Weak budget hints at an end to outperformance

There was little surprise when stock investors gave a thumbs-down to the Indian budget, which was widely termed a damp squib. Although the consensus opinion seems to suggest share prices would still meander along thanks to the abundant global liquidity, the case for out-performance has dropped out of reckoning. Most of the goals set out in the budget for 2012-13 beginning April are over-ambitious and unrealistic. Economic growth, for instance, is forecast at 7.6 per cent after a sharp slowdown to an estimated 6.9 per cent expansion in 2011-12. The budget has proposed additional taxes totalling Rs459.4 billion - a record that would fuel inflation and hit consumer spending which is the main driver of the economy. Finance Minister Pranab Mukherjee said in the budget on Friday the bloated subsidy bills would be reduced and set a lower fiscal deficit target, but provided no realistic roadmap how this could be done. Article continues below "The budget lacks conviction and fails the litmus test on growth, inflation and containing deficits," said one money manager at a large foreign fund who did not want to be named. "It reflects a true picture of the government which has been rudderless for a long time." The Congress party, which heads the fractious ruling coalition in New Delhi, neither had the resolve nor the stomach to push bold reforms that were needed to bolster growth. "For an economy that is crying for reforms — structural like in manufacturing, labour or factories; capital through increases in foreign direct investment in various sectors; or regulatory with focus on consumer protection — Mukherjee's seventh budget offers little more than a reversal," senior journalist Gautam Chikermane wrote in the Hindustan Times. Another commentator called the budget "politically cautious and economically risky" as the assumptions were clearly not achievable, which would most likely make it difficult for the central bank to reduce interest rates needed to help revive growth. The Reserve Bank of India held rates for the third consecutive policy meeting, and sounded a warning on inflation pressures, casting doubts on whether the central bank would begin cutting rates in April. "Notwithstanding the deceleration in growth, inflation risks remain which will influence both the timing and magnitude of future rate actions," the RBI said. Following the policy, brokerage Nomura lowered its forecast for rate cuts in 2012 to 75 basis points from 100 basis points it had projected earlier. The top-30 Sensex shed 1.2 per cent on Friday to 17,466.20, posting modest losses for the week. Oil and Natural Gas Corp and Oil India fell 4.7 and 4.5 per cent respectively after the budget almost doubled the cess, or tax on production, on crude oil to Rs4,500 a tonne from Rs2,500. The benchmark index is still up 13 per cent this year after plunging a quarter in 2011 and market pundits believe foreign fund inflows would continue to keep the marker on an upward trajectory. "The budget neither can stop the current market rally nor accelerate its pace," said Sandeep Sabharwal, chief of portfolio management services at Prabhudas Lilladher. "India will follow the trend set by other markets, but there is nothing to suggest that markets here will outperform." While the excise duty on cars was raised, prompting carmakers to raise prices, there was relief the budget did not impose an expected new levy on cars that run on subsidised diesel. The budget also offered comfort to state-controlled banks, which have been on the back foot due to sticky loans, by providing Rs158.9 billion (Dh12 billion) in capital — more than double the target in the previous year. From gulfnews