Market may extend Monday's losses

The key benchmark indices may extend Monday's (6 July 2009) losses on lack of any big bang economic reforms in the Union Budget 2009-2010. The disappointment over the budget resulted in sell-off on the bourses on Monday, 6 July 2009 that was accompanied by heavy volumes The BSE 30-share Sensex tanked 869.65 points or 5.83% to 14,043.40 on the budget day. As per provisional data released by the stock exchanges, foreign funds on 6 July 2009, dumped shares worth a net Rs 1483.03 crore. On the other hand, domestic funds bought stocks worth a net Rs 815.71 crore.

Investors were disappointed after the Union Budget 2009-2010 did not contain any major reforms such as a roadmap to increase foreign direct investment in insurance sector and decontrol fuel prices. Lack of financial sector reforms and a clear roadmap on divestment were other sources of disappointment. The government set an very small target of Rs 1120 crore from divestment for the financial year ending March 2010. A surge in fiscal deficit target added to the market's woes. Finance Minister (FM) Pranab Mukherjee set a sharply higher fiscal deficit target to 6.8% for the financial year ending March 2010 after he increased spending on roads, power and aid to the poor.

The market was expecting some announcement on decontrol on fuel prices but the FM only said that a panel will be set up to look into the pricing of petrol and diesel. The market was also surprised by the FM keeping a mum on Foreign Direct Investment (FDI) policy at a time when expectations were running high that the government will announce a roadmap for hike in foreign direct investment in insurance sector to 49% from 24%

The next major trigger for the market is corporate earnings of India Inc. for the quarter ended June 2009. India's second largest IT major by sales Infosys kickstarts result season on 10 July 2009.

However, positive Asia may support the market today. Most Asian stocks rose today in a volatile trade as utilities advanced on optimism energy costs will drop. The key benchmark indices in Hong Kong, South Korea, Singapore and Taiwan rose by between 0.25% to 1.19%. The key benchmark indices in China and Japan fell by between 0.22% to 0.68%.

The Wall Street ended Monday, 6 July 2009 session mixed. The gloomy earnings expectations weighed on sentiment. The Dow Jones managed to end positive on some bargain hunting. The Dow Jones gained 44.13 points, or 0.5%, to 8,324.87. S&P 500 index rose 2.30 points, or 0.3%, to 898.72. The Nasdaq Composite Index fell 9.12 points, or 0.5%, to 1,787.40.

Back home, the projected FY 2010 fiscal deficit is much higher than the 5.5% deficit forecast by Mukherjee in an interim budget in February 2009, and also higher than the 6.2% deficit recorded by the government in the previous year ended 31 March 2009.

The finance minister has forecast an increase in plan expenditure by 34% and non-plan expenditure by 37%. The total projected budgetary spending in 2009-10 stands at Rs 10.23 lakh crore. The government has proposed an increase in the allocation for government welfare schemes by 45%. Expenditure on Bharat Nirman has been hiked by 45%. The government has allocated Rs 3,91,000 crore under the National Rural Employment Guarantee Scheme this year. The allocation for rural roads scheme has been raised by 59% in 2009-10.

The 10% surcharge on personal income tax has been scrapped. The FM has scrapped the Fringe Benefit Tax and also suggested removal of the Commodities Transaction Tax (CTT). The Minimum Alternate Tax (MAT) has been hiked to 15% of book profit from 10% of boom profit. The FM has kept the corporate tax rate unchanged. Mukherjee said the government will pursue structural changes in direct and indirect taxes. He said states have agreed on basic structure of goods and services tax which will be introduced from 1 April 2010.

FM has increased personal income tax exemption by Rs 15,000 for senior citizens and by Rs 10000 for others.

The Finance Minister (FM) said the plan is to a return to a path of 9% at the earliest and to deepen and broaden the agenda for inclusive development. The FM forecast a 6.7% GDP growth for FY 2010.

The government has extended agriculture debt waiver by 6 months and provided additional Rs 1000 crore over interim budget for irrigation. Budget will provide additional subvention of 1% to farmers who pay short term farm loans on schedule. He said government will develop long distance gas pipelines to develop national grid and LNG infrastructure in the country.

The finance minister has allocated Rs 4000 crore to incentivise lending to small firms. Budget extended interest subvention to exporters in seven sectors till March 2010 and will provide relief to exporters hit by global financial crisis. FM has extended agriculture debt waiver by 6 months and provided additional Rs 1000 crore over interim budget for irrigation.

The budget has allocated Rs 5000 crore for Mumbai flood project. The government will raise allocation for urban poor schemes to Rs 3,973 crore in 2009-10.

The finance minister proposed to raise the threshold for non-promoter holding in all listed companies. The FM said the government will encourage people participation in divestment of state owned firms. He said a plan will be set up to review domestic fuel prices. He said the government plans to return to fiscal reform targets at the earliest and that institutional reforms are required to control fiscal deficit. The government plans to move towards nutrient based subsidy regime for fertilizers and to offer direct subsidy to farmers.

The FM said significant flow of foreign capital is important and that there are signs of revival in domestic industry and foreign investors have returned. He said the government will continue to provide fiscal stimulus and to provide more flexibility to Infrastructure Finance Company (IIFCL). IIFCL will facilitate 'take out' financing for infrastructure projects. He said allocation for national highways development will rise 23% and has asked states to remove bottlenecks on infrastructure projects.

The government has restored 8% excise duty on manmade fibres. It has meanwhile, scrapped the excise duty on branded jewellery. With regards to the customs duty, the duty on LCD panels has been cut to 5% from 10%. The government has imposed a 5% customs duty on set top boxes. The customs duty on wind power equipment has been cut to 5% from 7.5%.

The finance minister said fiscal deficit target will be closer to 3% of GDP by FY 2011-12 assuming a global economic recovery. He has assumed GDP growth of 8% in FY 2011 and 9% in FY 2012.

Meanwhile, credit rating agency Standard & Poor's (S&P) said India's proposed budget deficit of 6.8% of gross domestic product is within the boundary of the rating agency' expectation. The prospect of a wider fiscal gap had already prompted S&P to change the outlook on India to negative after the government said in its February interim budget that additional stimulus of 0.5% to 1% of GDP may be required, Takahira Ogawa, a Singapore-based director of sovereign ratings at S&P said.

India's meteorological department said on 6 July 2009 good monsoon activity is likely over central India during next 4-5 days with extension into Gujarat and interior Maharashtra from 8th July onwards.