Low expectations from Budget 2011

February 23, 2011

(The views expressed in the column are the author’s own and not those of Reuters)

Low expectations from Budget 2011There was a time when Budget day in India (typically the last working day of February) meant a good part of the country’s population virtually came to a standstill in anticipation of what the Budget had in store for them in terms of taxes, duties, price increases, etc.

Over the last few years, this has undergone a change. Hopes and expectations from the Finance Budget have reduced to an extent that, as in many other countries, it’s gradually becoming a non-event. What could Finance Budget 2011 have in store for us, for the economy, for the capital market?

The Finance Budget is essentially a CFO’s (Chief Finance Officer) report on the economy. It tends to take stock of the year gone by, tries to define the direction that it will take in future, and lists out measures which will help nudge the economy in that direction.

In recent times, the one aspect that the capital markets have keenly watched out for is whether it is a growth enabling Budget which can possibly catapult the economy closer to a double-digit GDP growth. The other key message being watched for has been the government spending on infrastructure, particularly on power, roads, ports, etc.

What has clearly been felt by the corporate sector is that despite enjoying a majority in parliament, there has been no clear direction spelt out by the government to spur growth and that the domestic economic growth has been in spite of the government. A consistently high level of inflation and a string of governance issues which have come to light recently, have led to disillusionment among the common man.

So what is the corporate sector or the capital market really expecting from the Finance Budget 2011? This will be yet another year when the corporate sector will keenly watch specific pronouncements about the government’s infrastructure spend, for steps to attract sustainable and healthy FDI into India, investments into retail, into insurance and other sectors.

Announcements on the Direct Tax Code (DTC) will be closely watched for a whole lot of changes expected in taxation including that on capital gains. The Goods and Services Tax (GST) could be another game changer for several businesses, and will be anxiously looked out for.

This is not to say that it’s an easy task for the government. Challenges in the form of inflation, higher interest rates, rising fiscal deficit, globally rising oil prices, etc will constantly hound the decision makers. Being put on the defensive due to corruption issues does not help matters either. However, that is the very reason why a sincere effort can result in tremendous turnaround in stock market sentiment.

Low Budget expectations have been reflected in the lacklustre and range bound movement of and low volumes on the Indian stock markets. What this could mean is that if there is even a tangential indication of the government’s seriousness to show a clear roadmap for long-term economic growth, FII inflows could start showing a reversal and we could see a smart stock market upmove.

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