Markets just can't believe India's latest budget math

Indian markets looked very tentative on the first trading day after budget 2019 was announced. The recovery in the last hour of trade helped the Sensex and the Nifty close with gains, but the momentum came largely from the rebound in Reliance Industries in late trade.

The gains in India's stock markets are underwhelming given the fact that global risk appetite has improved and Asian peers are near a four-month high.

Companies that would benefit from higher demand, thanks to the many sops announced in the budget for the rural areas and the middle class, did not attract buyers. Stocks in the fast moving consumer goods (FMCG), healthcare and auto stocks witnessed heavy selling pressure.

"While the government's growth assumptions appear reasonable, we think the government will continue to face challenges in meeting its fiscal targets, primarily due to structural increases in spending and difficulties in raising revenue further," Gene Fang, from global ratings agency Moody's, reportedly said.

There are others who also fear that the finance ministry may be underestimating the deficit- the excess of expenditure over the earnings. "Market is fearing a fiscal slippage because of various announcements in the Interim Budget, like the higher borrowing programs by the government," Rusmik Oza, Head-Fundamental Research, Kotak Securities, told IANS.

If indeed the fiscal deficit is more than what the government has projected, it would weaken the rupee, make imports costlier and push up inflation.

There could be many reasons for why the deficit may exceed the target. "the government's estimate of GST collection in FY19 is on the higher side. The nominal GDP growth rate of 11.5% is also difficult to achieve," Oza said.

The capital expenditure for the next year is 6%, which is very low according to Oza. Spending less on capital expenditure means the government is investing less on assets that will generate income in the future. India already spends a lot more on running the government than on assets that can produce growth.

The market will continue to evaluate the budget proposals for a few more days. "Fears of slippage is because of governments fiscal deficit target of 3% in FY21. The 3.4% target for next year is also not good. It is not possible to reduce 0.4 per cent in a year," Deepak Jasani of HDFC Securities told the IANS.

--With inputs from IANS

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