The markets reacted to poor Congress performance and was down on Tuesday and Wednesday. All eyes are now focused on Finance Minister Pranab Mukherjee and the Budget he is expected to deliver on March 16.
This budget has to be more pragmatic since it has to focus on fiscal consolidation. Any move
for a populist budget will result in the fiscal deficit going completely haywire. This is expected to see markets reacting negatively. Already the fiscal deficit is projected to be way beyond the projected 4.6% made at the time of the Union Budget 2011-2012.
Also, the government has to keep in mind that crude prices have risen dramatically, which means that the subsidy bill has gone higher and any further hike in crude prices cannot be ruled out. This would continue to increase the fuel subsidy, and hence the fiscal deficit, since it may not be prudent to deregulate diesel prices, due to the political storm it creates. Also, the rupee has begun falling and has breached the 50 mark to the dollar once again, making crude prices even dearer. The Government may not be able to do much in reducing the fertilizer subsidy, which will continue put a strain on the fiscal deficit.
The government while being prudent in doling out goodies, would also have to look at its revenue side. It would have to look at ways to mop up revenues, considering the fact that net direct tax collections have grown negatively in the first nine months ending December 2011.
Clearly, the FM has to now look at balancing growth with fiscal consolidation. Apart from this the key reform initiatives like 100% FDI in multi-brand retail and the DTC must be pushed through with greater urgency. This alone would ensure that India's long term story is intact and markets would react positively.