Budget 2012 – What stock markets expect

A note on budget 2012 and what Indian stock markets expect by budget, published by Geojit BNP Paribas, a leading online stock broker and investment research firm.

The macroeconomic scenario
Budget for FY 2013 is crucial for the economy and markets. The macro economy is facing a major headwind in the form of very high and unsustainable fiscal deficit. Fiscal deficit of the centre rose from 2.8% in 2007-08 to 5.8 % in FY 2012(projection). If we add the fiscal deficits of the states and the off budget items of expenditure, the aggregate fiscal deficit will be more than 9%. This is equal to the 1991 crisis level and clearly unsustainable.

GDP growth rate has fallen from 8.4 % during 2005 - 11 to 6.9 % this year. FY 2012 Q3 GDP growth is an alarming 6.1 %. This trend has to be reversed.

Our savings rate has fallen from 36.8% in 2007-08 to 32.3% in 2010-11. Consequently, our capital formation has fallen from 38.1% to 35.1% during this period. The main reason for this sharp cut is the rising fiscal deficit.

Slowdown in the economy has also been caused by the savage monetary tightening by the RBI which raised interest rates 13 times between March 2010 and October 2011. The RBI has been fighting inflation without any help from the government through fiscal deficit reduction. Excessive reliance on monetary tightening, ignoring fiscal consolidation, is a sub-optimal solution.

What the market expects
Serious attempt at fiscal consolidation is what the market is looking for. If the FM projects a fiscal deficit number of less than 5% of GDP for 2012-13, and comes up with practical and realistic measures for achieving that, the markets will give a thumps up to the budget. There is huge liquidity in the global economy now. Fiscal consolidation can attract a lot of liquidity into India. These capital flows can lift the market substantially, improve the investment climate and do a lot of good to the economy.

Expect excise and service tax hikes
Excise and service tax rates are likely to be raised by 2 percentage points. The service tax net is likely to be cast wider by including all services except those in a negative list. There will be relief for income tax payers in the lower tax bracket.

If the STT is abolished, as many expect, that will enthuse the market. More important will be announcements regarding DTC and GST.

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