Budget 2011 will be tabled in a tough environment of high current account deficit coinciding with high inflation. While the domestic consumption-led growth momentum today seems strong, the source of strength may shift a bit from domestic consumption to exports.

This presents a challenge to the government's revenue flows. While disinvestment and 3G auctions have resulted in large fund-raising for the government this fiscal, there appear to be no such sources in sight next year. Disinvestment, which raised a tidy sum last year, would, after all, be a function of the state of the capital market this year.

New revenue sources

However, there are certain unconventional sources that the government can look to for funds. For example, sale of coal blocks has been talked about for some time. While auctions were expected last year, they may yet take place this year.

Given the prices at which Indian companies are acquiring coal assets overseas, the government can hope to raise a tidy sum of money from these auctions. We believe that Indian coal should fetch a higher price, given the higher profitability on account of proximity to consumption. Similarly, while cigarettes are highly taxed and may be taxed even higher, bidis are hardly taxed, though they account for the bulk of tobacco consumption in India. A beginning can also be made on taxation of farm income.

A Voluntary Disclosure of Income Scheme (VDIS) or equivalent scheme could also be a large fund-raiser. Withdrawal of some of the fiscal incentives granted, to sectors recording strong growth, such as automobiles, could also help, as would an increase in service taxation levels to the level of goods tax.

The challenge with these schemes is that the success of the same will only be known over time and, hence, would constrain the planned spending of the government, if fiscal deficit has to be contained. Overall, the Government is expected to budget for around 14 per cent growth in tax revenues.

This would seem to be a realistic target given the expected GDP growth of around 8.5 per cent and an inflation level of around 7 per cent resulting in a nominal GDP growth of around 15.5 per cent (Source: Finance Ministry).

Limited room on subsidies

One area where a lot of expectations lie is in subsidies. Fertiliser and fuel subsidies have been targeted over the past year. However, while some progress has been made, adverse oil price movements have made absolute reduction in subsidies difficult.

Like last year, the Budget may not account for the fuel subsidies and may account for only limited amount of fertiliser subsidy in expectation of reforms in the nitrogenous space. However, chances of any subsidy containment still appear slim, given the way commodity prices have shot up and a rapidly closing reform window, what with the forthcoming Assembly elections in some States.

Stock market performance

So, what does all this mean for the stock market performance of various sectors? Given that growth in government spending would rise by less-than-nominal GDP if fiscal deficit is to be contained, the sectors that traditionally do well in the run-up to the Budget may not really perform. Sectors such as IT may get a breather with the extension of Software Technology Parks of India (STPI) benefits for one more year, given that the DTC has been delayed, but that is not a given. The banking space may see some cheer with provision of amounts for re-capitalisation of banks in a phased manner. For the infrastructure space, new avenues of financing may help.

In terms of direction of the market, well, the market is looking oversold now and a bounce-back may be expected. However, expectations today are quite low that budgetary measures will provide the trigger to change the long-term direction of the market.

(The author is Head–Equity Bharti Axa Investment Managers. The views are personal. This is not intended to be investment advice.)

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