INSTANT VIEW 10-India unveils budget, food inflation a concern

NEW DELHI/MUMBAI Feb 28 (Reuters) - India's Finance Minister Pranab Mukherjee presented his annual budget on Monday, saying the impression of policy drift in the scandal-tainted government was misplaced and that food inflation was still a major concern. [ID:nSGE71R03N]

For highlights, see [ID:nINBUDGET]

For full coverage of the budget for the fiscal year that begins on April 1, please click on: here

KEY POINTS:

* Economy expected to grow at 9 percent in 2012, plus or minus 0.25 percent

* Fiscal deficit seen at 4.6 percent of GDP in 2011/12, compared with 5.1 percent seen in 2010/11

* Gross market borrowing for 2011/12 seen at 4.17 trillion rupees (Reuters forecast 4.5 trillion rupees)

* Net market borrowing for 2011/12 seen at 3.43 trillion rupees (Reuters forecast 3.77 trillion rupees)

* Revised market borrowing for 2010/11 at 4.47 trillion rupees

* Plan expenditure seen at 4.41 trillion rupees in 2011/12, up 18.3 percent

* Gross tax receipts seen at 9.32 trillion rupees in 2011/12

* Non-tax revenue seen at 1.25 trillion rupees in 2011/12

* Inflation seen lower in 2011/12

* Divestment in 2011/12 seen at 400 billion rupees

* To boost infrastructure development with tax-free bonds of 300 billion rupees

* Raised foreign institutional investor limit in 5-year corporate bonds for investment in infrastructure by $20 billion

COMMENTS:

RAMYA SURYANARAYANAN, ECONOMIST AT DBS BANK IN SINGAPORE:

"The budget is based on optimistic assumptions pencilled in. With substantial expenditure hikes and no increase in excise duty, the question is can the fiscal deficit target be reached?

"Of course the positive move is direct cash subsidy but it has to be seen how and when it will be implemented."

JAGANNADHAM THUNUGUNTLA, HEAD OF RESEARCH AT SMC CAPITALS, NEW DELHI:

"The finance minister has done a good balancing job, there is nothing spectacular in the budget but nothing disturbing as well.

"The fiscal deficit target is the most encouraging part in the budget. The disinvestment target of 400 billion rupees also indicates that the government plans to move aggressively on that front."

AMBAREESH BALIGA, VICE PRESIDENT, KARVY STOCK BROKING LTD, MUMBAI:

"The budget is more agriculture and rural focused, probably with an eye on the state elections. There is nothing much for the capital markets because we were expecting a major focus on sectors like infrastructure. Though the budget does have measures such as creation of infrastructure debt funds, the focus is not as great as we had expected. Service tax not getting touched is a positive."

DARIUSZ KOWALCZYK, SENIOR ECONOMIST AND STRATEGIST AT CREDIT AGRICOLE CIB IN HONG KONG:

"Indian FY12 budget assumes GDP growth of 9 percent year-on-year and deficit of 4.6 percent of GDP. It also assumes decline in inflation and further RBI steps to stem it. We see the growth target as somewhat too ambitious given fiscal tightening plans and the need to raise real interest rates.

"The rupee reacted positively after cap on foreign investments in infrastructure bonds was raised to $40 billion from $20 billion. However, impact should be limited as current limit is not fully utilized and there are strict conditions -- the bonds have to be infrastructure ones with maturities of 5 year or more."

MANISH WADHAWAN, DIRECTOR AND HEAD OF RATES TRADING, HSBC INDIA, MUMBAI: "Market has been positively surprised with the gross borrowing number for the next fiscal and it looks quite optimistic because of the government's expenditure loaded programme and its assumption of several kinds of receipts during the year.

"But for now it will bode well for the market as there is no supply till March end. I expect the 8.13 percent 2022 bond around 8 percent until fresh supply comes in. The OIS (overnight indexed swaps) will remain under pressure as liquidity may remain tight till March end and may ease in April as liquidity condition improves."

AJAY MAHAJAN, MANAGING DIRECTOR AND HEAD OF FINANCIAL MARKETS AND INSTITUTIONAL BANKING AT UBS, MUMBAI: "Since the bond market was prepared for worse, this number will be cheered by the market in the short term. In the longer term though, inflation can not be wished away and the market will like to see how the reforms announced today will eventually be implemented.

"The 2022 bond yield may fall closer to 8 percent. Short term bullish as positions need to adjust to the lower fiscal deficit for FY12."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

"The borrowing number is on the lower side. Currently the country is facing so many uncertainties and the realisation of these targets (fiscal deficit and borrowing) will depend upon the government's total receipts, both tax and non-tax.

"Going by the current macro-economic situation, it looks difficult that the borrowing programme will be contained at this level.

"Even this year, the fiscal deficit at 5.1 percent was largely because of the one-off revenues from the telecom spectrum sale. Hence, considering the slight growth moderation expected next year and the heightened inflation, 4.6 percent looks difficult to achieve.

"Both the borrowing and fiscal deficit numbers numbers have been worked out taking into account the most optimistic macro-economic scenarios, which in all likelihood is not going to be the real situation."

R.V.S. SRIDHAR, PRESIDENT AND HEAD OF MARKETS, TREASURY, AXIS BANK, MUMBAI:

"Market should take it easy now as the borrowing number is lower than what market had estimated. But we have to go through the fine print of the document to see how the liquidity pans out. But for now, I expect the 8.13 (percent) 2022 bond to move closer to 8 percent and face resistance at those levels."

D.K. JOSHI, PRINCIPAL ECONOMIST, CRISIL, MUMBAI:

"It looks like a tough target (borrowing) to meet. There are risk of slippages, particularly if oil prices go up beyond the comfort level, or if fertiliser subsidy goes up."

R.K. GUPTA, MANAGING DIRECTOR AT TAURUS MUTUAL FUND, NEW DELHI: "The budget is virtually flat without any specifics on sectors. They have not increased excise duty, which came in against market expectations. Government borrowing came in less than what the market was expecting, which has been taken positively."

MARKET REACTION:

- The yield on the most-traded 8.13 percent, 2022 government bond IN081322G=CC was at 8.06 percent, from 8.09 percent before the announcement of net market borrowing for 2011/12. It closed at 8.13 percent on Friday.

- The one-year overnight indexed swap rate INRAMONMI1Y= was at 7.46 percent, from 7.51 percent beforehand and below Friday's close of 7.50 percent, while the benchmark 5-year rate swap INRAMONMI5Y= was at 8.08 percent, down 5 basis from before and compared with Friday's 8.15 percent.

- The benchmark stock index .BSESN was trading 1.3 percent higher from Friday's close.

- The partially convertible rupee was at 45.18/20 per dollar, off the day's low of 45.31 and stronger than Friday's close of 45.31/32.

BACKGROUND:

- India is likely to borrow 4.5 trillion rupees ($99.3 billion) from the market in the fiscal year starting in April, in line with current year borrowing, a Reuters poll of 25 market participants showed.

- Policymakers must maintain a consistent anti-inflationary monetary stance, given stubbornly high prices and strong growth, the finance ministry's annual economic survey, released ahead of the federal budget said.

- India's central bank has raised its projection for wholesale price inflation to 7 percent by end-March and analysts expect it to raise rates during the course of 2011 to rein in inflation expectations.

- A finance ministry report expects 2011/12 GDP growth at 9 percent, +/- 0.2 percent, fiscal deficit at 4.8 percent of GDP for 2010/11. (Reporting by Mumbai Treasury Team; Editing by Ranjit Gangadharan)