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Market trend hinges on budget expectations
Finance ministry's economic report last week suggested wide range of reforms such as reduction of subsidies.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 23:04 July 4, 2009
Mumbai: Just how much India's annual budget tomorrow meets market expectations will set the tone for the stock market, which leapt nearly a half in the June quarter in anticipation of major reforms such as opening the door further to foreigners, especially in the financial sector.
The budget is the first since Prime Minister Manmohan Singh's coalition government swept to power for a second term in May, picking up more seats in parliament and decimating the communist parties which had stalled key reforms in the past five years.
A report on the economy released on Thursday by the finance ministry suggested a wide range of reforms - from reducing subsidies and doing away with innumerable taxes to selling partial holdings in state-owned companies - to lift growth to around 7.75 per cent in 2009-10 and more in later years.
"With the revival still uncertain, policy interventions are necessary," the economic survey said.
It said India should allow an increase in the overseas investment limit in banks and greater participation in the financial system by foreign lenders, along with tighter regulation. Voting rights in banks should be aligned with equity holdings and Indians should be allowed to hold bigger stakes in state-run banks, it said.
The government should also consider allowing foreign investment in food retailing in the next few months, and raise the overseas holding cap in insurers to 49 per cent, it said. Currently, overseas investment is allowed only in single-brand retail stores and is limited to 26 per cent in insurers.
"There is a perception among financial and other investors that government has been slow on policy reforms in the past five years," the report said. "As long as economic growth was above trend, these apprehensions did not matter."
India's $1.3 trillion (Dh4.77 trillion) economy, Asia's third-largest after Japan and China, expanded 6.7 per cent in 2008-09, its slowest pace in seven years and sharply below nine per cent or more in the previous three years, as the global crisis took its toll.
The top-30 Sensex rose one per cent last week, rising for a second week in a row and registering the 16th weekly gain in 17 weeks. Its 49.3 per cent jump in the June quarter was the biggest since the three months to March, 1992 when it soared more than 120 per cent after Singh, who was then fin-ance minister, unveiled the first reform budget.
India must raise Rs250 billion every year from divestments, the finance ministry said in the economic review and called for selling at least 10 per cent in fully-owned government companies.
A junior minister told parliament last week the government plans to raise Rs18.54 billion from share sales in two state companies, electricity producer NHPC Ltd and explorer Oil India Ltd, in 2009-10. Finance Minister Pranab Mukherjee is expected to spell out details of more divestments in the budget.
The cash-strapped government is under pressure to raise revenue and plug its burgeoning budget deficit, which soared to 6.2 per cent of gross domestic product (GDP) in 2008-09.
- The writer is a journalist based in India.
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