Flat budget gives further fizz to IndiaÆs stock market

IndiaÆs stock markets scale new high of 10,370 on increased liquidity post 2006-07 Budget announcements.
India's benchmark Sensex Index hit a new record high of 10,370 yesterday (February 28) after finance minister Palaniappan Chidambaram delivered his third budget. The United Progressive Alliance government minister is now something of a veteran at the task, having delivered a total of five budgets over the course of his political career.

JPMorgan's Indian Head of Markets V. Srinivasan believes the market's strong 0.9% upswing can be attributed to a build up in big cash positions that investors, "Immediately ploughed into markets once no untoward news emerged."

As had been widely predicted, Chidambaram did not announce a second ôDream Budgetö. This had been the billing for his 1997-98 budget, which carried a host of noteworthy reform measures.

This time round the current government is engaged in maintaining a delicate balancing act between the populist measures demanded by the Left and the capitalist measures sought by industry. But as analysts point out, budgets are likely to have successively less of an impact as India gets further down the path to liberalization.

Srinivasan feels it is important to note that, ôEven though nothing dramatic was announced, there was also no back tracking. Indeed announcements point towards consolidation of reform measures.

"The numbers corroborate an excellent performance on the fiscal front," he adds. "These have perhaps been somewhat better than the markets were expecting.ö

During his speech, Chidambaram said that, ôGrowth is the best antidote to poverty.ö He pegged GDP growth for the year at 8.1%, with manufacturing growing at 9.4% and agriculture at 2.6%.

Chidambaram also highlighted the containment of IndiaÆs fiscal deficit - the stated reason why all the international ratings agencies continue to rate India below investment grade. He said the fiscal deficit stood at 4.1% for the fiscal year ended March and predicted it will shrink further to 3.8% in the new fiscal year.

Other announcements covered increased spending on defence, rural infrastructure, education and health. Much to the relief of IndiaÆs corporate sector, no populist measures were announced such as introduction of new direct taxes. Personal and corporate taxes were also left changed.

Foreign institutional investors purchases of Indian government debt were lifted to $2 billion from $1.7 billion. On a more bearish note, the finance minister did annouce a hike in securities and transaction taxes.

However, this seems to have subsumed within the overall the bullishness of the day and proprietary broker Rajesh Baheti, says, "The acid test of the new tax will only be felt if markets are flat or turn bearish."

The rupee ended the day at 44.44 to the US dollar, up 0.13% from MondayÆs close.

The market also reacted positively to news that the government plans to set up a single exchange for corporate debt trading. Baheti now believes, ôretail investors may finally have an option to buy corporate debt rather than just keeping their money in bank depositsö.

Srinivasan, however, is more guarded in his reaction and adds that, ôclarification will have to be sought on how the exchange will function as we don't want it lead to more fragmentation."

Where the government's privatization programme is concerned, Chidambaram projected
receipts of Rs.38.4 billion ($865 million) from stake sales - another piece of positive news for markets wondering whether he would bow in to Leftist demands to discontinue privatizations.

In the corporate sector, auto companies had some good tidings. Listed auto players with small cars such as Tata Motors and Maruti Udyog (SuzukiÆs Indian subsidiary) gained on ChidambaramÆs announcement that excise duty on small cars will be reduced. Both companies and unlisted Hyundai immediately announced that prices on their small car models would be reduced.

Anticipated û and much needed û proposals to increase infrastructure spending saw shares in cement and construction companies gain, more on sentiment than surprise.
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