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FM on the right track

Feb 26, 2010

'Markets cheer Budget 2010', screamed one headline. 'Sensex salutes Union Budget', said the other. Clearly, bouquets far outweighed the brickbats in response to the Union Budget 2010-11 that was tabled in the parliament today. Count us amongst the one offering the bouquets! Of course, it would be too premature to pass any judgement right now. But the budget clearly showed that the Government is in no mood anymore to drive down the wrong path. Most of all, in the field of fiscal prudence. And it also showed that the previous two years were an aberration. An aberration that had arose as a result of political compulsions and a severe global economic turmoil. Absent any of these factors, the Government seemed quite intent to take the right steps. Steps that will put the economy on a structurally higher growth path and at the same time strive for financial inclusion.And clearly, markets seem to have liked this positive gesture by the government. Most of us would remember that during the last budget, it was the ballooning of the fiscal deficit that had perhaps caused the maximum heart burn for the investors, resulting into the markets going into a tailspin on the budget day and the Sensex shedding a massive 870 points. But things were starkly different today. The FM promised that the Government would strive to shave off fiscal deficit by nearly 3% as a percent of GDP by FY13, thus helping lift investor spirits.

Fiscal deficit is not entirely bad in itself. But increasingly in India, more of it has been finding its way into wasteful expenditures that do nothing to improve the long term productivity and economic health of the country. Thus, with the same expected to come down, markets heaved a sigh of relief that money would now be spent towards more productive purposes, thus boosting economic growth.

Reduction in fiscal deficit was not the only positive for the markets. The Finance Minister also chose to take away a lot less money from salaried professionals by way of taxes thus boosting their disposable income and further strengthening the Indian consumption story. Also, availability of credit, so very essential for big ticket purchases like auto and homes, is all set to improve what with the Government deciding to give away more banking and NBFC licenses and also strengthening the capital base of public sector banks.

It should be borne in mind that all these measures were over and above the ones that the Government has now started taking on a regular basis and the ones so very essential for the sustenance of the Indian growth story like focus on infrastructure, employment guarantee schemes, greater emphasis on education and health and the like.

In a nutshell, while the Finance Minister did nothing that could take away from the near term India growth story, it took further measures like showing a firm resolve to rein in the fiscal deficit that could do wonders to the long term India growth story and put us on a higher growth path. And there can be no better news for the investors as this would translate into their wealth increasing at a stronger pace than before. Thus, if one is looking to invest in the markets from a 3-5 year perspective, there is a strong chance that the returns in the region of 12%-15% annually that the investors have come to expect from Indian stock markets from a long term perspective, could well be surpassed. Of course, one will have to stick to companies favorably positioned to ride the India growth story run by a competent management team and available at reasonable valuations. The FM seems to have done his bit. Now, it is your turn to take advantage of it.

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