New Delhi: Finance minister Pranab Mukherjee did exactly what he was expected to do. Make a balancing act and avoid drubbing in and outside the parliament. Sticking to his commitment of balancing act, he appeased political constituent by increasing social spending and pleased the stock markets by promising to contain the fiscal deficit at 4.6% of the coming financial year 2011-12.
The lower than expected fiscal deficit has come as a pleasant surprise to the stock markets. Economists were expecting the fiscal deficit to come in at around 5% of the GDP. The current financial year deficit is pegged at 5.1%, finance minister set an ambitious target of bringing down the fiscal deficit to around 3.5% by 2013-14.
This led to the rebound in Indian stocks. Led by gains in FMCG, PSUs and real estate stocks, Sensex gained 451 points or 2.55% in mid-day. However, profit booking in last hour lowered gains of the day. By closing, Sensex managed to retain a gain of 122 points or 0.69% and finished the day at 17,823. Nifty on the other hand hit 5,477 before closing at 5,333.
|BSE Sectoral indices|
“It is largely a relief rally. Markets are relieved that there is nothing negative in the budget. I think the estimated fiscal deficit at 4.6% of the GDP is quite aggressive,” says Tarun Kataria, chief executive officer, India, Religare Capital Markets.
What also helped the sentiment is the continuation of the excise duties on the automobiles at current levels. Market participants were expecting the government to raise duties on automobiles to 12%.
Lower fiscal deficit makes the government tone down the borrowings from the open market. Finance minister estimated the government to borrow Rs 3.43 lakh crore from the market in the coming financial year. This is far lower than what market participants were expecting. Goldman Sachs was expecting the government to borrow Rs 3.8 lakh crore.
Lower borrowings will ease pressure on interest rates, thereby benefiting private companies and individuals. “Net borrowing figure of Rs 3, 40,000 crore is at least a good Rs 60,000 crore short of market expectations and positive for bond yields. Positive for both bonds as well as equities,” says Amit Rathi, MD, Anand Rathi FInancial Services.
Even though the finance minister steered clear of making any announcements regarding relaxing of FDI norms and issuance of banking licenses, he assured that the government is working in that direction and stakeholders can expect an announcement soon.
He promised to pump in around Rs 6,000 crore into the PSU banking units. Fresh capital can help the PSU banks to aim for higher loan growth rates.
However, it is a bad day for iron ore exporters. Government has finally given-in to demands of steel manufacturers and started taking steps to discourage export of iron ore. He raised export duty on iron, which is a dampener for ore exporters like Sesa Goa and NMDC.