All eyes on India's mini budget

Mumbai: After all the hype, it is time for India's central government to show its hand. Tomorrow, it will present a mini budget, which, if it contains the ingredients to jump-start an increasingly moribund economy, should set the tone for the stock market.

India's once robust economy has run into turbulence and is threatening to unravel, caught in the fallout from the recession-hit US, euro zone and Japan. Piece-meal stimulus plans have failed to stop the rot.

Economic pundits and lawmakers admit there is a need for rate cuts and a large helping hand from the government to increase spending. Just how much the ruling coalition, which faces national elections by May, is willing to do will determine the outlook for stocks.

"Some bravehearts have built long positions in anticipation of a strong stimulus plan," said equity trader Kevin D'Souza. "Expectations are high and the stakes are higher."

Last week, Foreign Minister Pranab Mukherjee, who will present the interim budget, told an industry gathering: "There is a need to sustain our foreign trade, revive foreign investment and generate domestic demand in order to maintain our growth rates, which are essential for the upliftment of the multitudes below the poverty line."

His comments came after industrial output in December unexpectedly contracted for the second time in three months, falling two per cent from a year earlier, with manufacturing output falling 2.5 per cent, indicating severe economic stress.

The government estimated last week that India's $1 trillion (Dh3.67 trillion) economy would expand 7.1 per cent in 2008-2009, the slowest pace in six years and far below the nine per cent recorded in 2007-2008, with a global slowdown hurting key sectors such as exports, housing and manufacturing.

Most independent economists, who have forecast growth to drop below seven per cent, believe the government is optimistic and final figures will be sharply revised.

"Clearly, the government is overly optimistic," said D'Souza. "Unless the government comes out with a big-bang stimulus, the outlook looks bleak."

French bank Calyon said it expected Indian economic growth to slow to 5.5 per cent in 2009 as domestic demand falls and exports falter, but should bounce back from 2010.

"If the US economy eventually stabilises in the second half of 2009, India's growth could return to its medium-term potential in 2010 and beyond," Sebastien Barbe and Eric Tsang, strategists at Calyon, wrote in a note.

Commerce Minister Kamal Nath, former finance minister P. Chidamabaram and top economic advisers to the government have all hinted the interim budget would have fiscal incentives, including cuts in taxes.

The top-30 BSE Sensex rose 3.6 per cent last week, only its second weekly gain in six weeks, to 9,634.74 points, but it was not plain sailing as some players partially booked profits, indicating a cautious undertone.

The government has so far announced two stimulus plans, including extra spending of $4 billion, while the Reserve Bank of India (RBI) has cut its main lending rate by 350 basis points since October to 5.50 per cent.

Last week, the government said it would additionally borrow Rs460 billion (Dh34.6 billion) by March to fund its stimulus measures and meet extra spending needs.

"The government is going to continue to stimulate domestic demand, the government will continue to inject liquidity and induce bank lending," Kamal Nath said.

Suresh Tendulkar, the top economic adviser to Prime Minister Manmohan Singh, said on Friday there was a need for another reduction in interest rates.

"A cut in interest rates is desirable but the final decision has to be taken by the RBI," he told reporters in New Delhi.

Falling inflation has helped support expectation for a rate cut.

Annual inflation dropped to 4.4 per cent at the end of January from nearly 13 per cent last August, and economists say it could turn negative by the middle of 2009.

The rupee, which fell 19 per cent in 2008, will weaken almost 10 per cent to an all-time low of Rs54 against the dollar by the end of this year, HSBC said.

"We expect the slower moving remittance and FDI flows to now start to show the strain," Richard Yetsenga, HSBC's Hong Kong-based forex strategist, said in a report. "Our estimates suggest FDI into Asia could fall to roughly zero this year. While that may be overly pessimistic, the fall in FDI should certainly be spectacular for global reasons."

The writer is a journalist based in India.