An ambitious plan of fiscal consolidation in the budget announced on Monday saw the bellwether Sensex index closing 0.7% higher at 17,823 points after a 4% fall last week.
A lower-than-anticipated fiscal deficit of 4.6% for fiscal 2012 brought cheer to the market, with the Sensex rising to an intra-day high of 18,296.53 points, a gain of 3% after the announcement on fiscal deficit was made.
But the market could not hold to the gains till the end of trading as scepticism surfaced surrounding the assumptions made to reach the target.
“There was a relief rally as expectations were muted and the market sentiment was negative ahead on the budget with foreign investors pulling out money from India,” said Meera Sanyal, country executive at the Indian arm of the Royal Bank of Scotland Plc.
The market outlook ahead of the budget was quite weak with the Sensex falling by 13.7% since January, the worst year-to-date losses in a decade. Spooked by political uncertainties as well as macro-economic concerns because of high inflation and rising commodity prices globally, foreign investors have pulled out $1.5 billion worth of equities this year, net of purchases.
In 2010, overseas investors pumped in a record $28 billion, pushing Sensex to its lifetime high of 21,005 points in November.
A major concern was that the government might give in to demand for populist spending in the face of an adverse political climate. That and rising crude oil prices had led analysts to predict the government would find it difficult to stick to the fiscal deficit target of 4.8% for fiscal 2012.
The lower number surprised positively, at least initially.
“The lower fiscal deficit target as well as a smaller government borrowing programme appear as positives if taken at face value, but the devil lies in the details,” Sanyal said.
The government plans to borrow Rs3.43 trillion in fiscal 2012, net of old bond redemptions, against the current year’s Rs3.54 trillion.
Market experts say the targets appear unrealistic, which is why a budget-driven rally is unlikely unless there is real progress on pending legislation such as the Companies Bill, which is expected to be taken up in the budget session.
“The assumptions both on revenue growth and on the expenditure side appear very optimistic and I would expect the borrowing programme to shoot up as the year advances,” said Prasun Gajri, chief investment officer at HDFC Standard Life Insurance Co. Ltd, which manages about Rs25,000 crore worth of assets.
For instance, subsidy expenditure is estimated at Rs1.44 trillion for FY12, lower than the actual expenditure of Rs1.64 trillion in the current fiscal.
Given the way subsidy bills shot up in the past and with commodity prices rising, it would not be a surprise if the actual expenditure on subsidies is much higher, pointed out Gajri.
The subsidy expenditure is 41% higher than what was budgeted for fiscal 2011, and if the same happens next year, the fiscal deficit would well rise above 5%.
While there was no big ticket reforms such as foreign direct investment in retail or insurance, there has been assurance that these will happen during the course of the year. Also, there was no big-ticket populist spending measures announced in the budget, which markets were apprehensive about.
The tighter fiscal policy, which supplements a tight monetary policy, is positive for the outlook for both, inflation and interest rates although this is being partly achieved by providing fairly low numbers for key subsidies, said Apurva Shah, head of research at Prabhudas Lilladher Pvt. Ltd.
“I think the government has signalled its intent to continue reforms with the introduction of GST (goods and services tax) and DTC (direct taxes code) as per schedule and overall it is a decent budget,” said Krishna Sanghvi, head of equities at Kotak Mahindra Asset Management Co. Ltd, that manages assets worth Rs27,565 crore.
The step towards opening up of mutual fund investments to foreign individuals was also a positive development, analysts said.
“While we don’t know how exactly this will work out, generically it is a positive and a step towards capital convertibility,” said Sanyal.
While the broader market rallied, some sectors gained more. Some investors who were anticipating a roll back of fiscal stimulus with a raise in excise duties were positively surprised.
Automobile stocks reacted positively to the announcement that duties would remain unchanged. The auto index on the Bombay Stock Exchange rallied before ending flat with a .02% rise.
“Overall, the Union budget 2011-12 is positive for the automobile sector as the Central excise duty has been kept unchanged,” a post-budget note by Angel Broking Ltd said. “Further, special incentives has been announced for companies manufacturing hybrid vehicles in India. Moreover, broader measures like increased focus on rural and infrastructure spending would support long-term growth of the sector.”
Among the sectors likely to benefit would be banking and financial services due to lower borrowing programme. Cigarette makers such as ITC Ltd will also benefit as it will not have to pay higher taxes and automobiles that have been spared an excise hike, Shah of Prabhudas Lilladher commented.
The key losers are technology firms and ports since minimum alternate tax will be applicable on special economic zones and iron ore exporters because of hikes in duties, Shah added.
“Overall, the budget was marked by the lack of any negatives, although I don’t expect the markets to rally much,” said Saurabh Mukherjea, head of equities at Ambit Capital Pvt. Ltd.