Indian Budget 2009-10 – Budget and the Sensex

Soon after the Indian Budget for 2009-10 was announced by our Finance Minister, Pranab Mukherjee, the Sensex started its downfall. Nothing surprising as the market has ended in red three times out of five during the UPA term, each time the budget was announced. The market generally rises before the budget in the expectations build up and then falls. The markets have 60% probability of falling on the day of the budget.

Soon there will be a lot of theories on why the markets fell and what has the budget done to depress the industry. For starters, UPA being a government with a pro social reform and pro poor agenda was not expected to cheer up the markets. Because what may be good for the poor may not necessarily be good for the industry. The UPA has come out with a slew of social sector reforms for farmers, urban poor, people living below poverty lines, education sector, infrastructural building but not much has been done for the industry. Though the cumbersome fringe benefit tax has been removed, the Corporate tax has been left untouched. Also, there were no announcements on foreign direct investment or disinvestment, which are key market drivers.

The UPA was likely to announce disinvestment plans for sick public sector companies but nothing was said about it other than the dampener, that Banks and Insurance sector will be left out of disinvestment. The banking stocks, especially the public sector banking stocks are expected to be negatively impacted by this but hopefully, the infrastructure companies will gain following key infrastructural announcements like, the 31% increase in allocation for National Highway, evolving financing mechanism through Indian Infrastructure Financial Corporation Limited (IIFCL), for giving increased support to infrastructure projects or the Gram Sadak Yojana whose allocation has been hiked up 59% to Rs 12000 crore.

Also, the Growth rate which dipped to 6.7 per cent in 2008-09 from average 9 per cent growth in previous three fiscal years and the big Fiscal deficit ( revenue – expenditure of the government) that grew from 2.7 per cent to 6.8 per cent of GDP, did not help the sensex downfall either. Yet one should not look at the sensex reaction as an economy indicator. As Keynesian economics says that, during recession the country may have to take a fiscal deficit on its balance sheet as it has to provide a stimulus to the economy by increasing its own expenditure. The budget has definitely increased its expenditure items but it’s for the reform of the not-so-rich. As C.K. Prahalad has mentioned in his award winning book, Bottom of the Pyramid, that a whole big sector which forms the bottom of the social ladder remains to be exploited in India Such reforms will definitely help the industry in reaching this new market segment.