Keeping fingers crossed in the run-up to Budget 2012

March 9, 2012

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

It’s interesting that in India, the run-up to the annual Budget means individuals, companies and industry associations keep their fingers crossed in the hope their annual budgets don’t get affected by the announcements of the Finance Minister.

Even the market capitalisation fluctuates several percentage points in the matter of a day based on the pronouncements in the budget. It continues to be an event everyone looks forward to each year and 2012 may be no different.

This will be the eighth finance Budget in a row by the current government, and the past seven have struggled to provide any direction to the economy or to drive it upwards. It’s an admitted fact today that economic growth in India is driven by the private sector, in spite of the government and the policy paralysis that it is so closely identified with now. The opportunity and the need for impetus in policy and government support relating to education, medical facilities, infrastructure, FDI among others is huge, if there is a political will to drive change and growth in these areas. Nonetheless, government policies define the cost of day-to-day life and hence the keen interest.

Beside the fundamental expectation that policy announcements need to be made to stimulate the growth and investment cycle, there will broadly be five areas in which policy measures will be expected.

– Clarity is required on the actual implementation of the Direct Taxes Code (DTC) and the Goods and Services Tax (GST). Both these policy announcements govern day-to-day lives of the common man in the country

– While the fiscal deficit continues to grow each year, it is not really reflected in growth in sectors where government spending and support is essential. Measures to contain fiscal deficit will be eagerly awaited

– Inclusive growth has often been spoken about, with limited policy measures to show a clear direction to achieve it. A clear lack of political will shows up when projects like the unique identity project which can bring about both inclusive growth and lower corruption get unduly mired in the political quagmire

– No economy can grow in a sustained manner without adequate infrastructure creation at various levels. This government has been excruciatingly slow in providing an impetus to a sector which can change the face of the country and the inertia is distinctly unnerving

– It is well accepted now that economic growth for 2011-12 is likely to be below 7 pct. Political compulsions after the Uttar Pradesh election results aside, there can be enough done to stimulate growth for 2012-13 to take it above 8 pct. But whether the government has the political will to achieve it, will show up in the vigour shown in the upcoming budget.

In the same way as the stock markets gyrated in a state of uncertainty before the UP elections, investors will be hesitant to take long positions in the equity markets for the next week during the run-up to the budget. Given the attractive valuations and the growth opportunity in them, sectors like power, infrastructure, capital goods and cement can come into favour depending on whether there are measures to invigorate the investment cycle.

If you do want to bet on the markets, bet on these sectors, though a better strategy would be to wait and watch till the Finance Minister shows his cards. Will the finance budget live up to the common man’s or investor’s expectations this year? For the moment, only the Finance Minister can tell, while we keep our fingers crossed.

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