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Don’t judge budget by market reaction

The stock markets might not have had specific reasons to be enthused about the budget. But their hyper-reaction is both inexplicable and unwarranted. On Monday the Sensex fell by a record 869 points, the biggest fall on any budget day; and the Nifty by 259 points. The over-the-top negative reaction is attributed to two sets of factors. First, the budget’s failure to announce any ‘big bang’ reform belied great expectations. Secondly, there has been disappo intment over certain key aspects of the budget, notably a higher fiscal deficit number and a sluggish rate of growth of tax revenues. Days before the budget was presented, there was intense speculation on whether the government would use the exercise to kick-start the public sector disinvestment programme and provide wider space for foreign direct investment (FDI). To a large extent, the Economic Survey fuelled expectations to unrealistic levels. For instance, it set an annual target of Rs.25,000 crore for disinvestment. Largely ignored were subsequent clarifications that statements such as those were advisory in nature. Economic reforms such as the disinvestment programme have been controversial politically and the first United Progressive Alliance government was forced to go slow. What is now clear is that pushing through reforms of this genre will not be a garden party.

The budget need not be the occasion to announce broader public policies. Indeed the budget exercise is strictly a statement of government expenses and income. Over the years, however, successive Finance Ministers have used it as a forum for interfacing with the markets and the public at large. It would have helped had the government conditioned pre-budget expectations by emphasising the central theme, inclusive growth. There is no doubt that the considerably enhanced allocations for the social sector have strained government finances but the 6.8 per cent fiscal deficit could have been placed in a proper perspective. The Finance Minister has committed the government to fiscal consolidation from next year and the introduction of the Goods and Services Tax from April 1, 2010. There have also been several positive features such as the withdrawal of the surcharge on income tax and the abolition of the fringe benefit tax. Tuesday’s rally suggests the stock markets might be discovering the virtues of the budget slowly. Monday’s lesson: don’t judge a budget or any set of public policies by the market reaction.

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