India Budget Disappoints Investors

By Mehul Srivastava, 6th July 2009, BusinessWeek

India's Finance Minister Mukherjee presents a budget that increases spending on the rural poor but leaves the future of reforms uncertain.

Trapped between a stuttering economy and a spiraling deficit, India's newly reelected government of Prime Minister Manmohan Singh decided on July 6 to toe a middle path, with Finance Minister Pranab Mukherjee presenting a budget that disappointed an over-eager stock market and provided little clarity on the future of reforms that have driven the country's economic growth in the past. Instead, the government decided to tinker with tax rates, pledge increased spending in infrastructure, and borrow heavily from domestic markets to spend in rural areas, which make up more than 60% of India's population and 46% of its gross domestic product.

Investors immediately showed their disappointment. The benchmark 30-stock Sensex index dropped 5.83% following the budget speech by Mukherjee, after having rallied nearly 55% this year, including a 17% one-day leap after Indian voters gave a Communist-free coalition government a resounding victory in June. "Those of the view that the budget would encompass all sorts of exciting structural economic reforms have just had their hopes firmly dashed," says Robert Prior-Wandesforde, Hong Kong-based economist for HSBC (HBC). In addition, "there is a good chance that the government will, as has often been the case in the past, undershoot its infrastructure spending commitments," he said.

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