Investors are awaiting the presentation of Union budget later this week with high hopes for a growth stimulus by the government even as concerns about a fiscal slippage has left them worried.
If the budget fails to be the growth catalyst that everyone is hoping for, investors may turn bearish on the Indian stocks, market experts said.
Even as economic indicators weakened, benchmark indices have rallied to record highs in the recent past, driven primarily by optimism that the budget will spur a much-needed recovery.
Managing fiscal prudence and growth demands will be tough. Abhiram Eleswarapu, head of India equity research at BNP Paribas said, “We think the government will do well to restrict the FY20 deficit to 3.7% .”
Nomura expects the budget to show fiscal deficit slipping to 3.7% of gross domestic product (GDP) in FY20, against the targeted 3.4%.
“Amid a challenging growth environment, the government will find itself having to choose between correcting this slip in FY21, or on the other hand, using fiscal activism to support growth, but at the cost of other macro risks,” it said.
Even so, markets are bracing for a fiscal slippage in FY20. “Some amount of slippage in fiscal deficit is already factored in by the markets,” Atul Bhole, vice president of investments, DSP Mutual Fund said.
Stressing that the demand slowdown need to be addressed, Bhole said the markets are essentially looking for steps to restore confidence in the economy.
“The government needs to put its whole weight behind reviving demand. Reluctant measures won’t help achieve the objective and may go waste,” he said.
“Markets will be comfortable with higher fiscal deficit for boosting consumption and reviving investment. The stock markets are looking at a growth-oriented budget which will boost consumption, revive investment and be capital markets friendly,” said Nilesh Shah, managing director and CEO, Kotak Mahindra Asset Management Co.
Others concur. According to Amar Ambani, senior president and head of research for institutional equities at Yes Securities, containing fiscal deficit and selling stakes in state-run companies could excite the market.
“A 3.7% deficit number will be viewed as acceptance of the problem and come as a relief amid the burgeoning market fear of a 4% deficit. It seems evident that the government is focusing on reviving the economic growth rate. Our view is that not all measures will necessarily flow through the budget speech. If we look at the Modi era, we’ve noticed that many major announcements were made during the course of the year apart from the budget,” Ambani said.
However, selling of ₹4,102.35 crore equities by domestic institutional investors (DIIs) in January may indicate that given the tight fiscal space, the government is unlikely to make any big-bang announcements.
DIIs have been consistently selling since November, and it is the foreign money which has kept the markets buoyant.
In January so far, foreign institutional investors (FIIs) were net buyers of Indian shares worth $2.15 billion.
“It is understandable that expectations run high on the upcoming budget. However, given the tight fiscal space, we doubt many big-bang announcements could be made. The steep fiscal slippage of 48 basis points (bps) in FY20 is largely due to growth slowdown and the lack of addressing sector-specific issues,” Emkay Global Financial Services Ltd said in a note on 22 January.
It expects FY21 budget will addressing sector-specific issues and steer toward railways, defence and reviving sentiment in the real estate sector.