Union Budget 2010-11 to dictate trend

The market is likely to remain highly volatile with the focus being on the Railway Budget and the Union Budget 2010-11. Derivatives expiry on Thursday, 25 February 2010 will also add to the volatility on the bourses.

The highly eventful week begins with the Railway Budget on 24 February 2010. It will be followed by tabling of Economic Survey on 25 February 2010 and the Union Budget on 26 February 2010.

President Pratibha Patil will address the joint session of the Lok Sabha and the Rajya Sabha on 22 February 2010, marking the beginning of the fourth session of the 15th Lok Sabha.

As far as railway budget is concerned, the Railway minister Mamata Banerjee is likely to present a populist budget leaving passenger fares untouched, but rationalise the freight rates of certain commodities like iron ore, coal and cement. Banerjee is unlikely to tinker with the freight rates of essential commodities including foodgrains.

Expectations are sky-high for Union Budget 2010-11, with this being the second budget session of the current Lok Sabha. However, apprehensions too are abundant. The expectations are fueled by the sharp recovery displayed by the Indian economy from the global economic slowdown. The rising GDP growth, easy liquidity in the banking sector and strengthening of rupee are all aiding the cause. However, the soaring inflation remains a cause of concern and a phased withdrawal of stimulus packages is likely to be announced in the budget. Burgeoning fiscal deficit is another cause of worry. The street will closely watch the measures the government will resort to fill the widening gap amidst demand for tax cuts and tax waivers.

The government may announce increase excise duties as a first step towards a gradual winding down of fiscal stimulus measures. It may also raise the service tax rate to 12% from 10%. It may be recalled that the government had slashed the Central Value Added Tax (Cenvat) rate for excise duty from 14% to 8% in two rounds starting in December 2008. It had also cut service tax by 2 percentage points. These reductions were effected in order to provide a stimulus to domestic industry. Since the overall prospects for growth are much brighter today, the finance minister may withdraw a part of the stimulus in order to boost tax revenue.

The fate of three important fiscal bills, which had been stalled by the Left parties, will be closely watched. These are the Pension Fund Regulatory and Development Authority (PFRDA) Bill, Insurance Bill and Banking Regulation (Amendment) Bill.

Meanwhile, the recommendations of the 13th Finance Commission will be tabled in the parliament on 25 February 2010, just a day ahead of the budget. Analysts and economists expect the Finance Minister to provide a road map for the introduction of the key direct and indirect tax reforms viz. the direct tax code (DTC) and the Goods & Services Tax (GST) in the Budget.

As far as government expenditure is concerned, the thrust areas could be agriculture, water resources, power, roads & other infrastructure projects and social sector schemes.

The global economic situation remains grim as an increase in the Fed's discount rate on Thursday, 18 February 2010 spurred concern the economic rebound will slow as stimulus programs are unwound.

The US Federal Reserve raised the discount rate from 0.5% to 0.75% effective 19 February 2010 and said the move will encourage financial institutions to rely more on money markets, rather than the central bank, for short-term loans.

Sentiment has been edgy ever since the policy tightening move announced by the People's Bank of China (PBOC) on 12 February 2010. In a surprise move, the PBOC had announced of an increase in banks' reserve requirements, the second hike this year, as it clamps down on loans in a bid to keep the economy from overheating.