Markets tumble on govt deficit concerns

By V. Ramakrishnan

MUMBAI (Reuters) – The BSE Sensex fell nearly 6 percent on Monday, its sharpest slide in six months, and the rupee hit its lowest in more than a week as the government boosted spending in the budget to stoke demand, widening the fiscal deficit.

Unveiling his first budget after the Congress-led coalition was re-elected with a stronger mandate in May, Finance Minister Pranab Mukherjee said spending would be ramped up by 36 percent to help lift growth to 7 percent in 2009/10.

Bond yields rose the most in three months as investors grew wary of large market borrowing to bridge the shortfall in funds to spend on rural and infrastructure programmes, which are expected to result in higher supplies and depress appetite.

While the previous government's reform efforts were stymied by its leftist allies, investors had hoped the new administration would be able to push through market friendly measures but the budget belied those expectations.

"Those of the view that the budget would encompass all sorts of exciting structural economic reforms have just had their hopes firmly dashed," said Robert Prior-Wandesforde, senior Asian economist at HSBC.

"Instead this was largely a populist budget focused mainly on the poor with plenty of promises of additional infrastructure spending," he said.

The main stock index ended 5.8 percent lower at 14,043.40, its sharpest fall since Jan. 7 when it slumped 7.2 percent. In intraday trade, it had fallen as much as 6.4 percent.

It was the lowest close since May 26, but the index is still up three-quarters from its 2009 low in early March.