Stocks rose after tumbling by the most in six months on Tuesday after Mukherjee announced a larger-thanexpected budget deficit and failed to lay out plans to sell state-run assets and ease foreign investment rules. The budget also outlined plans to spend more on cooking subsidies, rural jobs, roads and power and tax relief.

The budget “will lead to faster economic growth, but it wasn’t packaged and sold well,” said Vikram Kotak, who helps manage the equivalent of $2.4 billion in Indian stocks and bonds at Birla Sun Life Insurance Co. in Mumbai. “His intentions in the budget were good. He needs to convey them.”

The Sensitive stock index’s rose 0.9 percent to 14,170.45 at 3:45 p.m. on the Bombay Stock Exchange. The rupee gained 0.1 percent to 48.5 against the dollar.

‘Overreacted’

Macquarie Group Ltd. raised its April 2010 target for the stock index by 20 percent saying markets “overreacted” on Monday. It expects the index at 18,000 by April.

The benchmark five-year bond yield fell 2 basis points to 6.44 percent at 3:45 p.m. in Mumbai after a 22 basis-point advance Monday.

Investor expectations for the budget were high after Prime Minister Manmohan Singh won a resounding re-election in May, reducing his dependence on allies such as the communist parties who opposed asset sales and looser foreign investment policies during his first term.

Morgan Stanley, for example, expected Mukherjee to announce a target of between $4 billion and $5 billion from selling shares in state-run companies this year. Mukherjee provided for only 11.2 billion rupees ($227 million) in the budget.

Mukherjee said Tuesday that the budget wasn’t a “detailed roadmap” on asset sales, and pledged that he will sell stakes in state-run companies at an opportune time.

“The budget is a fiscal document and we think the short-term policy objective of stimulating demand will likely be achieved,” said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc.

Income-tax burden

Mukherjee lowered the income-tax burden on companies and individuals by scrapping the fringe -benefit tax and the 10 percent surcharge on personal-income tax respectively. He also announced spending of 1.79 trillion rupees on roads, telecommunication and power, where capacity constraints are estimated by the finance ministry to shave two percentage points off the nation’s annual economic growth.

The minister ended a plan to tax trading of commodity futures in India, the world’s biggest user of gold and second- biggest grower of rice and wheat, aiming to lure more investors to a market that’s doubled to $1 trillion in the past three years.

To support consumption in rural India, where more than three-fifths of India’s 1.2 billion people live, Mukherjee allocated 391 billion rupees for a rural jobs program, which benefited 45 million households last year. The amount earmarked is 144 percent more than the previous year, the minister said.

Rice, wheat

Mukherjee said the government will provide rice and wheat at a subsidized rate of 3 rupees a kilogram to the rural poor.

Higher spending will see the budget deficit widen to 6.8 percent of GDP in the year ending March 31, from 6 percent, forcing the government to borrow a record 4.51 trillion rupees.

Mukherjee said he plans to overhaul subsidies and is relying on growth picking up to 9 percent in the next two years to boost tax revenue and cut the deficit to 5.5 percent of GDP by March 2011 and to 4 percent in the following 12 months.

India’s record growth of close to 9 percent in the five years ended March 31 helped tax revenue more than double since 2004. The $1.2 trillion economy expanded 6.7 percent last year, the slowest pace since 2003.

Reserve Bank of India Deputy Governor Shyamala Gopinath said Monday that the central bank has enough debt-management tools to help the government successfully complete its record bond-sale plan for the current fiscal year.

Credit ratings

Mukherjee’s first budget in a quarter century received mixed reviews from credit rating companies. The minister served in the foreign and defense portfolios in the bulk of Singh’s first term.

While Standard & Poor’s said the fiscal deficit was “within the boundary” of their expectation, Fitch Ratings said the budget doesn’t “alleviate” pressure on India’s ratings.

S&P ranks India’s long-term local-currency rating at BBB-, their lowest investment grade. Fitch has a BBB-long-term rating on India, also their lowest investment-grade level.

Source: Bloomberg