The Indian stock markets have typically seen fairly sustained pre-Budget rallies — but for this time. The sharp spike in crude oil prices, which hit $117 per barrel last Thursday, have left investors skittish.
Given how vulnerable India is to rising oil prices the mood is almost bearish. Although the Sensex bounced back last Friday, it gave up nearly 3 per cent during the week and the benchmark index is close to 16 per cent down from the highs of 21,005 seen last November. Even before oil prices breached the $100 mark, foreign investors were taking risk off the table, not convinced that the government would be able to rein in inflation, which is ruling at above 8 per cent for more than a year.
Investors were also not sure if the government would be able to push through projects, needed to spur the investment cycle and take action on the policy front even as fixed capital formation is slowing down sharply in the six months to March 2011.
The mood in the market is one of complete circumspection, with expectations from the Budget tempered like never before. There is some apprehension that given the state of the government’s finances, there could be a 2 per cent hike in central excise duties – at a time when the government needs to splurge on social-welfare schemes ahead of elections in five states later in the year. What is also worrying the Street is that government borrowings, estimated at a net Rs 3.45 lakh crore in the current year, may not come off at all next year and could, to some extent, crowd out private sector borrowings leaving interest rates at elevated levels. What the market has already priced in is that due to higher nominal GDP and buoyant revenues, the fiscal deficit could be contained at somewhere close to 5 per cent this year, depending on the subsidies bill. But it realises that 2011-12 could turn out to be an altogether different year, without the one-time proceeds from 3G spectrum and broadband licences and pressure on expenditure given the government’s focus on financial inclusion. The Food Security Bill could push up subsidies further, hurting the fiscal deficit. Moreover, the government could end up collecting less than the Rs 40,000 crore that it had targeted from disinvestments this year.