No positive surprises so far from an eagerly awaited month

March 2012 was an eagerly awaited month for India's equity markets, particularly considering the strong tailwind preceding March. Unfortunately, none of the three highly anticipated events – state elections, credit policy and union budget – has given any meaningful directional boost to Indian equity markets. The Indian market is now back to the ebb and flow of global risk appetite (which thankfully remain positive) as its key determinant. With no domestic macro impetus, it is unlikely that India can maintain the outperformance versus its emerging market peers seen in Jan-Feb. Credit policy and an anticipated fuel hike in April (after parliament has closed for recess), the presidential election in June, and the monsoon forecast will now emerge as the next prospective catalysts for the markets.

FY13 budget a vivid reflection of constraints of coalition dynamics in India

The most glaring illustration of the diversity in popular mandates of coalition partners comes from the finance minister's stated resolve to rationalize subsidies, but without any commensurate roadmap. While the increase in excise/service taxes is positive for fiscal consolidation, the absence of credible subsidy rationalization is disappointing. The fiscal deficit target of 5.1% looks fairly difficult. Post budget, bond yields rose by 8bps, underscoring market scepticism of fiscal targets. A fuel price hike could lend robust credibility to fiscal consolidation.

Increases in plan expenditure on infrastructure and agriculture are standout features of budget

Plan expenditure on agriculture, industry and roads is up 20%, 27%, and 19%, respectively. We see the keen focus on public investment (via higher allocations for roads, irrigation, and industry) as strongly underscoring the government's urgency in addressing decelerating capital formation in India. Other emphatic measures in terms of infrastructure include extension of viability gap funding to newer sectors, doubling of tax-free infra bonds and elimination of the import tariff on imported coal for fuel-starved power plants. Budget gainers: capital goods, cement, power utilities, steel, two wheelers, tractors, and fertilizers. Budget losers: upstream oil and pharma.

Eoin Treacy's view Infrastructure has long been the Achilles heel for India's development. Interestingly, India offers a completely different pattern of development to China. India has been persistently slow in providing the infrastructure needed to fuel economic growth. China, on the other hand, has relied on infrastructure development to flatter its economic growth. Both countries are at interesting junctures. China is migrating from a focus on building to developing its human capital. India needs to migrate from relying on its human capital to giving its people the tools they need to aid economic expansion. It has seldom been useful to compare the two countries on a like for like basis because they are so different. What they share is a requirement for bold leadership to push through the reforms needed to proceed with development.

The Nifty Index rallied to break the yearlong progression of lower rally highs last month. It encountered near-term resistance in the region of 5650 four weeks ago and needs to continue to hold the majority of its earlier advance if the medium-term upside is to continue to be given the benefit of the doubt.

The clear outperformance of the Indian cement sector over the last year supports the view that Indian infrastructure development has become more of a priority. Associated Cement, Ambuja Cement and Ultratech Cement all remain in consistent medium-term uptrends. (Also see Comment of the Day on September 21st).