>STRATEGY & ECONOMICS (MORGAN STANLEY)

Budget F2010 – Tilting Policy Bias toward Growing the Pie

First key policy signal from the new government: Investors are likely to watch the budget announcement on July 6 closely as this will be first major policy announcement from the new government and will be a reflection of the government’s priorities. Will the budget live up to the market’s expectations? We think the budget will provide positive signals, indicating the government is keen to make progress in policy reforms.

Growing the pie is as important as redistribution: Despite the slow pace of reforms during F2006-2008, positive global factors ensured strong GDP growth. However, in the current environment where global growth is likely to be sub-par, the government will need
to move on economic reform. We expect the government to take a balanced approach, with adequate focus on reviving growth and sending the right signals to the private sector.

What do we expect from the budget? We expect the budget to focus on the following themes: (a) announcing a clear plan to improve the health of public finances; (b) augmenting resources through a divestment program; (c) committing to an increase in infrastructure spending; (d) implementing a goods and services tax (GST) scheme; and (e) maintaining the push on social sector spending but without straining the fiscal deficit further. Our expectations for FDI liberalization remain low.

Stock market implications – will history repeat? Our India Strategist, Ridham Desai, highlights that history does not favor a move up in the market in the month post the budget. However, he argues that this time, since we expect the finance minister to deliver a reform-oriented budget, history may not necessarily be relevant.

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