Following the UPAโs sweeping victory at the polls, the market was buoyed by expectations of a blazing round of reform by the new government. Of late, however, expectations appear to have been tempered by the realisation that growth and fiscal prudence make for a tight balancing act. Consequently, the market has backtracked at 7.5 per cent from the monthโs high. The Union Budget remains a major event risk and would play a key role in dictating market direction. Though the market has consolidated at higher levels, we see a risk of disappointment from the budget, as the theme may be big on social welfare and low on corporate reform.
An analysis of pre- and post-budget market movement suggests that over the past 18 years, the market has corrected 14 times post-budget. Excluding the outlier of 1992, the average fall is 4.3 per cent. This time as well, given the higher expectations and strong rally subsequent to the election results, a post-budget correction appears likely.
Key themes likely to populate Union Budget 2009โ10
Social sector spending: In order to demonstrate its commitment towards the people of India, the government will once again emphasise on social sector welfare schemes such as Sarva Shiksha Abhiyaan, midday meals, secondary education, health sector spending, National Rural Employment Guarantee Act, Rajiv Gandhi Drinking Water Mission and women specific programmes.
Infrastructure development: We expect higher infrastructure fund allocation in a bid to contain the impact of the global economic slowdown. Among the likely focal points would be the Bharat Nirman programme (allocation of Rs 312.8 billion in FY09), and roads and power sector development.
Balancing public expense and fiscal prudence: The thrust on higher spending, which is essential to partly counter the impact of the global meltdown, would be balanced by efforts at fiscal prudence via the following options:
* Disinvestment: Dilution of a 10 per cent stake in the top 10 PSUs by market cap can garner Rs 370bn for the government. Another money spinner in contention is the 3G auction, though this falls outside the budget purview.
* Partial free pricing of oil & gas: Rising crude prices make deregulation unlikely, but the government could consider a hike in auto fuel prices.
* Hike in cenvat and STT: Certain incentives offered in the two stimulus packages may be rolled back โ this would include restoring Cenvat to 10 per cent from 8 per cent and service tax to 12 per cent from 10 per cent.
* Increase in FDI limit, easing of ECB norms: In order to bring long-term foreign capital into the country and improve forex reserves, the 49 per cent FDI in cap in insurance may be hiked from 26 per cent. Increased FDI in retail, however, seems unlikely. ECB norms too may be relaxed.
Corporate India: FBT may be done away with, especially for exporters of gems & jewellery and textiles. We also anticipate an increased rate of accelerated depreciation for new plants, in line with that offered to commercial vehicles.