<b>Devangshu Datta:</b> Comfortable only for the time being

The Budget soothes FPI fears over fiscal deficit and addresses rural and farm issues. The projections are optimistic in terms of tax buoyancy too. But the impact of these actions will be known in the future - and that may not pan out in obvious ways

The Budget did trigger a significant turnaround in sentiment. It is fiscally prudent at first glance. Other positive influences on sentiment include strong American payroll data, another Chinese stimulus package and some recovery in crude prices. India's markets have rebounded with astonishing speed. Central bank action over the next few weeks could be crucial to sustainability.


One key element is foreign portfolio investor (FPI) attitude. The Budget alleviated FPI fears about the fiscal deficit going out of control. The current account deficit will also stay under control, assuming India's crude basket doesn't lift above an averaged $50 a barrel for the 2016-17 fiscal.

Acceptable deficits have induced overseas investors to buy over Rs 4,000 crore of equity in the past five sessions. Even though domestic investors have sold into the rally, major indices like the Nifty and the Sensex have jumped by over seven per cent since the Budget.

This Budget has an apparent rural and farm focus. It incorporates large giveaways to panchayats, farmers, allocations for MNREGA etc. It also envisages an accelerated pace of road-building, of rural electrification, of irrigation capacity etc. It will also attempt to persuade states to rework the food procurement systems. If that happens, it could indeed be a major game changer for rural prosperity.

The infrastructure build-up will be useful, though the improved performance of the power sector has not eliminated genuine problems in terms of huge accumulated losses. But a fair chunk of the rural handouts will be wasted, more or less. Many panchayats lack the capacity to fully absorb and meaningfully deploy the Rs 2.87 lakh crore they will collectively receive. Farm loans also tend to go sour at alarming rates and much of the Rs 9 lakh crore allocated to agricultural loans will probably turn into bad debts. All the money may, however, raise rural consumption, which would be useful in the short run.

The expansion of crop insurance under the Prime Minister Fasal Bima Yojana could set up the insurance sector and the government for massive losses. Last year, drought alone caused at least Rs 25,000 crore worth of losses across nine districts. The government will pay a large proportion of the premium for the new scheme; it will also pay out a large proportion of claims through the fully-owned Agricultural Insurance Company of India; it will be the pre-eminent reinsurer as well.

The Budget raises the tax burden several ways (often via a "cess", which is becoming a popular four-letter word). It doesn't really offer much by way of relief for corporates in terms of tax breaks. The dividend double taxation proposal will hurt mutual funds and holding companies. Attempts to ease harassment and smoothen procedures on the tax inspector front will be appreciated.

The projections could be optimistic in terms of tax buoyancy. The projections do appear optimistic when it comes to revenues from the telecom sector (estimated at roughly Rs 1 lakh crore), and from disinvestment (about Rs 56,000 crore). It is opaque about the possible impact of the Seventh Pay Commission. Projection errors on these fronts could render Fisc calculations moot. Also, there are inadequate provisions for bank recapitalisation. At Rs 25,000 crore, the recapitalisation provision for public sector banks is perhaps a tenth of the required funding.

But all these possibilities are in the future and the future does not necessarily pan out in obvious ways. If there is a bank crisis, or a major slippage from Fisc projections, that will be cause for worry in February 2017. In the meantime, money has come into the bond market where yields have fallen sharply, and into equities.

The USD has retracted sharply on the FPI inflows. Optimists anticipate lower inflation and the possibility of rate cuts by the Reserve Bank of India (RBI) in April. The bond market is also anticipating more profitable corporate bond issues in the next fiscal, including possibly tax-free issues by infrastructure public sector undertakings, since treasury issuance will not rise this fiscal.

America is still generating jobs at an impressive rate. That has pros and cons in a topsy-turvy world. Strong employment data may induce the US Federal Reserve to push rates up again in 2016. If it does, or even threatens to, the USD could spike up again while equity markets fall. Everybody will be watching the mid-March meeting of the Fed, for action and attitude. The Bank of Japan is standing pat for the moment while China has eased again. The RBI's actions in April will be, at least partly predicated on the Fed's action.

Technically speaking, the market trend is up. The Nifty bounced from a 21-month low on Budget day. It is hitting resistance at current levels of 7,500. But if it breaks through that, it could easily run up another five per cent. But it's still not clear if this is a bear market rally, which means it would fizzle out one way or the other before moving above the 200-Day Moving Average (around 7,950).

One point to be noted is that cash stocks and the underlying index is at premium to the futures. That's because of delivery-based buying in the hope of receiving an interim dividend before the next tax kicks in. This could lead to some selling after the record dates, as the new fiscal kicks off in April.