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Market awaits strong reforms signal in budget

The share market is hoping that the budget will significantly hike investment in infra and open up the economy for foreign investors.

india Updated: Feb 25, 2006 14:32 IST

India's sizzling share market is hoping that the general budget for the next fiscal year will significantly hike investment in infrastructure development and further open up the economy for foreign investors.

With a couple of days to go for the unveiling of the annual union budget for 2006-07, expectations that the Left-backed United Progressive Alliance government would carry forward the reforms and growth agenda are running high in the stock markets.

Finance Minister P Chidambaram will present the government's second general budget for the next fiscal in parliament on Tuesday.

While favouring a greater emphasis on infrastructure, rationalisation of taxes and opening up of key sectors like banking for overseas investments, analysts say the budget should attempt to maintain the prevailing market momentum.

"With the key share index already trading at a record high and massive overseas investments flowing in, the market is not looking for anything specific this year," said KK Mittal, vice president of Escorts Mutual Fund.

"The main thrust of the budget should be on boosting economic growth and cutting the high fiscal deficit. This, in turn, will further strengthen the capital market," Mittal said.

"The general feeling is that the momentum of the market will not be disturbed by announcing some negative proposals. The budget should take the reforms process forward."

The stock market barometer, the 30-share Bombay Stock Exchange sensitive index or Sensex, closed Friday at 10,200.76, representing a gain of 219.65 points or 2.2 percent over its previous week's close.

The key market index had touched an all-time high of 10,304.88 on Thursday on sustained institutional buying interest in shares of blue-chip new as well as old economy companies.

The Indian stock market benchmark, one of the best performers in the world, has gained nearly a massive 55 per cent since the unveiling of the last budget for the current fiscal year that ends March 31.

Experts say the budget's possible thrust on boosting the country's creaky infrastructure such as roads, ports, and airports would come as a major positive boost for the market.

There are also hopes that Harvard-educated lawyer-turned-politician Chidambaram would rationalise income tax rates, both direct and indirect.

Market players also hope that the budget would retain the capital gains tax rebates that were announced in the general budget of the financial year that ended March 31, 2005.

Chidambaram, who had become the darling of the market during his previous stint in the finance ministry from 1996 to 1998, had abolished long-term capital gains tax and fixed short-term capital gains tax at flat 10 percent.

On the negative side, investors fear that the budget could see a hike in the securities transaction tax that was introduced in the budget of fiscal 2004-05 and had triggered massive selling pressure on the bourses.

The Finance minister is likely to marginally hike the securities transaction tax on secondary market equity trades done through the stock exchange in view of the sharp rally on the bourses in the last one year.

"If the security transaction tax is not touched, it will be good for the health of the market rally. A moderate hike in the tax, however, cannot be ruled out," said a broker with the Bombay Stock Exchange.

First Published: Feb 25, 2006 14:32 IST