The neither here nor there budget has chosen the middle path

The Finance Minister, Pranab Mukherjee on Monday, February 28, presented the Union Budget for 2011-12. The reactions were mixed as expected and very clearly it appears that the budget has tried to balance everything.
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The budget is a little populist, a little political, does a little here and there but fails to deliver any big-ticket reforms.
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The statue of a bull being cleaned yesterday at the Bombay Stock Exchange (BSE) before the budget was read out

The important thing that it does is to direct a roadmap towards moving to Direct Tax Code (DTC) and General Sales Tax (GST) in 2012, if not 2013.

Volatility
The markets last week saw the BSE SENSEX losing 510 points or 2.88 per cent while the NSE NIFTY lost 155.40 points or 2.93 per cent. Yesterday, the markets saw huge volatility with the BSE SENSEX moving intra-day between a high of 18,296 and a low of 17,718 before closing with a gain of 123 points. The NSE NIFTY saw a high of 5,477 and a low of 5,308 before closing at 5,333 points a gain of 30 points.

Very clearly, the intra-day rally could not be sustained and the market lost a significant portion of the gains. The question that comes to mind is why this rally and why this fall? It was widely believed that excise duty rates would be restored to those prevailing before the global meltdown and raised across the board, which did not happen.
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This brought about a rally and large amount of short covering of positions. Once the short covering was over and the fine print of the budget became clearer, the market rally gave up almost 80 per cent of its gains.

Significant

There is one significant event, which has been announced from the stock market perspective. Earlier only Foreign Institutional Investors (FIIs) registered with SEBI were allowed to invest in the Indian capital market. Now, the Union Budget proposes that subject to Know Your Client (KYC) norms being fulfilled, foreign individuals would be allowed to invest through the mutual fund route in India.

This throws up lot of opportunities and would allow larger capital inflows into the country, which is good and bad for the economy. The details of this scheme would be available at a later date and it is only at that time that clarity on this subject would be available. At this point, there would be plenty of discussion on this subject whether it is good for our economy or not and also whether it is an indirect route for money currently parked overseas, to be routed into the company.

Middle

The budget is neither good nor bad. It has chosen a middle path and chosen to abstain from major reforms or being a path setter. It is soft and is a middle path budget talking about the concerns of inflation, rising crude oil prices and corruption. It chooses to address issue of black money by more agreements of double tax treaties.

Digest

Coming to the issue of stock markets and investors, I believe the markets will need a couple of days to digest the budget implications. During the course of the week, the immediate hurdle would be crossing yesterday's intra-day highs while the previous week's lows would be supports.

I believe the markets would remain range bound and wait for the next week by which time various experts would have discussed the budget and its implications threadbare. Summing up, I believe the road map for DTC and GST has been spelt out and the opportunity for individual foreign investors through the mutual fund route could be a big opportunity once global markets stabilise.