MUMBAI // India's stock market saw the biggest budget day fall in its history as the new government laid out a populist spending agenda that destroyed hopes of sweeping market-orientated reforms. The country's Sensex stock market index tumbled as Pranab Mukherjee, the finance minister, outlined investments in roads, power and social schemes that he estimated would increase government spending 36 per cent in the year ahead to a record 10 trillion rupees (Dh765.68 billion).
Shares ended the day 7 per cent down from the morning peak. "Aam Admi [the common man] is now the focus of all our programmes and schemes," Mr Mukherjee said. "The first challenge is to return to the GDP growth rate of 9 per cent per annum at the earliest. The second challenge is to deepen and broaden the agenda for inclusive development." Manmohan Singh, the prime minister, said: "It is essentially a rural development-oriented budget. It is a measure of our commitment to the well-being of the poorer sections of our community."
Robert Prior-Wandesforde, a senior Asia Economist at HSBC, said: "What we've seen in this budget is really the left wing of the Congress Party outing itself. Those of the view that the budget would encompass all sorts of exciting structural economic reforms have just had their hopes firmly dashed." Investors criticised the lack of any plan or schedule to reduce the country's ballooning fiscal deficit, and in particular the commitment to raise 11.2bn rupees this year from the sale of stakes in government-controlled companies, a fraction of the potential 250bn rupees a year suggested by the finance ministry's economic survey last week.
"It's the first budget of a new government and there are no policy pronouncements whatsoever," said Rakesh Jhunjhunwala, one of the Bombay Stock Exchange's most prominent investors. Mr Mukherjee said the spending increase would bring India's financial deficit to a 16-year high of 6.8 per cent of GDP, up from a revised 6 per cent. Including state-level debt and the government's liabilities for oil bonds, the real deficit could be 12 per cent or 13 per cent.
Investors returned to Indian stocks after Mr Singh's unexpectedly strong election victory on May 16, hoping that the new government would be able to restart its programme of financial reforms. In the budget, most of the social spending was tied to new roads, irrigation and power, a 144 per cent increase in India's National Rural Employment Guarantee scheme for urban housing, and a promise to give credit at "reasonable rates" to small businesses.
A disappointment was the decision to avoid the issue of India's cap on petrol, diesel, LPG and kerosene prices, which forced it to issue vast quantities of oil bonds as the oil price neared $150 last year. Mr Mukherjee said the issue would be left to a high-level committee later in the year. The only positive surprise for investors was the announcement that India would simplify its complex system of direct taxation, bringing in a nationwide goods and service tax by April next year.