This one will go down to the wire like one of those agonizing cricket matches that pack it all into the last ball. But you can bet your last NRI buck that when when the Indian budget is unveiled this Friday, every one who has invested in the market will heave a sigh of relief, regardless of whether the result is win, lose or draw. It's because the market has not followed its usual pre-budget pattern of high expectations this time around. It took a nasty fall, kept losing hope and slipped into a stupor these past four weeks, refusing to react even to strong data confirming the economy's impressive recovery from recession. The relief for you investors in Saudi Arabia who are parked in mutual funds or have demat accounts to trade more actively, would be from knowing that your brokers and wealth managers who were stumped by the market's recent inertia would gorge on the budget's fine print and bounce back with some meaningful deliveries by email or phone on how to strategize in 2010 and make your stocks work for you. So, will Finance Minister Pranab Mukherjee manage to pull it off? Heave a mighty sixer to show that India has finally come of age as an economic power with the gall to do the right thing at the right time? Or will he just tap and run? Chances are he'll do the latter because much of last year's strong rebound of the Sensex and Nifty is owed to stimulus measures and it is still premature to make drastic cuts in support. Moreover, the global outlook remains precarious – Greece went on life-support last week, and Spain and Portugal are on the verge of following suit. Nonetheless, one reason why Mukherjee should perhaps risk taking the big hit now is that never before has the Indian economy been so strong in comparison to the rest of the world. According to C. Rangarajan, chairman of the prime minister's Economic Advisory Council, India's GDP growth in 2009-10 is expected to hit 7.2% with an upward bias toward 7.5% and a further acceleration by at least one percent in the next fiscal year ending March 2011. All the key sectors except agriculture (because of the poor monsoon) and real estate (that's deep in debt) have recorded impressive FY9-10 growth rates in the face of severe global recessionary pressures. The numbers are all out there and any serious investor should be aware of them by now. Only China has fared better than India, but then it's no democracy, isn't as transparent, and has no comparable institutions to safeguard investments. That's the upside. The downside is that India is sinking into debt. Its FY9-10 budget deficit is expected to hit 6.8% of GDP (10.3 percent for Centre and states combined), a 16-year high and the highest among the BRIC group of emerging economic powers: China's fiscal deficit is forecast to be 2% this fiscal. Brazil's 1.1% and Russia's 3.2%. Besides, inflation is approaching double digits. Food prices have gone through the roof. And the Congress government is stuck with its populist commitments made to the rural poor, it's traditional vote bank (the futile Rural Employment Guarantee Scheme that has done more harm than good is a glaring example). Other budget pressures include the huge cost of the Sixth Pay Commission that will see a revision of central government staff salaries and a further rise to bring state government staff wages on par. And there is no way the government can stop heavy spending on infrastructure so as to position India as an economic superpower in the 21st century. All said, the budget deficit could well rise 2.2% higher in the next fiscal, inviting more inflationary pressures, straining the bond market and pushing the economy closer to tipping point, which would have the all-so-important foreign insitutional investors (FIIs) fleeing to safer havens. Taking the first step toward addressing the problem of rising inflation, the government increased the cash reserve ratio (CRR) by 75 basis points last week. But Duvvuri Subbaraom, the governor of the Reserve Bank of India, the country's central bank, wants more. He wants the government to reduce public spending and begin the process of fiscal consolidation right away by lifting in phases the generous fiscal stimulus measures. His argument is that a very high level of fiscal deficit cannot be sustained over a long period. But he also says that the deficit cannot be brought down abruptly because of the need to provide adequate stimulus for continued growth. New Delhi is in a spot. It must introduce just the right dose of corrective measures that are severe enough to be remedial yet soothing enough to boost market confidence. A marginal increase in excise duties and service tax may be expected as a forerunner toward implementing the Direct Tax Code later this year. Lower corporate taxes to bring India's rate down to the 25% level of most other country's is however unlikely for now. The good news is that the government does have options lined up for later this year to raise revenues – through disinvestment of large cap public sector units the success of which would depend on market confidence, sale of 3G mobile licenses, lifting of fuel subsidies in line with the Parikh committee's recommendations, etc. For the average investor who can be befuddled by the nitty-gritty of the broader economy, here's a simple guideline that should help formulate an investment strategy for the year. It's derived from the golden rule of playing it safe by making investments according to the price to earnings ratio (P/E ratio) of a company. The latest report by the Bespoke Investment Group shows that India has the best P/E ratio over the growth rate (PEG) among 21 countries studied – ahead of China, Brazil, Singapore and Malaysia, in that order. The finding is based on India achieving a growth rate of 8% (and despite China's estimated GDP growth of 9.4%). So, if you're banking on India achieving an 8% GDP growth in 2010, which is not impossible unless a double dip recession hits Europe, the United States or any of the big economies in the Far East, go ahead and happily invest now while prices are at a low. The latter half of the year should offer some decent profit-booking opportunities. – SG Feedback: [email protected] __
