Another Skeptical Day

The market reacted quite adversely to the Railway Budget, which had nothing much to offer. It has read into it a sign of what can come in tomorrow in the General Budget. This shows the level of expectations that have built up around these two key events. But a landslide like what we witnessed yesterday was really uncalled for. Railway Minister, Sadananda Gowda has presented a very pragmatic budget. No over spending, no over promising, staying within means and talking only about what is necessary for the Railways to get back on their feet and look into the future growth of this key infrastructure element which is the backbone of the economy.

A good point which skeptics are missing about this year’s Railway Budget is the sincerity with which Gowda has accepted the fact that there is nothing much that can be done considering the cash strapped nature of this utility. Just one single metric justifies this. The operating ratio of the Railways, which represents the share of total working expenses in gross traffic revenue, is more than 90%. This means, more than 90% of the revenues go into servicing its working expenses leaving almost a pittance towards deployment in capital costs. In such circumstances, not promising the launch of any big plans and rather focusing on completing or executing all the pending plans is a good move indeed.

Of course there have been some very good announcements in yesterday’s budget which are probably not being discounted in the overall dullness of the moment. The ministry is gunning for FDI in Railways, which if goes through should be a very good thing for financing Railway infrastructure. Also the Project Management Coordination group to be set up with representation from State Government’s is a very good move to ensure faster execution of projects.

However, the overall conservatism demonstrated by the Minister in presenting the budget has been interpreted as pointing toward a similar fate for the General Budget too. The massive slide witnessed by the markets yesterday should not come as surprise considering the exuberance that investors had been showing after the new government took seat at the centre. It will be worth its while to remind investors, that there cannot be quick fix solutions for the nemesis that the economy faces.

It is a gradual process and will take its time to yield the desired results. Having said that, pragmatism, conservatism and at times even harshness in decision making at the highest level of governance will have to be digested without complaining much and reacting sensibly. Yesterday was just the beginning of that long drawn process and this is surely the time to set things right.  

Globally, major markets are tracking and reacting to the June quarter earnings which have begun coming in. The Dow and the S&P 500 fell almost 0.70%, while the Nasdaq closed 1.35% below its previous day’s close. Investors there are waiting for the minutes of the Federal Reserve’s June policy meeting due to be released today. Meanwhile, European Stocks too followed their US counterparts and ended the day on the lower side.

Asian markets are continuing their decline for the third straight day following some poor economic data points for China. Except for Indonesia, all other benchmark indices are trading decisively negative today. The Japanese Nikkei is down 0.33%, while the Shanghai Composite is trading 0.17% below its previous close. All others are down an average half a percent as of now with Hong Kong being the worst hit. The Hang Seng is currently trading down 1.35% from its previous close.

The Indian markets have reacted rather violently to the Railway Budget with benchmark indices losing heavily yesterday. With little support from its global peers to get over the depression and anxiety that it is going through, today could be a replica of yesterday. Of course, the level may be a bit milder than what was witnessed yesterday. The mood has changed and will remain so until the announcement and absorption of the General Budget tomorrow. Be reminded, there is more to come after the budget. The IIP numbers will round up the week and yes, corporate results have already begun trickling in, the big ones will soon come to acquire the centre stage of the markets.