After the elections, one of the most awaited events is the Budget presentation. The Indian stock markets have recently witnessed new highs on the back of reform hopes. This is despite weak economic fundamentals. Infact, brokers are selling levels like 40k for Sensex. As euphoria pervades, the next event which will give us some idea about the Government's action plan will be the Budget speech. And hopefully facts and realities will be reflected more than unfounded optimism.
Yesterday after the rail budget was announced, the Sensex posted its biggest one day loss in 10 months. One should be prepared if a similar scenario unfolds when the main Budget is announced. This is because the markets have built in unrealistic expectations with regards to economic prospects. Considering ground realities, it is quite likely that the Budget may not meet market expectations and this may lead to another plunge.
As an article in Economic Times suggests, barely three months into FY15, the fiscal deficit target for the year has already been half met. This is likely to result in higher borrowings for the Government. While overall expectation from the Budget will be higher economic growth, it would not be easy to go ahead with tough economic decisions. Owing to high inflation, be it food or fuel or other commodities, some of the important measures such as hike in fuel prices and freight have already been rolled back or postponed to some extent. It will be interesting to see what Government does about fuel subsidies, one of the prime culprits behind high fiscal deficit. Other areas that need urgent attention of the Government include revival in coal, power, infrastructure and manufacturing sector and taming high inflation.
As far as tax reforms are concerned, including implementation of Goods and services tax (GST), going by the Reuters survey, a major change is unlikely. While GST has the potential to soften price levels in the economy by doing away with multiple layers of levies, it can adversely impact revenues for states. As such, at least in this Budget, one will do better to keep expectations low in this regard.
On the positive side, a revival in the stock markets is likely to kick start the disinvestment in major public companies. We believe investors should make investing decisions on the merit of individual stock rather than on reform theme. Even though actual reforms implementation may take some time, it would be fair to assume that a roadmap will be laid for the same. All in all, Finance Minister Arun Jaitley's maiden budget speech to the Lok Sabha will be an interesting event to watch.