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Back to basics on street

CA Lalit Mohan Agarwal 
on 25 July 2009

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The Budget day, the sensex tanked 6% and gilt yields rose 30 basis points. The markets seemed to be repelled by P. Mukherjee’s budget. In fact, the budget does a good job of dealing with a Great Recession. That is a substantial achievement, notwithstanding some confused thinking and lousy presentation.
 
The market skyrocketed 20% after the Congress election victory, thinking UPA-II would go for radical economic reforms to celebrate independence from the Left Front. This was irrational exuberance. A party that has achieved 9% GDP growth and won re-election will naturally opt for continuity, not radical reform. Mukherjee has opted for continued emphasis on the aam admi, infrastructure, anti-poverty spending, social spending and agriculture. Why change a winning formula? Congress is intrinsically left of centre, so it’s logical for UPA-II to opt for Common Minimum Programme-II.
 
Union Budget 2009-2010 is Mukherjee’s ‘inclusive’ budget that has pricked the bubble inflated by the post-election euphoria to the dismay of some punters, but fund managers betting on the long term will be happy that fundamentals could be back in vogue on Dalal Street.
 
Shorn of any headline-grabbing policy announcements on reforms, the budget saw the BSE sensex plunge 870 points, and it’s widely expected that the market may spend the next few days in digesting the over 80% gains it registered since March this year. Market watchers feel that we are back to the core fundamental story.
 
Markets are dismayed by the rise in the fiscal deficit to 6.8% of GDP, up from 5.5% in the interim budget in February ’09. Add state deficit of 4% plus extra oil and fertiliser subsidies, the total fiscal deficit may be 11-12% of GDP.
 
But so what? Fiscal deficits are solutions not problems. Having achieved 5.7% GDP growth in the two worst quarters for the world economy, India can take credit for handling the recession pretty well. In a recession, finance ministers are under pressure to resort to protectionist dramatics.
 
To his credit, Mukherjee has resisted such pressures. Most of his small changes in import duty lowered rather than raised tariffs. He also showed courage in extending service tax to railway traffic, creating a level playing field with road and air traffic. And he raised MAT to an effective 17%, reducing unwarranted benefits to low-tax corporates. Lawyers are a powerful lobby, but Mukherjee extended service tax to legal advice, consultancy and technical fees. 
 
When the market crashed, the finance minister sought to reassure that he had by no means abandoned reform. He said it was not necessary to spell out every reform in the budget, and that the budget was only one of several instruments at the government’s disposal.
 
Very True, Mukherjee presented the budget in his style – strong content, lousy presentation. Commentators may argue that his communication skills may have been wanting on budget day. But history will judge this budget not by the immediate stock market reaction but by its success in combating the recession. Mukherjee has raised the fiscal deficit, accelerated infrastructure and safety-net spending, and monetised half of government borrowing. Such boldness is entirely warranted in a recession.
 
The big risk is that he will not be able to be able to roll back the fiscal deficit in coming years. Let’s cross that bridge when we come to it.
 
 
STOCK MARKETS
 
Beginning of the July ‘09 – Sensex raised 1%, ended near 15k before budget day
 

Daily review
26/06/09
29/06/09
30/06/09
01/07/09
02/07/09
03/07/09
Sensex
14,764.64
21.10
(291.90)
151.63
13.02
254.56
Nifty
4,375.50
15.45
(99.85)
49.80
7.95
75.04

 

Weekly review
26/06/09
03/07/09
Points
%
Sensex
14,764.64
14,913.05
148.41
1.01%
 Nifty
4,375.50
4,424.25
48.75
1.11%

 
The stock market remained bullish amid high expectations about sops to the industry and economic reforms in the Union Budget to be presented on Monday (6/7/9). During the week, Economic Survey has recommended sweeping tax reforms and asked the government to revitalise disinvestment programme and plan to generate at least Rs 25,000 crore per year while the Railway Budget left freight rates and passenger fares unchanged with a focus on upgrading infrastructure.
 
1st week of July ‘09 – Budget week – Sensex lost over 9% post budget  
 

Daily review
03/07/09
06/07/09
07/07/09
08/07/09
09/07/09
10/07/09
Sensex
14,913.05
(869.60)
127.05
401.30
(11.69)
(253.24)
Nifty
4,424.25
(258.55)
36.45
123.25
2.05
(77.05)

 

Weekly review
03/07/09
10/07/09
Points
%
Sensex
14,913.05
13504.22
(1,408.83)
(9.45%)
 Nifty
4,424.25
4003.90
420.35
(9.50%)

 
Why markets don’t like Pranab babu
 
Indian’s stock market nose-dived after finance minister completed his nearly two-hour-long budget speech in Parliament on Monday. Why did the sensex plunge 869 points when the FM did not do anything negative in terms of imposing new taxes on the corporate world? Mr Mukherjee also removed the much disliked Fringe Benefit Tax which was a thorn in corporate India’s flesh.
 
In fact, he surprised businesses on the upside by not rolling back the 4% central excise duty cut effected over the past several months as part of a massive fiscal stimulus to deal with the economic recession engulfing the developed and many developing economies. India, of course, survived the deep recession and registered 6.7% GDP growth during 2008-09.
 
He gave an even higher fiscal boost by increasing plan expenditure substantially. The total expenditure he had earmarked in his interim budget barely a month before the general elections was Rs 953,000 crore. He increased this to Rs 1020,000 crore in the full budget he presented on Monday. He increased allocations for various social sector projects in a big way. He tried to throw goodies at everybody. Yet the stock market gave him a thumb down. Why?
 
This is largely because expectations had run very high that UPA’s first budget would outline a big vision for economic reforms of the kind the markets and foreign investors love. The Economic Survey presented two days ago also sounded very positive on these reforms.
 
 
STOCK MARKETS
 
These excessive expectations were belied so the market’s first response was to tank 870 points. However, the market will soon realise its folly and start looking at the budget proposals in a different light in the days ahead. The notion of economic reforms is also changing rapidly in the backdrop of what is happened around the world today. Mr Mukherjee deliberately recalled bank nationalisation by Indira Gandhi as something that might have contributed to India’s banking system weathering the global financial storm. The markets, perhaps, did not like the way the thoughts was articulated. It probably took it as a sign that financial sector reforms in India will happen very slowly, if at all.
 
After all India, as a growing economic power, would want its banks to achieve global scale and compete in the global market. But the notion of nationalisation can appear very inward looking. The overall perception Mr Mukherjee might have generated is one of being an old school, pre-liberalisation finance minister who couldn’t care less if the government had to spend its way out of recession. Massive increase in the outlay for various social sector schemes only reinforced this impression. However, in these extraordinary times the markets will soon reconcile with more money being put in the hands of the poor. In fact, substantially higher public spending in rural areas – often denounced as profligate by market analysts - is what has kept up consumption demand and GDP growth so far in 2008-09. Of late, businesses have begun to appreciate acronyms like NREGA, JNNURM, etc!
 
The fact is the UPA government will pursue reforms at its own pace. The markets were expecting policy changes largely because the first budget of any government is full of big bang pronouncements. Most elected governments frontload market reforms. Such reforms stall when governments come closer to general elections. But, this time it was different. The first budget itself seemed like a very political one. This has happened because the Congress party now realises that the expectations of Bharat from relatively prosperous India are running high. Rural India is much more politically empowered now and demands its share of welfare from the government. The Congress, therefore, is taking the promises made in its election manifesto very seriously. Traditionally, political parties make tall promises in election manifestos, and forget about them after the elections. The UPA’s first budget shows that there is a mindset shift in the way the political class treats manifesto promises.
 
The FM said at the beginning of his budget speech that young India had become very aspirational and demanding across the urban and rural segments. Delivery of public goods and services coupled with decent governance is what people of India expect. The UPA’s first budget has tried to articulate that. Of course, the markets did not quite like it. But markets will soon realise reforms are taking on a totally new meaning, both in a political and conceptual sense.
 
2nd week of July ‘09 – Sensex gained over 9%     
 
FM rekindles reform hopes in budget reply
 
Finance minister on Tuesday made good the reform deficit of his budget speech, asserting the government’s commitment of disinvestment, financial sector reform, fiscal discipline and other policy and administrative reforms. He stoutly defended in Lok Sabha debate on the budget. He clarified that government’s borrowing would not impact the cost and availability of funds for private sector investment.
 
He responded to the criticism on the runaway fiscal deficit, giving two-fold defence: one, without expanded and sustained government expenditure, it would not be possible to sustain the economy’s growth momentum, and, two, the government is committed to bringing the deficit down to 5.5% of GDP in 2010-11 and 4% of GDP in 2011-12 as the economy gets back to its growth trajectory.
 
 
STOCK MARKETS
 
Rather than being defensive about the fiscal deficit, the FM said it is the government’s expenditure, financed by unprecedented levels of borrowings that had allowed India to continue to grow even as most parts of the world contracted. “I have taken a tremendous step as finance minister with the hope that there will be a turnaround.” On the back of positive signs in sectors like cement, steel, consumer durables and automobiles, the government said there were some early indications of economic recovery. “This is a small beginning. We are not out of it yet. International business scenario is still not out of the wood. It will take some more time. But our strategy of generating internal demand, enhancing purchasing power, has helped us,” the finance minister said.
 
Brushing aside criticism, muted and vocal in varying degrees from allies Trinamool Congress and DMK, and leaving no room for doubt over the Congress’ dominance of the ruling coalition, he asserted that the government would go ahead with selling shares in public enterprises. Pointing at reports on his “silence” on disinvestment issues in his budget speech, Mr Mukherjee said the President’s address to the joint session of Parliament had clearly spelt out the government’s policy on disinvestment. 
 

Daily review
10/07/09
13/07/09
14/07/09
15/07/09
16/07/09
17/07/09
Sensex
13504.22
(103.90)
453.38
399.54
(2.99)
494.67
Nifty
4003.90
(29.85)
137.35
122.10
(2.10)
143.55

 

Weekly review
10/07/09
17/07/09
Points
%
Sensex
13504.22
14744.92
1240.70
9.19%
 Nifty
4003.90
4374.95
371.05
9.27%

 
Periodic review
 

Month
June ‘08
June ‘09
July ‘09
Date
30.06.08
30/06/09
17/07/09
Sensex    
13,461.60
14,493.84
14,744.95
Points
 
251.11
%
 
1.73%

 
6-Monthly review
 

 
Month
 
Dec ‘07
 
June ‘08
 
Dec. ‘08
 
June ‘09
 
Date
 
28/12/07
 
30.06.08
 
31/12//08
 
30/06/09
 
Sensex     
 
20,206.95
 
13,461.60
 
9,647.31
 
14,493.84
 
Points
 
Base
 
(6,745.35)
 
(3,914.29)
 
4,846.53
 
%
 
Base
 
(33.38%)
 
(28.33%)
 
50.24%

 
 



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