Indian Equity Market Reaction to India's Budget

Indian equity market has reacted positively to the Indian budget. The Sensex rose by 175 points. I feel this euphoria is not really justified. The finance minister has actually reduced the cash in the hands of the people and hence there could be lower consumption led demand in the economy this coming fiscal year. Increase in fuel prices is an inflationary measure which is bound to have a cascading effect on prices soon. Reduction in direct taxes slabs is a cosmetic measure only. The FM could have actually gone onto introduce direct tax code ( planned from 2011) or close to it this year itself.

Last year FM gave a stimulus to the economy by reducing taxes, excise duty etc. But the real big stimulus was the arrears of the Sixth Pay Commission to the Central Govt Employees. This was money given directly in the hands of the consumer. The second noteworthy stimulus was the General Elections. This event delivered money directly in the hands of the consumers. These two were very strong stimuli which were untouched by leakages of any sort. Such stimuli are absent this coming year. Hence there could be a reduction in consumption led demand this year.

I have a feeling that markets will realise this over the weekend and are likely to correct. Even on the budget day they corrected from a high of 400 plus rise to close at 175 plus rise only.
The FM has taken some right steps towards fiscal consolidation. This is going to bode well for overseas investors though. Therefore markets will correct and then rise again gradually. So we use dips to enter slowly.

Let us wait for the market reaction on Tuesday. Happy Holi to all!

rgds
Vibhas