The stock market - Budget '14 anamoly

So it was kind of weird that other day when the budget came out. It was better than the last one where subsidies had really strained the fiscal deficit and added to that, no clear strategy of reviving growth made things bleak for the economy. The market reacted accordingly. They declined the day the budget was out. More precisely, they were unhappy that -

1. Govt. had no plans of reviving growth. The manufacturing and Industrial production was low. The sectors were not given investment opportunities through FDI.
2. Increased non-plan expenditure would lead to widening the deficit - which the center by the way promised to bring down to 4.8% of the GDP.
3. Increased non-plan expenditure would cause inflation. This would be both demand pull and supply push.
4. To bridge the fiscal gap the government would increase taxes. Bad news for businesses.

The 2014 budget was much better. Focused and it had some bitter stuff in it. The FM promised to bring down the deficit to 4.1%, implement GST, control inflation through fiscal policy (good news for businesses like RE where the interest rate exposure is high). The stock market still fell! Why?

Being ambitious is Ok. But being over-ambitious is not.

The first thought that comes to our mind is that perhaps the markets were over-expecting from the budget and things somehow fell short. This would be reasonable considering the hype that Modi got with him. However this is not the case. It is completely the opposite of that.

The market thinks that the budget is over-ambitious and based on unreasonable assumptions. Of particular importance are -

1. The tax revenues that the govt. forecasts are higher. The current tax revenues of the govt. are not good. And to be able to get the Fiscal Defficit down to 4.1% will be a challenge. This divergence of views when it comes to fiscal deficit is the major cause of the fall.
2. The markets were positive about the govt. having a clear long term view on reducing subsidy bills.
3. The markets also think that the implementation of GST will take longer then expected. The FM hopes to implement it in the next 8 months. The market thinks it'll take 2-3 years.

Besides this, the fiscal deficit number itself looks audacious. In the coming days as the govt. takes measures to show it's commitment, the market should react positively.