Devangshu Datta: Rhetoric and reality

BEATING THE STREET

The adjournment of Parliament means a lull in political action after several months of nonstop excitement. This breathing space gives investors a chance to regain their equilibrium. The focus is naturally the forthcoming Budget.

The declared goals of the CMP and the general principle of new brooms sweeping clean suggest the UPA will implement radical changes. But the shifts may not come in this Budget.

There hasn't been sufficient time for Chidambaram to draft a radically new Finance Bill. While the FM is reckoned a brave visionary, the impact of every shift in the tax/tariff structure and Plan/ Non-plan expenditure has to be projected, calculated and rounded by an army of bureaucrats.

Unless Chidambaram spent the last six years drafting detailed shadow Budgets for his own private entertainment, chances are he will wait till February 2005 before unveiling big shifts in approach. He may choose to signal the possibility of such changes in his July speech but it's likely that he won't do much actual tinkering.

If the above logic is right, the Finance Bill will deliver a pleasant surprise by being similar to the provisions of Jaswant's Mini-Budgets. That means a gap between the rhetoric of the CMP and the reality. The market might see this as a positive signal and receive the Budget with joy.

However, every word the FM utters on Budget day will be dissected and deconstructed for every possible nuance. Every Budget speech contains fluff and rhetoric and this one is likely to pay lip service to the CMP, even if the rhetoric is not backed by concrete action. If those references are too frightening, the market may tank regardless.

Chidambaram has probably done himself a disservice by going to Mumbai and trying to talk the market up. Prior to that visit, the market's expectations ranged from nil to negative. Any Budget that appeared reasonable would have made investors happy. Now that he's raised expectations, investors want more.

Most Budgets cause short-term disappointment and lead to selling. This could be a reflection on the competence of India's FMs, or on the idiocy of investors. However a contrarian will contend that this Budget won't trigger another selling wave.

There has been much selling since mid-May and that has created bearish sentiment. However it is quite possible that everyone who intended to sell has already done so "" in that case, the market can't fall further.

Contrarians try and identify inflection points in market action "" moment where sentiment is skewed in one direction but the share supply-demand equation is moving in the opposite. One signal is a dip in volumes "" this happens at both market tops and bottoms. Indeed, volumes have dipped. Other signs include high premiums on puts and a large volume of outstanding puts. These too, are apparent.

But it is impossible to identify such situations in terms of market action alone. So, contrarians look for confirmatory signals elsewhere. An air of doom-and-gloom across the media is considered crucial and indeed, this has already been apparent in newspaper headlines and electronic media.

The question is whether the supply of shares will indeed dry up at these prices. We'll never know the answer except in hindsight. But let's hope the contrarians are right!