It’s budget time in India once again, the annual month of anxiety and expectations that everyone awaits with bated breath.

Budget 2013 will be especially important on two counts. Coming as it does ahead of crucial state elections, the Feb. 28 budget could be outrageously populist. But with the government not really following through on its policy reforms in recent months, the question is how intent can translate to concrete action. Tough decisions are needed with a greater focus on growth.

While Finance Minister P. Chidambaram visited Singapore as part of a four-city tour to woo global investors and boost capital flows into India, he did little to convince the corporate sector in the country to make additional investments.

The government may be going out of its way to attract foreign direct investment but it has to do more to gain the confidence of local businessmen and turn around the investment cycle. Which is why this year’s budget is important.

Pre-election budgets in independent India have always been used to seek votes, a subsidy-filled exercise that turns a blind eye to one key parameter: the fiscal deficit.

If one views it from this perspective, we could be in for more rural development schemes, greater focus on farmers, more primary education schemes and more government spending on rural healthcare.

It’s important to understand that all these are an essential part of a good budget. But if spending increases on funding and subsidies with little focus on economic growth, it’s not going to help things.

Forget ambitious targets which are unachievable, New Delhi needs to come up with a clear road map to control fiscal deficit. This should be backed by a cut in subsidies.

Growth remains key. What India needs today is an out-and-out focus on growth in the budget, and one doesn’t need to be a Nobel Prize winning economist to know that.

The country needs a budget which further fuels the India consumption story. We need a budget that gives India its much needed infrastructure. The supply chain is another concern and the government needs to address this to get inflation under control.

Clarity on implementing the Direct Taxes Code (DTC), the Goods & Services Tax (GST) and land and labour reforms will be eagerly awaited. Above all, we need a budget that creates a healthy industrial environment where the investment cycle stimulates adequate capital expenditure and a surge in economic growth in the next few years.

This list is not too ambitious and should be an important part of the budget in any growth-focused economy. Anything less would only show a lack of intent by the government to follow up on the reforms already announced. Anything more and the economy will move towards that 8 percent growth mark sooner than later.

If calendar year 2012 was the year of scams in India which helped induce some much needed government reforms, the year 2013 is expected to be a year of hope and expectation for India and India Inc. There are expectations on better political governance, fall in inflation levels and hence interest rates, creation of an investment friendly business environment and lots more. It’s also the year with the last finance budget before the 2014 general elections.

Towards the fag end of 2012 the inactivity on the part of the government appeared to have been shrugged off in terms of policy action. This helped improve business confidence a shade. However, there still appears to be near total inaction on the part of corporate India to kick start the investment cycle in any major way. Are high interest rates the hurdle? Is lack of government decision making still a big hurdle? Is the business environment conducive to a larger domestic capex commitment? The answers appear to be almost obvious.

It did appear peculiar that at a time when scam after scam was being detected and there was complete policy paralysis in the government for the first nine months of the year, FIIs invested more than US $ 23 billion in the Indian capital markets in 2012. If consistently more reforms are announced by the government, one can expect close to this figure being invested again by FIIs in 2013.

The key to greater global investor confidence and domestic business confidence will lie in the urgency that the government will show for labour reforms, land reforms, implementation of the new Direct Tax Code (DTC) and the Goods & Services Tax (GST). All this can help bring fiscal deficit under control but most importantly, it can raise the governance bar to an extent that India Inc has greater confidence to create larger capacities within the country.

To expect a runaway rise in Indian equity markets during 2013 would be a folly. There are too many areas of concern in the domestic and global economic environment for that to happen. Much of domestic middle class savings continue to be diverted towards a passive asset like gold or to post office savings which are utilised relatively inefficiently by the state and central governments.

A pre-election subsidy heavy finance budget could derail fiscal deficit sharply. Globally, Europe is unlikely to be out of the woods before mid 2014 and the United States has its own serious fiscal issues to grapple with. On the economic front, a 6-6.5% GDP growth during FY 2013-14 and sustained policy reforms should be considered a possibility. For the equity markets, a potential 10% to 15% rise during 2013 taking the Sensex in the vicinity of 22,000 based on continued FII flows can be expected.

SECTORS IN 2013

The valuation gap between private sector banks and mid-sized PSU banks has widened considerably during the last quarter. One can expect this to be bridged to some extent. The asset quality concerns of PSU banks are likely to gradually diminish over the next couple of quarters.

The IT sector may continue to underperform, but old economy sectors like cement, metals will gain further momentum. 2012 favourites like pharmaceuticals and the consumption stocks can be expected to continue their upward march, but at a slower pace.

Essentially any upward swing in economic scenario hinges on the political will to set things right. Corporate India is ready out there to up their stakes if the government creates the environment. The ball is clearly in the government’s court.

It’s now been close to four years since domestic and global financial markets have been in a state of flux, plagued by uncertainty, as a slowdown ensures that government after government revises its growth forecast downwards.

The IMF, the rating agencies and the entire tribe of analysts have been either on a rating downgrade spree or have substantially revised growth projections of economies across the globe. Governments globally, on the other hand, have been splashing around to stay afloat by announcing policy measures or financial subsidies to support their economy, or have been just sitting around doing virtually nothing, like in India.

While the consumption story and the sheer weight of the FII fund inflow into the capital markets continues to support the Indian equity markets, concerns within the domestic economy abound. Coalgate, 2G, GAAR, rising crude oil price, continuation of huge petroleum product subsidies leading to a huge fiscal deficit and leaving the largest petroleum companies in India bleeding under the burden of losses, high levels of inflation, high interest rates eating into company profits and preventing revival of the investment cycle, complete lack of will to undertake policy reforms, unheard of levels of corruption, a continuing logjam in parliament due to Coalgate, the list is endless. All this has led to the impending threat of a further downgrade of the Indian economy — virtually to junk status.

What will all this lead to? A mid-term poll in India? Investors losing faith in equity markets? Will equity markets head steeply downwards? There are too many questions with no visible answers.

The fact remains that despite knowning about a serious governance deficit, a burgeoning fiscal deficit and sharply falling GDP growth, FIIs have pumped in more than $10 bln in the Indian equity markets YTD. This clearly indicates that when compared to other economies, 5.5 pct GDP growth — high in relative terms — will continue to attract global investments. Secondly, unless India runs into a de-growth scenario (not impossible for its set of politicians and bureaucrats), we may not see a run on Indian equity markets. In other words we can rule out a sudden sharp crash.

The Indian economy and the government had everything going in its favour a few quarters back, but has completely lost momentum, lost the faith of several large investors globally, lost the confidence of its prominently contributing corporate sector, all of this its own doing.

Should we have a mid-term poll, even though there is a risk of a hung parliament or the risk of a bunch of regional parties squabbling for political power? Given the current set of macro-economic statistics, a mid-term poll with even a remote chance of a stronger government which will take decisions, is better than a lame duck coalition unable to take any decision.

Quantitative easing and long-term refinancing operations (LTROs) notwithstanding, the global economy is nowhere close to a convincing turnaround yet. Can the Indian economy then go back to above 6 pct GDP growth, or stonewall the possibility of a downgrade? Appears highly unlikely. If there is a downgrade, will it scare away global investors? In the short term it just might, but again, appears quite unlikely. The redeeming factor is consistent growth in the face of this adversity, of sectors like pharmaceuticals, FMCG, IT, two-wheelers, banking, etc. This will ensure that a sharp sell-off is prevented.

Will the equity markets come anywhere close to the previous highs this calendar year? Again appears highly unlikely unless there are sharp interest rate cuts, or the government transforms itself on the policy front. In the best case scenario, India will still be stuck in a rut for at least 2 – 4 quarters of lacklustre growth.

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.

About a year back in November, we were at the highest ever level of the Sensex with hopes of moving higher. A year hence, as we inch closer to the end of 2011, the Sensex has fallen more than 26 pct from its peak, and then recovered a bit.

In the interim, there have been bouts of volatility, long periods of dull range-bound movements, and a lot of events and learnings from the domestic and international markets.

The biggest learning in the last year has been for the present generation of investors who would not have seen such a long period of stock market underperformance and for whom the definition of long-term has changed. For those who started investing after 2003, the last three years have been an excruciating period yielding seriously negative returns. Most of these portfolios are still a few years away from returning to green. The key lesson is, short-term is out and long-term is in, with long-term to be defined as more than three years.

The other key learning during 2011 has been for the Indian corporate sector, where some hardly ever hedged their forex exposure. It was largely perceived by these companies that the rupee would remain stable and the Reserve Bank of India (RBI) would intervene whenever there were sudden bouts of currency inflows or outflows.

This prevented several mid-sized companies from taking a forex cover with the objective of saving costs. After losing significant sums during 2011 on account of foreign currency fluctuations, risk management for forex has all of a sudden become the buzzword for companies that have foreign currency exposure. The corporate sector is unlikely to take the currency fluctuations for granted any longer.

It is gradually becoming apparent that after a few years of excellent domestic economic growth, even when the global economy was struggling, the growth momentum for an 8 pct (or thereabouts) GDP growth for the country cannot be taken for granted any more. Estimates for closer to 7 pct GDP growth for 2011-12 have already been announced by rating agencies. The decision paralysis and governance deficit within the government is at an unanticipated new low and threatens to pull down GDP for 2011-12 to 6.5 pct levels. The greater threat, however, is for the Indian corporate sector — starting to look overseas for expansion rather than investing in India, a far cry from the ‘India shining’ story that used to pull large investments from other countries into India.

Unless the government rises above politics and announces some key policy reforms soon, funds will exit India and we could see a new low for the Indian rupee in the near future. The crisis that a 55 or upward level of the rupee can invite is unfathomable.

In a year when both the euro zone and the U.S. were in a crisis and not attracting global investments, and when emerging markets correspondingly did see good inflows, the fact that the Indian equity markets had a net FII sell figure of close to 0.5 billion dollars (in early December), is an indication of the level of low FII confidence in the Indian economy. The key takeaway is never to take FII investments for granted even if GDP growth is healthier than several other countries. With both business confidence and domestic investor confidence at a new low, and the government in a functionally paralytic mode, 2012 is unlikely to start on a very positive note.

With an uncertain 2012 ahead of us, what should be the investor’s course of action at current levels? With the Sensex at close to 16000 levels, and with downward earning revisions expected for 2011-12 and 2012-13, valuations are already rich. This makes buying a clear no till markets correct further by 5 – 10 pct from current levels, unless of course one is willing to patiently sit out the investment for more than two years. A host of domestic issues will ensure selling at every rally. Selling out at these unattractive levels would be a folly. Under the circumstances, a solution to the euro zone problem appears to be the one factor that could trigger a sharp rally.

H1 2012 doesn’t look too optimistic, hopefully H2 2012 would bring in a change — even a mid-term election in India. If you do want to stick your neck out, buy with a three-year horizon. If not, tide the uncertainty out and wait for a positive turn of events.

If one were to evaluate global events of the last four years dispassionately, the subprime mess in the U.S. and the imminent debt default by Greece (and four other countries to a lesser extent) and the resultant crisis in the euro zone have virtually held the global economy to ransom.

This generation of bankers, analysts, bureaucrats, politicians or even economists, has not been witness to the kind of convolutions that governments and markets are passing through. All this has also led to credit rating agencies taking some surprising and some highly inexplicable decisions.

The outcome of this extraordinary, though not entirely unexpected, chain of events has been various out-of-the-box decisions and/or suggestions like introduction of a new tax on the rich called the ‘Buffet Tax’, an offer by Brazil to start funding the euro zone deficit (much like the tail wagging the dog), of breaking up of the EU, of easing Greece out of the EU, of issuing a new layer of ‘Euro Zone Bonds’, tranches of quantitative easing by the Federal Reserve, etc. The pendulum of risk aversion has swung so sharply that gold and more recently the dollar are the only asset classes that have performed in the last few quarters.

The uncertainty created by persistent delays in a clear decision within the euro zone has created a lot of volatility across markets and asset classes. The latest potential solution of investors taking a 50 pct cut in their investment in Greek bonds will shave off billions of dollars of assets from a few European Banks’ books and impair their balance sheets by raising a serious question mark on their overall asset quality.

Bank rating downgrades have already happened in Europe and unless governments capitalise some of them soon, an impending banking crisis is brewing in some European countries. Due to their huge exposure to Greek bonds, two of the largest French banks have already been forced to announce a 110 bln euro asset liquidation over the next few years to strengthen their balance sheets. Can you imagine the impact of such a measure on global businesses in various countries?

The kind of volatility across bond, forex, commodity and equity markets that we have seen globally over the last few months has been immense, and unknown to many, with far reaching implications. If a close to 9 pct rupee devaluation (vis-à-vis the dollar) over the last three months can create havoc amongst businesses, imagine the kind of impact on P&L a/cs, of bond price movements on profitability of some global banks, of importer or exporter revenues in case of adverse forex movement. The fact that company budgets have gone awry or government fiscal deficits estimates have increased will be apparent only after a lag. It’s best to be prepared.

Amidst all this mayhem in the bond markets, there has been an interesting fight for market capitalisation leadership in equity markets in certain countries. Let us take the case of the U.S. and India. Over the last few months, at above $400 bln, Apple overtook Exxon Mobil as the world’s most valuable company in terms of market capitalisation, before the launch of the iPhone 4S brought it down to $350 bln. After several years of dominance, Microsoft at $219 bln briefly gave way to IBM as the second most valuable software giant. At $ 72 bln now, Citigroup lost more than 50 pct from its 52-week peak market capitalisation and has allowed JPMorgan to surpass it and become the largest bank by market capitalisation in the U.S. at $76 bln. For a brief period, Coal India overtook long time leader Reliance Industries in the domestic space, amidst colossal erosion in investor portfolios over the last three years.

All this market behaviour gives rise to several unanswered questions.

When a financial robust government-owned bank like SBI is downgraded while several weaker European banks are rated far higher, are the credit rating agencies above board? Do they have a ‘consistent’ rating rationale? How long will the current global recession last?

What will be the shape of the euro zone over the next few years? Will it stay intact or will it split up?

A lot of focus has been on European banks’ exposure to Greek bonds, what about their exposure to debt issuances by Italy, Portugal, Spain and Ireland? Italy was downgraded 3 notches by Moody’s on Oct 5. What impact will this and other downgrades have on banks’ NPAs and their ratings? Obviously it will lead to another bout of crisis and uncertainty.

In the market capitalisation sweepstakes, which will be most valuable company over the next few years? Will the Chinese conglomerates overtake the Apple and Exxon Mobils of this world? My take is that over the next five years, Google (presently at $162 bln) will overtake both Microsoft and IBM in terms of market valuation. Closer home, Reliance could give way to other PSUs, even as PSU banks like SBI (at around $23 bln) will inch closer to the Citibanks of the world.

Various global markets are presently in a state where there are too many questions without any convincing answers. The fact remains that the contagion effect of the developments in the EU will ensure that at least for a few more months, the global economy grows at a slower pace. Undoubtedly, its impact will be felt on the Indian markets too.

The unthinkable (for some) happened last week when the U.S. economy was downgraded from ‘AAA’ to ‘AA+’ with a negative outlook by Standard & Poor’s, one of the three large global rating agencies.

That led to an interesting situation where European economies like France and the UK are rated higher than the U.S., despite huge concerns about their financial condition. The event would undoubtedly have hurt the American ego, particularly since S&P announced that there could be more downgrades in the offing.

That this was an event that was imminent is accepted by many, but what is in store for the global economy and the Indian economy going forward?

There are several concerns that will keep haunting the central banks, the equity markets and governments around the world. These include:

-         What if the UK and France are downgraded too?

-         Will the other two rating agencies also downgrade U.S. in a few weeks’ time?

-         How long before some U.S. companies and state and local governments get downgraded?

-         Why is Spain still rated AA, Italy A+ and Ireland BBB+, when India and Brazil are rated ‘BBB-‘, by Standard & Poor’s? Will these European economies be downgraded soon?

-         At ‘BBB-‘, why are India and Brazil rated the same as Portugal which has serious economic issues?

While a downgrade of one or more of the European economies is waiting to happen, one can rest assured that any such event can and will have a severe contagion effect on the other EU economies due to their linkage. Several European banks would undergo a rating change too under such circumstances.

The fact remains that even as far as the EU is concerned, the situation is delicate and we continue to tread on thin ice. Amidst all this is the bigger question of how long the U.S., being the world’s largest economy, will take to come out of the recessionary condition. One could just see another round of QE3 in the U.S. or a round of bank funding that we witnessed by France and the UK in 2008.

The other issue is of fiscal discipline by these countries which are facing a deep financial crisis. The easiest thing to reduce deficits is to raise taxes. What is always difficult for governments is to reduce expenditure as this could further lead to potentially slowing down the economy. It’s always a fine balance that needs to be created between inflationary pressures (that events like quantitative easing measures create) and recessionary conditions (which reduced expenditure can potentially create).

Given the global concerns, world equity and commodity markets will be affected even if they may not be directly impacted by the downgrade. Global currency and bond markets have already seen considerable volatile movements due to movement of large funds into and out of them.

While crude and commodity prices have eased post the event, how long they continue to fall, or sustain at lower levels will determine the inflation levels in several economies, as well as profitability of several companies in the manufacturing sector.

Select Asian economies on the other hand presently face the opposite task of inflationary pressures due to fast paced growth. It is due to this that equity markets in select Asian economies will possibly stabilise faster than the European or U.S. markets.

Risk aversion has ensured that funds move to safer asset classes like gold. One should not be surprised if part of these funds move to emerging economies once there are signs of stability in the global markets.

As far as Indian markets are concerned, once the global negative news subsides, it will be a choice between fundamentals, liquidity and valuations. While interest rate concerns, domestic scams and lack of decision making by the government continue to pull down sentiment, fundamentals remain strong and valuations are becoming increasingly attractive.

What is missing is the FII liquidity which can drive the markets upwards. In a situation where both the U.S. and EU face deep concerns over their fiscal policies, it may not be too long before emerging markets and India start attracting flows. We do need to closely watch policy action by the RBI.

Nibble into the equity markets if you have the risk taking ability to see some more volatility arising out of possible announcements from the U.S./ EU economies. If not, wait till there is greater stability in the global markets.

The Reserve Bank of India on Tuesday quite unexpectedly raised interest rates by as much as 50 basis points. It was a move that shocked the street and took a lot of people by surprise. It was also a move showing aggressive intent at inflation management.

How is this announcement being viewed by the street? What are the implications of such a hike when interest rates were expected to have almost peaked?

It’s an accepted fact now that various efforts at inflation management have either been unjustifiably inadequate or completely missing. It’s also an accepted fact that much more than this being a demand-led inflation, this is a lack-of-adequate-supply led inflation or what is better known as inadequate supply chain management. Hence raising interest rates at this pace (11 times in the last 17 months) cannot achieve the kind of impact that improvement in supply through preventing hoarding or improving farm produce can.

To play good music one needs an orchestra with several musicians playing various instruments simultaneously. On the other hand what we have is the RBI alone trying to play its instrument and others (read the government) just watching in the hope that the lone musician will create the effect of an orchestra, and bring inflation under control. Merely raising interest rates will not bring down inflation fast enough.

With limited hope of inflation coming under control in the next quarter or two, one should expect more rate hikes in the coming months.

A couple of observations made by the RBI governor warrant a mention. His concern that meeting the fiscal deficit target could be a challenge, and the fact that economic growth had moderated but there is no economic slowdown. The latter observation is important as it is contrary to the observation made by several Bank heads as well as industry chiefs. If there isn’t an economic slowdown, this, and the subsequent interest rate hikes will ensure that. Importantly, the subsidy burden, the excise duty cuts, etc will ensure a higher fiscal deficit, and that can be inflationary too.

What this rate hike will achieve is to slow down consumer spending and the clamour for housing and vehicle loans. Will it also slow down investment spending by the corporate sector? Well, large corporates will always have the luxury of continuing their investment spends by borrowing at lower rates from global markets. It is the small and mid-sized companies that will feel the pinch and postpone capex. Even working capital loans at the enhanced cost will further hurt these small and mid-sized companies whose margins have been under pressure in light of increasing competition or higher input costs.

For the street, this was an unexpected development and it reacted accordingly. With global economic uncertainties in the U.S. and the EU, a constant threat of sharp rating downgrades for several countries, the persistent fear of potential payment default by any one country resulting in a cascading effect, investors will be wary. While earning downgrades have often been spoken about, we haven’t seen any drastic downgrade reports or even a downward re-rating of a sector (except maybe the real estate sector, that too more for reasons of governance, or the lack of it). Isn’t this rate hike enough reason?

With economic uncertainties globally as well as nearer home in abundance, Indian equity markets will continue to remain in a range bound mode for a while longer. Inflation, which has been the bugbear for the Indian economy for almost 2 years now, will be very closely watched as the size and frequency of subsequent rate hikes could create seriously negative sentiment all round.

The Indian stock markets are in such a state of nervousness these days that the moment somebody shouts ‘Boo’, it triggers a bout of panic selling.

That’s what happened when the RBI announced the anticipated rake hike or when a section of the media reported rumours about the Mauritius tax treaties being revised and capital gains on Mauritius-based funds being taxed.

With more rate hikes expected, are we headed for another prolonged bear phase? Will we see the same kind of GDP growth during 2011-12, as was anticipated before inflationary pressures and the consequent rate hikes hit the economy?

We have seen as many as 10 interest rate hikes since March 2010 but inflation shows no signs of coming under control. While the rate hikes have started hurting the corporate sector, the RBI has observed it is willing to sacrifice growth (in the short-term) in order to bring inflation under control.

Despite a good start to the monsoon, food prices have started rearing their head sharply again, indicating that inflation for the month of June is only going to rise further. It is also important to keep at the back of the mind the fact that the petroleum products price hike had been postponed due to state elections and is imminent.

Rising fiscal deficit is the other concern which hasn’t raised too many eyebrows yet. Pressure arising out of petroleum and other subsidies will ensure that cries for raising diesel, petrol and LPG prices will get stronger, thereby nudging inflation upwards. Consequently, more rate hikes can be expected in the next few months.

Think about it, why would people rush to buy cars when the petrol price is nudging 70 rupees (from around 45-rupee levels just about a year back) and expected to rise further? Why will they not postpone their decision to buy a house when rising interest rates ensure that their 15-year loan gets extended to 20 years, or monthly loan instalments keep rising, making family budgets go haywire.

At a time when monthly surpluses in middle-class India are shrinking due to rise in costs of foodstuffs, spending on comforts and luxuries will clearly tend to take a back seat.

Financial crises in some of the European economies clearly appear to be far from over. The fear of banks globally getting affected due to this crisis will ensure risk aversion, and will keep funds from getting invested into equities, more particularly emerging market equities, for the time being.

A market like India which is largely dependent on FII funds for sustaining upward movement will witness a temporary drying up of sustainable FII liquidity, valuations notwithstanding.

High borrowing costs and an inability to raise adequate funds from equity markets at a decent price would mean that corporate sector growth has to get affected. Fresh capex would come at too high a cost for any company. Typically, the equity and the debt capital markets have an inverse correlation. In a high interest rate regime, equity markets cannot sustain at higher levels for too long.

Importantly, some of the core sectors have already started witnessing a slowdown, gradually getting reflected in the softening IIP numbers. With clear signs of governance deficit and lack of decision making in political circles, achieving GDP growth at the projected 8.5 pct levels will be a serious challenge.

Lower commodity prices and gradually inching down global crude oil prices notwithstanding, there’s too much uncertainty and indecision out there for equity markets in India to rally convincingly. It would be a folly to get carried away if they do. However, bull and bear market cycles have shortened over the years, and a bear phase beyond 2 or 3 quarters looks difficult. At the current level of valuations of several mid-cap and large-cap stocks, each sharp fall in this bear phase would be a good opportunity to buy.

There 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.