The Indian market reacted with disappointment to the budget presented this morning by the new Finance Minister, due to lack of any new liberalization measures and the ballooning budget deficit. The Bombay Sensitive Index plunged 870 points, or almost 6%, as the high hopes for major pro-market structural reform in pensions, insurance and retail sectors were not met. Markets were expecting that there would be a roadmap for bringing down the fiscal deficit, as also details of disinvestment and deregulation of oil prices.

The budget seeks to boost government spending that would increase the fiscal deficit to 6.8% of GDP. The country's fiscal deficit has been soaring since the government enacted three fiscal stimulus packages of tax cuts and spending, on top of deep spending on fuel subsidies, government pay hikes and farmer loan and employment programs. Last year, the deficit was 6.2% of GDP, and the year before that it was 2.7% of GDP. Rising deficits have led to concerns of rating downgrades and crowding out of the private sector.

The government intends to boost much needed spending on infrastructure development (to 9% of GDP by FY2014), increase defense spending, create 12 million jobs a year and support the manufacturing export sectors which have been hit by the global slowdown. The budget aims to lead the economy back to a high growth rate of 9% from the current rate of 6.7%, as the economy was hurt by the global recession.

We agree that increasing spending on infrastructure and employment schemes was very much needed. Poor infrastructure is regarded as the major constraint in India's economic performance. Positive movements on social sector reforms are also required in view of high levels of poverty and illiteracy. But the budget provided few details on how these will be achieved.

While we are disappointed with the budget, we remain optimistic about the long-term outlook for the economy and the stock market, due to a stable political situation and prospects for high economic growth (the World Bank recently projected that India will be the fastest growing economy in 2010). The market, which was getting slightly ahead of itself, now stands at a much reasonable level. Investors can use the post-budget sell-off to gradually build positions in Indian ADRs like Infosys (INFY), Wipro (WIT), ICICI (IBN), HDFC Bank (HDB) and Tata Communications (TCL).