Budget 2010: Cheers to middle class, jitters for 'aam admi'

The elephant has been synonymous with India from time immemorial, through history, mythology and belief. For decades, the Indian economy, too, came to be likened to an elephant, but in a pejorative, lumbering sense. Today, as the balance of global power shifts to the East, and India is regarded with awe for weathering the financial storm better than most, the elephant analogy is back – but with the positive attributes of size, stability, solidity and strength. With our economy projected to become the second largest in the world, after China and ahead of even the US, there’s a growing sense that we’re riding a quiet but powerful giant, one that needs to be taken care of if we want it to travel far and carry over a billion people on its back. Just as the elephant-god is worshipped by millions as remover of obstacles and bearer of good fortune, our Budgets are awaited with a prayer that they will lead us to a better tomorrow. Will this Budget make a difference to our lives, will it help the elephant dance?

NEW DELHI: When finance minister Pranab Mukherjee presented the interim budget last year on the eve of elections, the phrase 'aam admi' figured five times in his speech starting with the opening paragraph. In his latest Budget speech on Friday, the aam admi figured only twice and had to wait till well into the speech to be invoked.

Is this more than just trivia? It might well be. The salaried middle class can celebrate an entirely unexpected windfall of up to Rs 56,000 per annum from the reworked personal income tax slabs and a new tax exemption option. Most Indian corporates have reason to be happy with the surcharge on corporate tax coming down from 10% to 7.5%, even if some among them will be unhappy about the minimum alternate tax (MAT) being hiked from 15% to 18%.

Reformers will welcome the declaration of intent implied in a disinvestment target of Rs 40,000 crore for the coming year — and another Rs 14,000 crore in the one month left in this year — and the assertion that the return to fiscal rectitude has begun with the deficit being pruned to 5.5% of GDP. The proposal to issue new banking licences to the private sector after a gap of over 10 years should also please business groups that have been hankering for entry into the sector.

In contrast, the aam admi might wonder why the 'flagship' rural employment scheme (NREGS) has been given just 2.5% more than in last year's budget and the ambitious Bharat Nirman has got just 6% over the budgetary allocation last year. In real terms, adjusting for inflation, both would amount to a cut in outlays.

The aam admi is also hardly likely to be pleased with the hike in fuel prices by way of excise and customs duty increases on crude oil and petroleum products — which alone are estimated to yield the government an additional Rs 26,100 crore in the coming year. This is bound to stoke fears of further inflation. The fact that excise duty hikes are more or less across the board — in a partial exit from the stimulus package rolled out through late 2008 and early 2009 — does not help.

Mukherjee's announcement that excise duty on petrol and diesel will go up by one rupee per litre prompted what might well be the first-ever boycott of a budget speech, or a part of it, by the Opposition. That's a sign that these parties believe they can gain some political traction on the issue.

True, the middle class too will not be spared the impact of these duty hikes, which the FM later insisted would directly raise the inflation rate by just 0.4%. It can also point to the fact that the extended coverage of service tax to things like domestic air travel and under-construction houses will do it no favours. But it would be difficult to dispute that on balance the Budget has saved more money for this section than it has taken away.

As for corporates, the 175-point rise in the Sensex on the day was a fair indicator of how the markets perceive the overall impact of the Budget on India Inc. While excise duty hikes are never good news for industry, the much lower-than-expected borrowings of the government — projected at Rs 3.45 lakh crore — means business need not fear being either crowded out of the credit market, or being hit by the kind of rise in interest rates that a larger borrowing programme would have meant by increasing the demand for credit.

The FM is clearly betting on growth to help him raise revenues on the scale he expects, while the fact that the pay commission arrears and farm loan waiver are no longer a millstone around his neck has helped enormously in keeping expenditure from rising too much.

The direct tax changes for individuals and corporates, he said, would cost him Rs 26,000 crore over the year, while the excise, customs and service tax changes would get him an additional Rs 46,500 crore, thus yielding a net Rs 20,500 crore. On the corporate tax front, a higher MAT will fetch him Rs 6,000 crore, while lower surcharge will lose him Rs 5,000 crore — a modest additional burden of Rs 1,000 crore on India Inc.

Mukherjee said in his speech that the proposed move to a goods and service tax (GST) would have to wait till April next year and that he would also introduce the proposed new direct tax code, which is premised on lower rates with fewer exemptions, from April 2011.

Later in the day, he told a TV channel that while he was sure about the introduction of the direct tax code next year, since that was within his purview, GST coming into force would require the concurrence of the states and hence was something he couldn't guarantee.

Economic Survey positive on economy, worried about price rise

NEW DELHI: Enthused by reforms and the strong fundamentals, the Economic Survey on Thursday predicted that India would bounce back to a high nine per cent growth in 2011-12 on the way to becoming world's fastest growing economy in four years.

The document, which assesses the state of the economy, warned that high food prices would rise further over next few months and criticized the food management policies that have led to "unacceptably" high prices of items like sugar.

Food inflation is at present hovering close to 18 per cent.

The pre-budget Economic Survey (2009-10), presented by finance minister Pranab Mukherjee in Parliament, also recommended a "gradual rollback" of stimulus measures after assessing the impact on each sector.

Projecting the economic growth to touch up to 8.75 per cent in 2010-11 and nine per cent in the next year, the survey said: "It is entirely possible for India to move into the rarefied domain of double digit growth and even attempt to don the mantle" of the fastest growing economy in the world within the next four years.

It, however, expressed concern over rising prices, saying that a major concern during 2009-10 was the emergence of high double digit food inflation.

In a direct criticism of the government, particularly over the very high consumer price inflation, the survey said that the "hype" over kharif crop failure without taking into account the comfortable food stocks and rabi prospects "may have exacerbated inflationary expectations encouraging hoarding and resulting in a higher inflation in food items.

"... in the case of sugar, delay in the market release of imported raw sugar may have contributed to the overall uncertainty, thereby allowing prices to rise to unacceptably high levels in recent months," it added.

The survey said that "since December 2009, there have been signs of these high food prices, together with the gradual hardening of non-administered fuel product prices, getting transmitted to other non-food items, thus creating some concerns about higher than anticipated generalised inflation over the next few months."

Referring to projection of 7.2 per cent growth of the economy in 2009-10, the survey said, "The fast-paced recovery of the economy underscores the effectiveness of the policy response of the government in the wake of the financial crisis."

The board-based recovery, it added, "Creates scope for a gradual rollback, in due course of some of the measures undertaken over the last 15 to 18 months, as part of the policy response to the global slowdown."

These initiatives, it added, were also necessary for pushing the economy back on the growth path of 9 per cent, the rate at which the economy was expanding before the global crisis hit the world.

Two-third of India's forex kitty due to rupee rally: Survey

NEW DELHI: The country's foreign exchange reserves grew by USD 31.5 billion in the first nine months of this fiscal, but credit for two out of every three of these dollars go to the rupee appreciation.

The Indian currency's sharp appreciation against dollar -- an eyesore for the export sector that has been the main contributor to forex reserves traditionally -- contributed USD 20.3 billion or 64.4 per cent to the total accretion in forex reserves till December 2009 in the current fiscal.

The total foreign exchange reserves increased by USD 31.5 billion in 2009-10 fiscal, from USD 252 billion at the end of March 2009 to USD 283.5 billion in December 2009, according to the Economic Survey presented in Parliament today.

The pre-budget document on the country's economic health added that the actual accretion in forex reserves was, however, only USD 11.2 billion (35.6 per cent of the total increase of USD 31.5 billion), which was mainly due to rise in FDI inflows and investments from foreign institutional investors.

"... accretion of USD 20.3 billion (64.4 per cent) was on account of valuation gain due to weakness of the US dollar against major currencies," the Survey said.

Rupee has been appreciating against the US dollar in the current fiscal, largely due to signs of economic recovery and revival in FII inflows after March 2009.

Hathway Cable falls 12% after listing

MUMBAI: Cable television and broadband services provider, Hathway Cable & Datacom Ltd, listed on Thursday in line with its issue price of Rs 240, but slipped as much as 11.7 percent in early trades.

The company had sold 27.75 million shares to raise up to Rs 7.35 billion ($158 million) to be used for customer acquisitions, capital expenditure, loan repayment and general corporate purposes.

At 9.01 a.m., shares were down 3.75 percent at Rs 231 in BSE, which was up 0.2 percent.

Sensex below 16200; FMCG, auto, metals down

MUMBAI: Indian markets were slipped lower on account of profit booking on February series F&O expiry day. Gains in capital goods and realty were offset by losses in FMCG, auto and metals space.

Meanwhile the Economic Survey for 2010 sees FY10 fiscal deficit at 6.5 per cent with 2004-05 GDP base and FY10 revenue deficit at 4.6% with 2004-05 GDP base.

At 11:30 am, Bombay Stock Exchange’s Sensex was at 16175.37, down 80.60 points or 0.50 per cent. The 30-share index hit intraday low of 16167.13 and high of 16329.33.

National Stock Exchange’s Nifty was at 4838.50, down 20.1 points or 0.41 per cent. The index touched a low of 4835.60 and high of 4880.15 in trade so far.

“If Nifty sustains above 4855 then we may see some support buying in market. The index has support at 4855-4840-4820. Below 4820 we may see more profit booking and pulling down the Nifty to 4805-4790. On the higher side, Nifty has resistance at 4880-4905 and above 4905 we may see comfort buying taking the index to 4920-4935 during the day. Today is February series expiry so we may see stock specific action in market. Nifty expiry is expected to around 4900 ( +/- 10-15 point ) because the whole month market was in range of 4800-4900,” the Arihant Capital Market report said.

BSE Midcap Index was down 0.02 per cent and BSE Smallcap Index moved 0.11 per cent higher.

Amongst the sectoral indices, BSE FMCG Index was down 0.74 per cent, BSE Auto Index fell 0.46 per cent and BSE Metal Index slipped 0.36 per cent. BSE Capital Goods Index moved 0.59 per cent higher and BSE Realty Index gained 0.20 per cent.

Hindustan Unilever (-2.17%), Tata Motors (-1.96%), GAIL (-1.39%), Grasim (-1.14%) and Sun Pharma (-1.11%) were amongst the top Nifty losers.

Hindustan Unilever (-2.85%), Tata Motors (-2.78%), Sterlite Industries (-1.77%), Jaiprakash Associates (-1.51%) and Hero Honda (-1.29%) were amongst the major Sensex losers.

L&T (1.32%), Maruti Suzuki (0.88%), Mahindra&Mahindra (0.32%), Bharti Airtel (0.31%) and BHEL (0.25%) were amongs the top Sensex gainers.

Market breadth was negative on the BSE with 1150 advances and 1309 declines.

Vaghul-led panel to probe fraud at Wipro

MUMBAI/BANGALORE: Narayanan Vaghul, former chairman of ICICI and an independent director with software major Wipro, is heading an internal probe into the recent embezzlement case at the firm, amid signs that India’s third-largest software company is exploring options of an organisational reshuffle to fix accountability.

People familiar with the development said the high-level internal probe has the backing of Wipro chairman Azim Premji, who has taken a serious note of the embezzlement which, although small in magnitude, has the potential to dent Wipro’s reputation in India and overseas.

The fraud at the NYSE-listed Wipro has already attracted attention, especially from overseas investors. The Wipro stock fell 0.6% to Rs 671 on Wednesday. The scrip has lost 4% in the past month since January 25. In comparison, the BSE’s broader index, Sensex, was down 3.5% during the same period.

ET had first reported about the development in its edition dated February 16, where it was also mentioned that Wipro CFO Suresh Senapaty confirmed the embezzlement amount to be about $4 million. A Wipro spokesperson, when contacted on Wednesday, declined to comment, saying that internal investigations were on. Wipro is also bringing in professional services firm Ernst & Young to minutely verify the audited accounts that were earlier certified by the company’s statutory auditor BSR — an audit arm of KPMG. Both E&Y and KPMG are part of the Big Four accounting firms that typically audit large companies such as Wipro.

However, auditors that ET contacted didn’t read much into the move to bring in E&Y. “The appointment of E&Y shouldn’t be construed as contradictory to KPMG, as E&Y’s job would be more akin to that of an internal auditor,” said one auditor, adding the difference would be like that of macro and micro job. The internal auditor would have to closely go through every transaction to detect any wrongdoing, something that is not typically followed by a statutory auditor. Usually, a statutory auditor relies on financial information given by the internal auditor. Both KPMG and E&Y declined to comment for this story.

Mr Vaghul would oversee the investigations being carried out by the company’s audit and legal committees. “The investigations should get over before April,” said the person who is connected with the process, but can’t be named as he isn’t authorised to speak to the media.

Wipro is also understood to be exploring options of effecting a reshuffle in key organisational portfolios, in a bid to fix accountability. “A broader restructuring of the finance division involving senior officials is also being considered,” said the person.

The fraud came to light in December last year after a banker to the firm alerted Wipro about an overdraft. An employee working with Wipro’s ‘controllership’ division within the finance department had embezzled about $4 million by exploiting the exclusivity of access to the company’s banking accounts.

Some members of the audit and investigation committee of Wipro have raised concerns about whether more people were involved in the fraud. “How can somebody steal a password once and keep siphoning money over three years — passwords are changed frequently as part of the information security policy,” said the person familiar with the incident.

“It’s an employee fraud...You can’t hold somebody at his position directly liable, but it does put certain pressure on the management,” added the person.

Maruti shares hit 6-month-low on recall

MUMBAI: Shares in Maruti Suzuki pulled back after sliding to a six-month-low early on Wednesday, a day after India's top carmaker said it was recalling 100,000 of its A-Star hatchbacks sold overseas and in India.

Maruti, in which Japan's Suzuki Motor Corp has 54.2 percent stake, said on Tuesday that a faulty gasket leading to a potential fuel leakage problem had been identified and the company had fixed about half of the cars.

"As expected initially the stock opened lower, as any recall involves costs," said Arun Kejriwal, director at research firm KRIS.

"But, I think, people are awaiting more details on the costs and the full impact of it before they take a definitive view. It seems to be a one-off event," he said.

Maruti shares initially fell about 2 percent to Rs 1,310, their lowest since Aug. 19 last year, but quickly pulled into positive territory and then eased again. At 9:33 a.m. (0403 GMT), the shares were up 0.05 percent at Rs 1,336.90.

The stock has fallen 14.3 percent this year, lagging the main index which has lost 6.7 percent.

Economy to grow over 7.5% this fiscal, 8% next fiscal: FM

DELHI: Finance Minister Pranab Mukherjee on Wednesday said the economy will grow by over 7.5 per cent this fiscal helped by stimulus measures, but offered no hints if these sops will be retained or partially rolled back in the Budget on Friday.

For FY'11, Mukherjee pegged growth at over eight per cent. "Central excise has been used as a fiscal tool to cushion the impact of the global recession. It is reassuring to note that stimulus measures, including reduction in central excise duty, have had a positive impact on the Indian economy," the Finance Minister said at an event to mark Central Excise Day.

Mukherjee said that an impressive industrial growth of 16.8 per cent in December suggests the economy will grow by over 7.5 per cent in 2009-10 and over eight per cent in the next fiscal. The economy needs to grow by double digits to eliminate poverty and illiteracy, he added.

To blunt the impact of the slowdown that swept the globe since the middle of 2008, the government had cut excise duty by 6 per cent and service tax by 2 per cent, besides stepping up spending to provide Rs 1.86-lakh crore worth stimulus.

But, these measure widened fiscal deficit to 6.2 per cent of GDP in FY'09 from Budget estimates of just 2.5 per cent. As such, the Prime Minister's Economic Advisory Council has sought partial roll back of stimulus and there is speculation in certain quarters that stimulus might be withdrawn in the Budget, given recovery in the economy.

But, the Finance Minister did not give any indication to that effect. In fact, the PMEAC had favoured raising of excise duty by two per cent to the level of service tax at 10 per cent or raising both excise duty or service tax to 12 per cent.

However, many others, including industry, say that economic recovery is still confined to a few large sectors, and as such there is no case for withdrawing stimulus measures at all. They say that the recovery is still dependent on stimulus and the economy may again slow down, if these fiscal steps are taken back, partially or wholly.

Indian economy grew by a spectacular 7.9 per cent in the second quarter of this fiscal against a mere 6.1 per cent in the first quarter and 5.8 per cent each in the preceding two quarters.

Japan govt repeats deflation warning, pressure on BOJ

TOKYO: Japan's government warned on Tuesday that deflation, high job losses and weaker global growth could hurt the fragile economic recovery,

and the finance minister called on the central bank again to help it fight price falls.

The government hasn't said exactly what it wants the Bank of Japan to do, however, and while both sides say they share the same view on deflation, the BOJ has resisted further steps after caving in once in early December as the yen hit a 14-year high.

Despite the stalemate, analysts say the BOJ could take fresh action if risk aversion hits the financial markets again, knocking down Japanese share prices and sending the yen higher, as that could blow the recovery off course.

"If, for instance, US payroll data were to turn out very weak and send the yen higher, the BOJ would probably take more action," said Takuji Aida, an economist at UBS Securities.

"The BOJ may extend its cheap fund offer to six months from the current three months, or it could increase its offer of three month funds," he said, referring to the special operation the BOJ announced on Dec. 1 under pressure from the government.

In a monthly report, the government reiterated that it would work with the central bank to overcome deflation and ensure an economic recovery, even as it maintained its overall view that the economy is picking up.

"The government and the BOJ are basically in agreement about the need to overcome deflation. The government is doing what it should and it expects the BOJ to do the same," Finance Minister Naoto Kan said on Tuesday.

But the minutes of a central policy-setting meeting in late January showed the BOJ is in no rush. While some board members noted surveys showing a decline in consumers' near-term price expectations, the board decided against fresh steps as it judged that its policy was accommodative enough to support the economy.

KEEPING UP THE PRESSURE

Government representatives at the Jan. 25-26 board meeting called on the central bank again to help it overcome deflation through flexible monetary policy, the minutes showed, but the board took no action and kept rates on hold, as it did this month.

The board agreed that deflationary pressure would drag on even as it nudged up its price forecasts, while a few members said consumers' longer-term price expectations, which the central bank thinks are the most important thing to look at, have not changed much, the minutes showed.

Some BOJ board members said market attention to the nation's fiscal deficit was increasing and that it was becoming more important to gain market trust in fiscal and monetary policies, the minutes showed.

In its economic report, the government slightly downgraded its view on exports, saying export growth may be turning moderate, adding that Toyota Motor's recall woes were a concern for the economy.

"Strong growth in Asia-bound exports seems to be slowing. And we also have to consider Toyota's recalls. So we've given a cautious judgment on exports," said Keisuke Tsumura, Parliamentary Secretary of the economy.

Toyota's sales have fallen since it recalled more than 8 million vehicles globally for problems including sticky accelerators and a braking system glitch in its hybrid models.

Japan's economy grew 1.1 percent in the three months to December, but it is expected to slow early this year as the boost from stimulus-fuelled spending fades. Kan said last week that he would favour inflation of around 1 percent, roughly matching the BOJ's view, and he urged the central bank to do its part to achieve that goal.

Toyota global sales up 15.3% on-year in Jan

TOKYO: Toyota Motor's global sales in January were up 15.3 percent year-on-year, the company said on Tuesday, as the Japanese automaker showed

resilience despite being hit by massive recalls that month.

Toyota sold 537,454 vehicles in January, excluding subsidiaries Hino and Daihatsu Motors, a spokeswoman said. The world's largest carmaker sold 416,411 Toyota cars, buses and trucks overseas and 121,043 units in Japan, she added.

January domestic sales jumped 45.3 percent from the previous year, while overseas sales excluding Japan gained 8.8 percent. Toyota said it does not have global sales figures for Hino and Daihatsu.

The new figures underlined robust demand for the iconic Japanese automaker although it faces a deep crisis over its flawed accelerator and brake systems that have forced it to pull 8.7 million vehicles worldwide.

The major recalls in the United States, its biggest overseas market, as well as Europe and parts of Asia came toward the end of the month and may have had a stronger impact on consumer sentiment in February.

The company also said worldwide production jumped 55.8 percent to 643,925 units in January from the previous year. Including Daihatsu and Hino vehicles, that figure amounted to an increase of 46.5 percent to 716,570.

Company president Akio Toyoda is set to face a grilling by US lawmakers Wednesday, after the company revealed Monday that it had been subpoenaed in a US criminal investigation of its handling of the recalls.

Exemption limit on medical and travel costs likely to go up

NEW DELHI: While industry is apprehensive of a possible rollback of the stimulus package, there could be some cheering news in the forthcoming

Union Budget for salaried employees. The government is likely to increase the exemption limit for reimbursement against medical and travel expenses. A hike in the exemption limit for gratuity payment from the present Rs 3.5 lakh is also being considered.

At present, reimbursement of medical expenses up to Rs 15,000 is tax-free . Any reimbursement above that is counted as income and taxed. Similarly, transport allowance is tax-free only up Rs 800 a month. These exemption limits were fixed 10 to 15 years back. The income-tax department is now considering an adequate increase to at least ensure that inflation in the years since is neutralised . In the last 10 years or so, the average price of commodities has almost doubled.

Senior tax consultant Subhash Lakhotia pointed out that the exemption limit on medical reimbursement was introduced from April 1, 1999. In the last 10 years, because of general inflation and the high cost of medical treatment and medicines, the limit of Rs 15,000 has become grossly inadequate.

Executive director of tax consultancy firm KPMG Vikas Vasal too said the revision of the limit is overdue . ‘‘ It should be made meaningful,’’ he said.

Easing Tax Sting

Rs 15,000: Exemption limit for reimbursement of medical expenses. Tax experts say it should be made Rs 50,000

Rs 800/mth: Cap on allowance for commuting between home and office. ‘Meaningful hike’ likely

Rs 3.50 lakh: Tax-free gratuity payment. Anything above this is taxed for pvt employees, though tax-free for govt employees. Amount may be raised to Rs 10 lakh

Small liquid funds promise big returns

MUMBAI: With short-term yields firming up and likely to hold steady over the next few months, distributors are asking affluent investors to park

their money in liquid funds managed by small fund houses.

According to investment experts, fund houses with small liquid fund pools have better chance to provide more ‘per-investor returns’ as their asset bases are small and the returns generated are to be distributed only to a lesser number of investors.

The sales pitch is pretty straight and simple. Assuming there are two liquid funds — fund A having a corpus or Rs 100 crore and fund B with a corpus of Rs 1,000 crore — and both are generating similar returns (say 4.5%) currently . If fresh investments of Rs 25 crore each flow into both these funds, the percentage of fresh money in small fund will be 20% and that of large fund, (percentage of new money) it will be just about 2.5%. If both the funds invest in papers with same yields (say 5.75%), returns generated by the smaller fund will be much larger than the portfolio yield on larger fund (as the proportion of fresh money to overall portfolio is larger in the smaller fund).

“The difference in returns (between the small fund and large fund) could be even higher in current times, as yields on shorter duration papers are firming up after the rate hike by RBI,” said Sujoy Das, head-fixed income, Bharti Axa Mutual Fund. However, Mr Das is quick to point out that large funds sitting on high cash levels will be able to match returns generated by smaller funds in such situations.

Yields of money market papers maturing within 3-6 months have gone up by over 125 basis points, post the CRR hike a few weeks ago. According to experts , despite the rising yields, most debt fund managers will not be investing their money in short-term papers, as they would be wary of corporate investment outflows to meet advance tax payments and bank redemption. This will further jack up yields temporarily for a brief period. If industry sources are to be believed, most fund houses are maintaining cash-levels between 40% and 70% of their liquid portfolio AUM.

“Theoretically, smaller corpus funds will provide high per-investor returns as their asset base is much lower and they will begin investing at higher yields. But then, in these times, even large funds will do well as most of them are sitting on high-cash levels and they will also deploy cash as yields go up,” said Ritesh Jain, headfixed income, Canara Robeco MF. According to Mr Jain, large funds, sitting on cash, will only start investing once they get a clear idea about bank redemption and advance tax outflows in March.

From a retail investor’s point of view, investors should do a cost/reward comparison before investing in smaller funds to jack up portfolio yields. “I’ll stay away from such gimmicks. If I am a liquid fund investor, my sole aim will be to protect my corpus (before permanently investing somewhere else) and get some marginal return on it,” said Mumbai-based financial planner Gaurav Mashruwala.

“If the investor still wants a higher return , he should look at the return differential (likely to be generated on a small fund pool and large fund pool) before adopting this strategy. If the gain (return differential) is just about 3-3 .5% per annum , it is not worthwhile to invest in a small fund pool,” Mr Mashruwala added.

Partial stimulus rollback may cut net govt borrowing in FY11

MUMBAI: The Union government’s overall borrowings from the local debt market for the next fiscal may exceed that in the current year, but the large chunk of scheduled bond redemption could keep bond yields in check, say analysts. In fact, most market watchers predict the country’s net borrowing in FY11 (after adjusting for redemption that release liquidity) could likely be lower than that in the current year. Finance minister Pranab Mukherjee will announce the borrowing target in the Budget this Friday.

The gross market borrowing figure for FY11 is expected to be between Rs 4.6 lakh crore and Rs 4.9 lakh crore, helped partly by the roll back of fiscal stimulus measures. That would be broadly in line with what RBI seems to have factored in, it recently predicted the gross borrowing to be ‘slightly higher’ than this year’s record Rs 4.51 lakh crore. RBI is the merchant banker to the government and helps it find investors for government securities.

“The market has more or less discounted these possible higher borrowing targets and the immediate reaction may not be significant,” said Sandeep Bagla, senior vice-president at ICICI Securities Primary Dealership, a bond house. But he adds that yields on the 10-year benchmark bond could shoot to 8.40-8 .50% levels once the bond sales actually begin in April. The paper ended Monday at 7.83% and has risen 30 basis points in the last month.

Other bond market officials say a shortfall of revenues this fiscal could force the government to borrow more in March through sale of cash management bills or short-term treasury bills. Nomura Securities, an investment bank, expects the government to borrow a gross Rs 4.88 lakh crore in FY11, but the next year’s net borrowing could fall to Rs 3.74 lakh crore from about Rs 3.98 lakh crore in the current fiscal.

owever, there is a possibility that government may use up lesser money on subsidies. Although the bank needs to withdraw liquidity in 2010, monetary policy may be forced to stay more accommodative than necessary to ensure smooth financing of the sizeable FY11 borrowing, Nomura added.

Most banks are already heavy on government bonds, with most nationalised banks sitting on 28-30 % SLR levels (statutory liquidity ratio — a part of deposits parked in liquid government securities.) This could will mean that demand for bonds may not be big, dealers point out. In 2009, the central bank was helped in managing the borrowing through its open market bond purchases, weak private credit demand, and unwinding of sterilisation securities. Most of these avenues will not be available in 2010.

Deutsche Bank said government debt is likely to cheapen in FY11 (10-year yields to go to 8.5%) as the shortfall in demand for bonds widens in the absence of RBI buying and the likely tightening of monetary policy. “Effective net supply of central and state government bonds will be up between 3% and 10% on year-on-year basis, in spite of possibly a lower headline number,” it said in a note to clients.

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