It's Budget Day in India Saturday—Will Modi Meet Market Hopes?

02/27/2015 5:01 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Saturday, the Indian government was set to disclose its spending plans for the fiscal year that begins on March 31, and MoneyShow's Jim Jubak highlights three things he thinks the markets were looking for, along with what may conflict with these goals.

It's budget day in India on Saturday, February 28, with the government set to unveil its spending plans for the fiscal year that starts on March 31. Friday, Indian stocks moved up strongly with the Sensex 30 index up 1.68%. The Indian stock markets will even hold a special trading day Saturday, in honor of the budget release.

I think it's safe to say that the Indian financial markets are anticipating good news.

What are markets looking for?

Three things, I think.

First, reforms to India's swamp of rules, fees, and taxes that will make it easier to do business in India.

Second, a significant government investment in India's crumbling and inadequate infrastructure that backs up Prime Minister Narendra Modi's talk about a golden age of growth for India's economy.

Third, enough fiscal restraint so that big spending plans are balanced with increases in revenue so that the Reserve Bank of India can continue to cut interest rates.

Some of these goals will be tough to deliver: All of India's business, consumer, farmer, etc. constituencies are hoping for reforms that put money in their pockets. The trick will be balancing these demands while actually delivering something that increases the efficiency of the Indian economy instead of just passing out subsidies to one audience or another.

Other goals are, potentially, in conflict. Too big an infrastructure spending program and the government could push its budget out of balance and make it hard for the Reserve Bank of India to cut interest rates. Too small an infrastructure spending program and the government risks disappointment and further erosion of its belief in its commitment to increasing the rate of growth in India's economy.

Overseas investors surveyed by Reuters are looking for a significant increase in government big ticket spending from last year's 20% jump. And they warn that the Indian stock market could drop by 6% to 8% if the budget disappoints.

On the other hand, those overseas investors also warn that a lack of budget balance could lead Indian bond yields to climb by 25 to 30 basis points to the neighborhood of 8%. That could also send the rupee down toward 64 or 65 rupees to the dollar, near the all time lows of August 2013 when it traded at 68 rupees to the dollar.

I think the government will deliver on most of these expectations because it knows it has to deliver in order to stem the erosion of its electoral support that has shown up in recent local votes.

I added India's HDFC Bank (HDB) back on November 18 and Indian Infrastructure ETF EGShares India Infrastructure (INXX) on January 26 to my Jubak's Picks portfolio as bets on an increase in India's growth rate, and on lower interest rates, and on significant infrastructure investment by the Modi government. I think we'll get enough out of the budget Saturday to make those bets pay off. HDFC Bank is up almost 17% since I added it to the portfolio and it's pressing up against my target price. I'll revisit that target on Monday once we've seen what the budget delivers. EGShares India Infrastructure is essentially flat with my purchase price. If the budget delivers decent infrastructure spending and enough reforms to support expectations for higher growth in the general economy, this ETF should move up too.

We'll know more Saturday.

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