Dr. Mukherji has done a fairly good job by proposing measures to tackle inflation through significant supply side initiatives while seeing that the growth rate would not be compromised. The estimated fiscal deficit of 4.6 per cent with revenue deficit of 1.8 per cent for the year 2011-12 if achieved will help in gaining the confidence of the investors in the economy.

Infrastructure drive

The array of measures proposed for increasing agricultural production and improving supply will make a positive impact on inflation although not in the short term. The infrastructure industry is a big beneficiary since they will have easy access to capital through tax free bonds. The FIIs will be able to invest more in this sector in corporate debt paper. The proposal to set up infrastructure SPVs for launching debt funds with dividend tax incentive will help in raising more resources internally like the tax free bonds. This will help the government's stated objectives of investing $1-trillion in infrastructure during the next plan period. A booming infrastructure sector should drive growth in steel, cement and other allied industries.

The stock market in general should be happy to see that there is no reversal of economic stimulus as was feared during the run up to the budget; in addition to a marginal reduction in corporate tax through a lesser rate of surcharge.

The proposal to continue the course of disinvestment of PSUs with a target of raising Rs 40,000 crore will be subject to the market conditions. However, the specific announcement to retain 51 per cent in PSUs also can be taken as a part of the intention to bring down government holding to 51 per cent in many large listed PSUs if the markets help.

Investment measures

The most important announcement for the market is the proposed permission for foreign investors to directly invest in Indian markets through the Indian Mutual Funds. This significant change in portfolio investment will make it easy for foreigners to invest in India instead of going through an FII, a sub-account or a participatory note. However, there are two noteworthy hitches due to tax and regulatory complexities. It will be difficult to compete with Mauritius route as there is tax incentive attached to that route. Apart from this, one must remember that markets like the US and some other rich economies do not permit soliciting of investments by foreign mutual funds. However, oil rich West Asian investors will find this an attractive investment route to participate in the India growth story.

In the first two months of this calendar year, the FIIs have pulled out around Rs 9,000 crores which resulted in 16 per cent fall in the markets. The moot question is whether the budget will be an instrument to change FII sentiments? It is difficult to presume so as the FIIs will continue to keenly watch the scams and corruption stories which continue to attract lot of international attention. Although there have been many mentions about improvements in governance and elimination of corruption in the budget, these remain long-term ambitions. While the budget is a statement of good intent, the sentiment of the market will continue to be decided more by foreign flows in the days to come.

(The author is the Founder of Geojit Financial Services Ltd.)

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