Union Budget 2009-2010 to set direction

The Union Budget 2009-2010 at 11:00 IST on Monday, 6 July 2009, will play a key role in dictating further market direction as it will help in gauge the new government's policy stance. Hopes of big bang economic reforms by the Congress-led government after its thumping victory in the 15th Lok Sabha elections has triggered a solid pre-budget rally. The BSE Sensex jumped 5265.74 points or 54.58% in calendar year 2009 to 14,913.05 on 3 July 2009. From a 3-year closing low of 8,160.40 on 9 March 2009, the Sensex is up 6752.65 points or 82.74% to 14,913.05 on 3 July 2009.

The broad expectations from the budget are thrust on infrastructure, including easier financing of long-gestation infrastructure projects, a plan for disinvestment, some reforms such as hiking foreign direct investment limit for insurance and a clear road map to rein in the high fiscal deficit in the future. Consumption is likely to be shored up through the various rural spending programmes. At the same time, the government may rollback tax sops given to sectors doing well such as services.

The corporate sector is expecting a removal of the fringe benefit tax (FBT). Under the current dispensation, an employer has to pay FBT at 30% on the fringe benefit, the taxable value of which is determined in accordance with a formula. FBT is a tax levied on perquisites-or fringe benefits -provided by an employer to his employees.

Domestic brokerages and fund houses want the government to remove securities transaction tax (STT) on trading in securities in the Budget. The Securities & Exchange Board of India (Sebi) members have already forwarded the demand of premier stock exchanges, BSE and NSE, to Finance Minister Pranab Mukherjee for scrapping STT in the Budget.

STT, which was introduced in the Union Budget 2004-05 by the then Finance Minister P Chidambaram, taxes every purchase and sale of securities entered into in a recognised stock exchange in India in securities like shares, debentures, bonds, and units of mutual funds. Equity investors pay an STT of 0.125% for every transaction in cash for the delivery of shares.

Meanwhile, before the budget, investors will also be keenly watching the outcome of the Employees' Provident Fund Organisation (EPFO's) apex advisory body meet on 4 July 2009. The Central Board of Trustees (CBT) will take a view on the Finance Ministry's proposal to invest 15% of its corpus in equity. The EPFO has a corpus of about Rs 1,82,000 crore and the permission to invest 15% funds in equity could have positive implications for the capital market. A proposal to park funds in the stock market was earlier rejected by the EPFO's Finance and Investment Committee (FIC) at its meeting on 26 March 2009.

Foreign fund activity will also be closely watched. Foreign institutional investors (FII) were the key drivers of the recent solid surge on the bourses. FII inflow in the calendar year 2009 amounted to Rs 25,109.90 crore (till 2 July 2009).

The latest macro economic data confirmed that the economy is recovering. The Markit Purchasing Managers' Index (PMI) based on a survey of 500 companies, fell slightly to 55.34 in June 2009 from 55.7 in May 2009, which was the highest in eight months, data released on 1 July 2009 showed. Still, it is above the threshold of 50 that separates expansion from contraction. It hit a trough of 44.4 in December 2008 and has steadily risen since then. The new orders index fell to 58.6 in June 2009 from 59.1 in May 2009.

Investors will also monitor the progress of India's annual monsoon. India's south-west monsoon has covered all parts of the country, the weather department said on Friday, 3 July 2009. Rainfall during 1 June to 1 July 2009 was 92.2 millimeter, 46% below normal.

Earlier the Minister of Science and Technology, Prithviraj Chavan, in a press conference, on 24 June 2009 said that India's monsoon, which runs from June to September, will be below normal this year. Monsoon rains will be 93% of long term average.

The June-September monsoon rains are a major influence on the economy, as two-thirds of Indians depend on agriculture and large areas of the vast south Asian country suffer from a lack of modern irrigation facilities. Poor monsoon rains could dent rural demand, hurt corporate profitability and undermine sentiment in financial markets.

The Economic Survey for 2008-09 presented by Finance Minister Pranab Mukherjee in Parliament on 2 July 2009 said that India's industry is recovering from a slowdown in the last financial year. There are positive signs the Indian industry may have weathered the most severe part of the shock and is moving toward a recovery, the survey indicated.