The ides of the Budget

SMARTSHARE

As Chidambaram rose to present the ruling UPA's fouth Budget on the trot, he was walking into a quagmire none of his predecessors had faced.

The benchmark was down 300-odd points and the traders weren't sure whether the MP from Sivaganga had the toolkit to set things right. The Sensex finished 540 points down at 12,938, the highest loss in history on a Budget day. But not all of the fault lay at the Harvard graduate's doorstep.

The epicentre of this quake lay 2,500 miles across the Mekong in China, where the Shanghai Composite Index had tumbled 9 per cent the previous day. India, however, was not reacting to China, it was reacting to the fall of 416 points in the Dow. The same 9 per cent fall in China on Monday had left the BSE Sensex unfazed; in fact, it rose 17 points that day, overcoming early jitters.

The Index that had risen 125 per cent last year and another 15 per cent this year registered its largest fall since the February 18, 1997 fall which came after the death of reformist Communist Party elder Deng Xiaoping.

Call it the law of averages catching up with the Index or restoration of some order in a country that was going mad with opening trading accounts. Around 90,000 new accounts were being opened every day. That's 35 times more than last year, with a running total of 80.5 million accounts.

As daily turnover reached 1.2 trillion yuan, almost 50 per cent more than Hong Kong's biggest trading day, trading systems were on the verge of meltdown.

The Shanghai Composite Index fell 3 per cent again on Thursday, creating another flutter in the other emerging markets barring India. There was one eerie coincidence: a rise in the yen preceded the market fall on both occasions.

While one still can't really establish the cause-and-effect relationship, the unwinding of the yen carry trade may have just begun.

Back in India, things may be hotting up again. Despite the clear anti-inflation stance of the Budget, corporate India may be on a collision course with the powers that be.

While the fine print in the finance bill was still being deciphered, the steel companies announced a price hike followed by a small hike by cement companies. Car manufacturers, sulking in a corner after the Budget failed to provide excise relief to small cars, increased prices. While cars actually do not count in the WPI, the hike represented the state of mind of the corporate sector.

The attitude of confrontation adopted by the cement companies does not inspire confidence. There are times when the unspoken needs to be followed.

A case in point are the big daddies of agri-trade who have prevented themselves from procuring wheat from the market, which could have helped them rake in the moolah. Their abstention has left the doors open for the government agencies to procure wheat at lower prices than what would have otherwise been the possible.

So inflation will most likely stay on the front burner as the government thinks of ways to tame the cement tabbies. This environment is not congenial for the markets to thrive and prosper.

My sense is that the correction could run a shade longer than the market thinks. While the Budget has gone down well with high society canines, who will find their food cheaper, corporate India may have to revise their earnings lower, something they haven't done since 2002.

While common sense would say that after a corrective February things could look up in March, history says otherwise. A weak February usually results in a leaner March. 
 

A WEAK FEB-MARCH
	When Sensex fell in Feb	Returns  in March
1990	-1.04	15.50
1993	-1.06	-14.02
1995	-5.45	-4.69
2001	-1.84	-15.13
2004	-0.49	-1.36

Barring 1990, on all the other occasions when the Sensex fell in February, there were negative returns in March. So we might see a further loss this month.

With Punjab and Uttarakhand not going the Congress way, the Left may increasingly want to not be seen as a party that allied with the one that fomented inflation. This essentially buries whatever little hopes one had of second generation reforms.