FISCAL DISASTER

Standard

Do not expect goodies, extra spending, tax cuts, subsidies and any kind of relief from this budget.

Expect more levies, more taxes, reforms which can generate money for govt but would not benefit common man.

Expect tight Fiscal policy.

Because, India has reached to FISCAL DISASTER.

Dear Investor

First, about Market

Technical View

Market could not meaningfully cross 5280 after several tries.

Sure, valuation was ahead fundamentals. We were up more than 100% in a year and breather was needed.

It is not sudden and surprising because Chinese market topped out in August and since then it is in correction. It corrected close to 22% from top and since then it is into consolidation.

Indian market remain costly since end of September when I wrote that Rally is about to end ( https://investmentacademy.wordpress.com/2009/09/23/alert-a-fat-rally-is-about-to-end/ ) and further I wrote in December that Dollar’s rise should prompt market to take a pause( https://investmentacademy.wordpress.com/2009/12/07/alert-imminent-decline-in-market-with-rally-in-dollar/ ).

It took more time than expected to correct but since September Market is trading in a narrow range between 17000 and 17700.

As an investor, we always ask a question, what next?

I feel this was badly needed correction for further meaningful value based investments.

Will market correct more?

Unless Market gets back above 5008 in next few days and trades above it comfortably, there are strong technical bear forces, which would make market to test 4633. I believe, 4633 should act as strong support technically.

If Market extends correction breaching 4633, then there are all possibilities that Market would correct up to 4200.

Click on the below link to get a technical view of Nifty.

https://investmentacademy.files.wordpress.com/2010/01/nifty112.jpg

Fundamental view

But, I would not leave it up to technical parameters only. Correction was anticipated from fundamental viewpoints also.

Let me brief you about fundamental part of it

This budget is going to be a tight rope walk for our Finance Minister.

Our deficits have soared to 16 year high, put together revenue and fiscal deficits it is now 12.86% of GDP.

Our GDP is of 53 lac crore

Our budget deficit is 4 lac crore and revenue deficit is 2.86 lac crore, put together it reaches around 6.86 lac crore.

Below table shows it. It’s taken from finance ministry web site.

Don’t forget to look at last column, which shows that our revenue deficit has ballooned 137% year on year and Fiscal deficit has widened 109% year on year.

Click on link for large image: https://investmentacademy.files.wordpress.com/2010/01/govt-finances.jpg

If you are under impression that world across Govt’s have built up deficits to stem economic and market fall, why do we need to worry?

Let me show you another picture, which should open your eyes.

Look at below table( if image is not clear, click on the link).

Central Gov’s total obligations including last several decades debt to finance fiscal deficits and revenue deficits, Govt’s pension, retirement obligations towards employees, Liabilities towards paying maturity benefits for Small Saving Schemes and PPF — put all these together.

It is gargantuan debt —–    30,62,912 crore

 It is 5 times of Govt’s revenue and 56 % of GDP.

 If I add States liability together it is gigantic 43,56,781 crore

 It is more than 7 times to Govt’s revenue and 82 % of GDP.

 In 2000-01 Centre’s liability was 11.68 lac crore, from there it has tripled to 30.62 lac crore in last 9 years.

   Click on link for large image: https://investmentacademy.files.wordpress.com/2010/01/cetnters-obligations.png

Even after studying above figures you are unclear about how this would put us in trouble and why it would be difficult for our Finance Minister to continue with such a large deficits?

Have a look at below table

IMF says debt-to-GDP ratio of advanced countries to rise by 20 percentage points in 2009 – – biggest upturn in decades

June 21, 2009

 

Click on the link for large image: https://investmentacademy.files.wordpress.com/2010/01/debt_gdp-ratio_us_china_uk_june112009.jpg
   
       

Our debt to GDP ratio is 5th largest among G20.

 And look at our neighbour China, its debt to GDP ratio is mere 21.6% against are gargantuan 88.9%. I do not think we deserve to be named along with China.

 If we get into second phase of crisis, Can govt come out with spending spree? Surely not.

 Such a dire state of finance hardly leaves any space for extra spending.

 In coming years, Govt would be willing to sell more of her assets to generate the liquidity.

 I believe the Picture is clear to you. This is a FISCAL DISASTER.

 I have no hopes from Budget and recent market correction may extend if some courageous actions and policies are expected.
 

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com

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2 responses »

  1. Pingback: India Interest Rate Scenario Part -I « Investmentacademy's Blog

  2. Pingback: India Interest Rate Scenario Part -I « Investmentacademy's Blog

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