<p>There is a disconnect between markets and economy. While the Indian economy has been going on a downward spiral, shares price have been moving up. This disconnect between improving asset prices and worsening macro fundamentals has developed in recent weeks, say Deutsche Bank analysts. As globally stocks have rallied, Indian stock prices have also started going up. Both rates and liquidity indicators suggest investors are in a somewhat comfort zone. In fact, on 6 August, Morgan Stanley said the stock market in is in the early stages of a bull phase. <br /><br />However, the bullish market contrasts with the sticky inflation that might become worse owing to a poor monsoon, a reversal in commodity prices that may take away a much needed disinflationary impulse, weak industrial production, worsening agriculture production outlook, and greater fiscal slippage. The disconnect between the market and economy therefore is quite obvious. <br /><br />Deursche Bank analysts point out that the markets are clearly trying to look beyond the dataflow, betting on a major improvement in the policy environment. While this puts welcome pressure on the authorities to expedite reforms, the risk is that markets will be disappointed as realisation sets in that policy constraints accumulated over a long period cannot be resolved with a changing of the guard in a few offices. <br /><br />The return of a pro-market reformer to India's finance ministry has cheered investors and contributed to a market rally, but Palaniappan Chidambaram will need both political deftness and some luck to tackle the problems dragging the economy down.<br /><br /><strong>Fiscal Consolidation</strong><br />Fiscal data in first quarter of FY12-13 show that the budget deficit has already touched 37 per cent of the budget estimate, as compared to 32 per cent in the corresponding period of the last year. Revenue (44 per cent vs 35 per cent) and primary deficits (67 per cent vs 47 per cent) are also higher in the first three months of the current fiscal year relative to past trend. <br /><br />While total receipt (12.4 per cent vs 12.5 per cent) was broadly in line with past year’s trend, a higher non-plan expenditure outturn has pushed total expenditure to touch 21 per cent of budget estimate, 1 per cent point higher than last year. <br /><br />The fiscal trend of the first quarter highlights considerable upside risks to the budgeted fiscal deficit of 5.1 per cent of GDP for FY12-13. To help him deliver, Chidambaram is likely to appoint former International Monetary Fund Chief Economist Raghuram Rajan as his chief economic adviser. Rajan, currently a professor at Chicago University's Booth School of Business, is credited for predicting the 2008 global financial crisis and is a vocal critic of New Delhi's populist policies.<br /><br />The new minister's biggest test will be controlling the fiscal deficit, which overshot a target of 4.6 per cent of GDP by 1.2 percentage points in 2011/12 due to slowing growth and increased spending on fuel and fertiliser subsidies.<br /><br />India's sovereign credit rating is at risk because of the high fiscal deficit, whose funding from domestic savings is crowding out private investment and lowering growth prospects.<br /><br />However, a drought due to disappointing monsoon rains will push the government to spend more on relief for farmers. Rural demand for cheap fuel to drive irrigation pumps and tractors has further delayed a promised increase in subsidised diesel prices, which the government concedes is vital to fixing the deficit.<br /><br />Privately, finance ministry officials warn a lack of action on subsidies could push the deficit to 6 percent of GDP this fiscal year, above the government's target of 5.1 per cent.<br /><br />However, once must not forget the government will have only about six months to improve the state of fiscal affairs before the next year’s budget is announced in end-February 2013. <br /><br />In a study on FII shareholding in Indian equities, Citigroup said FIIs were trimming their bigger overweights, such as financials and industrials, as well as some of their underweights, such as IT services and energy.<br /><br />Foreign investors bought a net Rs 3,587 crore ($17.94 million) into the Indian stocks last week, according to data released, their biggest purchases since the week ending July 6.<br /><br />Foreign investors bought a net Rs 10,273 crore ($1.84 billion) into Indian stocks in the month July, their biggest purchase since February. According to official data, foreign inflows in the stock markets for the year 2012 now stand at a net Rs 52,266 crore ($9.37 billion).<br /><br />A lot of money has come in, but they are not taking too many chances, analysts said. Citigroup said foreigners' portfolios were positioned for higher markets, tilting towards cyclical stocks, including banks, consumer discretionaries and industrials. <br /><br /><br /><br /><br /><br /> </p>
