A positive, but not a reformist Budget: MF Global

In the last Union Budget speech, the Finance Minister had said that "a single Budget speech cannot solve all the problems of any economy but it is an instrument to solve those problems". His measures in the previous Budget helped India to weather the storm of the global crisis well. The FM continued to adopt a similar stance in terms of the policy direction while pledging to improve fiscal discipline. The FM has outlined his intent to make some structural changes to achieve higher growth, maintained focus on infrastructure spending and continued to give more disposable income in the hands of the 'Aam Aadmi'.

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Fiscal deficit ran at 6.7% of GDP in FY10 due to expenditure on the stimulus package to perk up the economy, relief to environment-related calamities, agriculture and fuel subsidies, etc. This year, the government has targeted to slash fiscal deficit to 5.5% of GDP on the back of strong economic growth–a step towards fiscal consolidation (4.8% in FY12, 4.1% in FY13). The pre-Budget move to reform India's archaic and onerous fertiliser subsidy system is a timely acknowledgement of the need to rein in the fiscal deficit. This should serve as a strong signal to the investors about the intent of the government to cut debt-especially pertinent, given the flight of capital from emerging markets this year on concerns over the sovereign default problems in the now infamous PIGS (Portugal, Ireland, Greece and Spain) economies. Setting such targets to control fiscal deficit will help a country like India (which has the lowest sovereign debt rating among the BRIC nations) attract foreign investment.

The other major positive factor of the Budget came in the form of lower net market borrowing (at Rs 3.45tn) based on robust revenue collection, 3G auction, disinvestment and contained expenditure.

Infrastructure continues to be the focal point of spending outlay of the Government for the coming year. The government has allocated close to Rs 1736bn or 46% of the total plan outlay towards infrastructure spending. The targets kept for IIFCL disbursements and refinancing (to banks) of infrastructure projects have been set at 2x the achievements of the current year. During FY06-10, the expenditure on infrastructure grew at a CAGR of 18%, while FDI inflows grew at a CAGR of 60%. However, with FDI flows growing only at 14% during FY10 and infrastructure spending growing by 9% in FY10, we believe that the move to rationalize the FDI norms and simplify the regulations is aimed at targeting FDI flows into infrastructure. This will help to meet the expenditure over and above the budgeted outlay to give these initiatives further impetus.

Overall, we believe this is a positive, but not a reformist budget. Fiscal prudence, simplifying FDI norms, continued thrust on infrastructure development, and inclusive growth are surely long-term positives for the equity market. However, these measures do not call for euphoria in the near term and we believe that our market would continue to depend on global economic news flow. We maintain our cautious stance on the market for the near term. Read More>>