What is the market waiting for?

It's budget time! More than anytime in the past, the stock markets are looking forward to this Budget, for a 'sense of direction'.

The common belief is that the markets are likely to remain range bound till the budget. But why is the market waiting for this budget to get a sense of direction? Aren't things apparent in some sense already?

To start of with, we have culled out some key points from the current government's Common Minimum Programme (CMP) that are of significance from the stock market perspective.

1. The government will ensure that the services industry will be given full support to fulfill its true growth and employment potential.
2. Irrigation will receive the highest priority and all ongoing projects will be completed according to a strict time schedule.
3. FDI will continue to be encouraged and actively sought. The country needs and can easily absorb atleast 2 to 3 times the present level of FDI inflows.
4. Competition in the financial sector will be expanded. PSU banks will get full managerial autonomy.
5. The government will retain existing 'navratna' companies in the PSU sector while these companies are allowed to raise capital.
6. Commitment to remove revenue deficit by 2009.
7. FIIs will continue to be encouraged.

It concludes by saying: "This is a common minimum programme for the UPA government. It is, by no means, a comprehensive agenda. It is a starting point that highlights the main priorities, policies and programmes. The UPA government is committed to the implementation of the CMP."

The government has clearly explained its stand towards divestment, FDI, initiating measures to create employment opportunities and providing a foundation for sustainable GDP growth in the long-term.

If one believes that the new government is going to function broadly on the basis of the CMP, what is it that the stock market is waiting to hear from the Budget 2005?

As far as timely implementation of government policies are concerned, in coalition politics, one has to have a certain extent of realism.

1. For example, according to CMIE, doubling of credit to rural areas in the next three years, as envisaged by the CMP, is next to impossible. While banks could face some pressure given the inherent risk of defaults in agricultural lending, to what extent is the concern justified? Is this the primary reason why banking stocks are falling?
2. Besides, can this government continue to subsidise LPG, kerosene, urea, provide employment guarantee and attain its objective of zero revenue deficit by 2009?

So, why 'wait'? Consider the events that have unfolded since January 2004. We have had train bombings in Spain, pre-election survey jitters, election results, CMP, fears regarding rise in interest rates and now the budget. Once the budget is over, the stock markets will wait for execution.

Every time markets will be 'waiting' for a sense of direction. Sometimes, it is better to ignore what Mr. Market says.

While we are not trying to downplay the importance of the budget, the issues that are important are much broader in nature. Apart from the tinkering of excise and customs duty and so on, which is a regular phenomenon, the new government has to focus on fundamental issues i.e. poverty, illiteracy and inadequate healthcare.

These three factors are one of the key reasons why the country is unable to move to the next level of growth (click here to download our special presentation on the economy).

Of course, any policy measures addressing these concerns will yield results only in the long-term. But who said the Budget is about one year, anyways!

The fact of the matter is that there is really no big trigger in sight for the stock market in the near term. In these times, what we suggest to the retail investor instead is that there are good companies/sectors available at descent valuations from a 3-year perspective at current levels. Identify those and invest in a staggered manner so that the risk is distributed over a period of time.

To quote Adi Godrej, Chairman, Godrej Consumer Products Limited: "I think the Indian economy is in a mode now where one should not be looking at the government for things."

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