What to look for in Budget 2009

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New Delhi: The new UPA government will present the FY10 federal budget on July 6 and is expected to expand both the budget deficit and its market borrowing requirement to support growth.

Following are some scenarios on what Finance Minister Pranab Mukherjee may announce and its impact on financial markets. The current fiscal year of 2009/10 runs until the end of next March.

BUDGET DEFICIT

The government is almost certain to expand the 2009/10 budget deficit beyond the 5.5 per cent set in an interim and pre-election budget in February.

Bonds have priced in expectations that the deficit will swell to between 6.25 per cent and 6.5 per cent of GDP. So it is unlikely to be rattled so long as the deficit is around these levels.

But any sign that the government is bowing to pressure for populist spending measures to make good on promises made in the April and May general election would spark a bond sell off.

If it also fails to present a plan to bring the deficit back under control in subsequent years, the country's credit rating could come under pressure.

GOVERNMENT BORROWING TARGET

The government will raise its borrowing target for 2009/10 to help pay for its increased budget deficit.

Bond yields have jumped to factor in a massive increase in government borrowing. Ten-year bond yields, for example, are up 170 basis points since the start of the year.

The forecast borrowing would be 29 per cent above 2008/09 borrowing of 3.06 trillion rupees.

ASSET SALES:

Mukherjee is likely to announce plans to sell shares in some state run firms to help fund rural and social programmes, a central part of the government's election platform.

Asset sales would relieve pressure on the bond market and help keep the budget deficit in check.

Analysts say the stock market could absorb 100 billion rupees ($2.1 billion) in share sales. A higher amount would be difficult to swallow and would weigh on market sentiment.

Analysts suggest Coal India Ltd and hydro-power generator NHPC would be among the easiest IPOs to complete.

Shares in railways consulting firm RITES, power equipment maker Bharat Heavy Electricals Ltd, Rural Electrification Corp and power transmission firm Power Grid Corp could also be sold off smoothly, they say.

However, potential sales of telecoms firm Bharat Sanchar Nigam Ltd and Air India may be problematic. Unions have opposed IPOs of the telecoms firm and loss-making Air India would need to be restructured to make it attractive to investors.

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