Mumbai: Stock markets remain nervous after the government`s annual economic survey on Monday suggested "a pause" in fiscal consolidation, sending bonds plummeting.
However, after the Economic Survey, much now depends on Union Budget that is all set to be presented tomorrow (February 1).
Since his election four years ago, Indian markets have welcomed Prime Minister Narendra Modi`s campaign to mend patchy public finances and develop new areas of growth in Asia`s third largest economy.
Stocks have been more resilient, gaining 4.9 percent this year and hitting records amid signs earnings are recovering after years of poor performance.
While investors expect some spending to support an economy that`s expected to post its weakest growth in four years, they will want to see such stimulus is well-financed.
Here are five things Modi government needs to do to keep investors` confidence
- Modi government will need to be seen containing the fiscal deficit, while also increasing spending in key areas of the slowing economy.
- Markets will be focused on how much India widens its fiscal deficit beyond the 3 percent of gross domestic product projected for 2018-19.
- A modest widening of that nature would calm investors worried that the government may slip away from its judicious spending. Traders say bond yields could fall 10 to 15 basis points, while shares could hit new record highs. Gains could be more pronounced if India sticks to its 3.0 percent target.
- A a deficit above 3.2 percent could hit shares and send bond yields up by 20-25 basis points, depending on the size of the blowout, on fears of populist policy ahead of next year`s elections. The government will have to take care so that the budget is neither inflationary nor fiscally less prudent.
- Growth has been hampered by a chaotic rollout of a goods and service tax last year and a shock move to ban high value currency notes in late 2016, which hit tax revenues and increased the chances the fiscal deficit shortfall would hit 3.2 percent target for the year to March. Government should maintain fiscal discipline in this Budget.