Just a few days before finance minister Pranab Mukherjee delivers his Budget for 2012-13, the mood on Dalal Street is cautious. Not many are betting on the government pushing reforms aggressively after the Congress party’s poor show in the state Assembly polls.
Market experts believe policy drift in New Delhi is likely to continue and Mukherjee may defer taking tough decisions in the face of opposition from key allies like the Trinamool Congress (TMC). The populist stance of its allies is likely to make the United Progressive Alliance (UPA) government wary of any raise in fuel prices and call off opening multi-brand retail for foreign supermarkets, they say.
“The ability of the government to pass pending bills has reduced further after the election results. The opposition may be virulent and some of the UPA allies may act pricey,” said Dhananjay Sinha, co-head of institutional research and strategist at Emkay Global Financial Services. “Earlier, there was an image issue due to scams; now there is a political issue. The government is likely to be much more cautious and defer tough decisions.”
Prior to the election results, the market was hoping the Congress would play a role in government formation in politically important Uttar Pradesh. However, a decisive mandate for the Samajwadi Party has dashed those hopes.
All eyes are now on the finance minister to give a credible road map for fiscal consolidation in the Budget. The government is set to miss its fiscal deficit target of 4.6 per cent for financial year ending March 31.
“Many are hoping against hope for a credible and achievable medium-term fiscal consolidation plan from the Budget. The market will be happier if control in the deficit comes from a judicious mix of calibrated tax increases and cut in wasteful expenditure,” said Ajay Bodke, head – investment strategy & advisory, Prabhudas Lilladher. “Investors will also look at the tone and tenor of the government in the Budget towards welcoming foreign investors in capital-starved sectors like insurance, aviation, pension and multi-brand retail.”
Some experts are also talking about the risk of a mid-term poll before 2014. “Fears have also risen that the heightened political-instability, post polls, will eventually culminate in a mid-term general election,” JP Morgan economists said in a recent note. “While the risks of a mid-term election have risen sharply, we still do not consider it the baseline, in light of significant under-performance by the principal opposition party (BJP) as well.”