budget management path.
Market collapse: The Bombay Stock Exchange building. Shashank Parade / PTI
Global rating agencies will pass their judgement in the next few days but the bond market didn’t wait that long. The benchmark bond yield shot past 7%, raising fears of interest rate spikes and triggering off a collapse in stock prices.
At a macro level, that perhaps was the undoing of the market. At a more micro level, a lot of sectors had run up expecting substantial boosts from the Budget. Education, real estate, textile and fertilizer stocks, which had meaningful rallies leading up to the event, collapsed. The surprise was infrastructure, where stocks sold off as well, as apart from an increased outlay for the National Highways Authority of India, the Budget was a bit low on bold moves.
Then there was disinvestment, which the market had pinned some hopes on. The pitiful Rs1,100 crore figure which Mukherjee unveiled dashed those hopes. That number is truly inexplicable.
Not that this Budget had nothing positive. The scrapping of fringe benefit tax, extension of 10A/10B for information technology companies, removal of the commodity transaction tax and no rollback of excise cuts were all positives, partly offset by the hike in minimum alternate tax.
The scrapping of the surcharge on personal income taxes may even be a limited consumption trigger. Tobacco companies were spared the axe this time and ITC Ltd was one of the few stocks that ended in the green, contrary to investor fears.
Yet, what the market wanted was a green signal that finally the drought on reforms is over, that a government, shorn of the Left parties, will press ahead with bold policy moves.
The charitable view is to accord finance minister the benefit of the doubt: He didn’t have enough time to unveil a big-bang budget and the best is yet to come, over the next few months and in the next budget.
The cynical view is that the market is running ahead of itself. Despite the electoral surprise, things will improve only incrementally and over a much longer duration than investors want. The truth, as often, perhaps lies somewhere in the middle. While investing in India, the virtue of patience cannot be overstated.
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