I am honestly a little surprised by the stockmarket's somewhat euphoric response to the Budget despite the obvious negatives. The uncertainty over the odious fringe benefits tax remains.

The combination of reduced depreciation benefits, higher surcharge, and cut in the basic tax rate has hardly lowered the tax incidence on companies. There's the service tax now on construction and that could slow down housing starts, one of the critical engines of growth in the current economic up-tick.

There was no clarity on the divestment programme and the couple of sentences that the finance minister spoke on FDI sounded rather lame.

Union Budget 2005-06: Complete Coverage

The Budget came also at a time when global oil prices have started firming, a fact that investors have chosen to ignore despite the fact that India is a large net importer of oil.

A possible explanation for this bullishness is of course that fund managers are sitting on huge piles of cash that they need to invest in equities. They were just waiting for the uncertainty surrounding the Budget to be resolved before going on an investment binge.

Thus, they have invested despite the disappointments in the Budget, hoping that this collective rush for stocks will create its own momentum and pull more money in.

In short, the Budget has been quite peripheral to the current bull run.

Another view is that instead of looking at the nitty-gritty, fund managers are taking a comprehensive view of the underlying macroeconomic strategy of the Budget.

And there are certainly a couple of things in this strategy that could help demand and push up profits. For one, the Budget clearly jettisons fiscal fundamentalism and goes a little easy on the FRBM targets.

This makes it an expansionary Budget that is likely to augment aggregate demand. Much of the increased spending is focused on the rural economy and the bulk of demand growth is likely to happen there.

If some of the programmes announced get implemented, it would raise the disposable incomes of this sector. Going by the recent experience of the highway projects that put money in the hands of rural workers, the impact of income transfers to the rural economy are quick and strong.

Besides, there is certainly no doubt that the biggest drag on overall growth is the rural sector -- any attempt to address this bottleneck cannot be but good for demand growth and top line.

The announcements on the revival of infrastructure initiatives like highway building and urban renewal have also helped. The restructuring of personal income tax, particularly the consolidated exemption for savings, is much more efficient than instrument-related rebates.

Thus, disposable incomes and the spending of the middle-classes go up as well.'

More importantly, I think both domestic and international investors are getting used to the pulls and pressures of Indian coalition politics. This has helped to moderate expectations about things like the Budget and pare the wish list of those looking at India as a place to invest.

Thus, fund managers weren't really looking for a radical change in labour laws, a massive privatisation initiative, or a quick and unconditional opening up of the retail sector in the Budget.

They view the Budget as what economists call a "constrained optimisation" problem. Given the constraints, they are happy with the results. This is coupled with the belief that the people in charge of the line economic ministries are personally committed to reforms and they will push through their agendas when they find it politically expedient.

There are, however, three potential party-poopers waiting to ring the doorbell. Expansionary fiscal policy often finds its nemesis in the bond markets.

High fiscal deficits mean large government borrowing and that pushes interest rates up. If one goes by the Budget papers, the central government will borrow more than twice what it borrowed last year.

Under the new structure of federal finances introduced this year, state governments will also borrow more from the markets instead of borrowing from the Centre.

The bond markets have been exceedingly jittery after the Budget, and as the government's borrowing programme gets under way from April, bond yields are likely to rise.

The key question, of course, is by how much. My feeling is that the rise in rates is likely to be somewhat moderate and cannot by itself offset the expansionary momentum.

The biggest threat to the equity markets across the world comes from the possibility of a global slowdown. Look at the facts. Japan, after a brief phase of recovery, seems to be lapsing back into recession.

Euro-zone GDP is growing at barely 1 per cent. If the US does not slow down this year, it runs the risk of running into a severe financial crisis and a strong inflationary spiral.

There is, of course, the popular argument that the Asian growth engine, particularly China, can offset the slowdown in the West. There is an inherent fallacy in the argument that should be apparent if you look at the numbers.

The US accounts for roughly 40 per cent of world GDP while China contributes 11 per cent. Thus, if US growth slows down by just half a percentage point, China will have to grow by two additional percentage points to keep world growth unchanged. That is a tall order indeed.

In fact, given the changing dynamics of global demand, China's aggressive growth, based on investment, brings its own set of problems. The biggest casualty is likely to be commodity prices, where the balance is shifting quickly from acute excess demand to oversupply.

In November 2004, China turned a net exporter of steel products. Chinese steel capacity is likely to expand to 338 million tonnes in 2006 from just 265 million tonnes in 2004.

Similar trends are visible for petrochemicals. If global demand indeed slows down, this could only mean commodity price deflation.

How does this affect India? Doesn't the fact that the Indian growth engine is powered by domestic rather than external demand make it a safe haven? The problem with the Indian equity markets is that they have a fair share of commodity companies.

The 30-stock Sensex, if you have noticed, contains six commodity sector heavyweights. The "pricing power" and profitability of these commodity companies hinge on global cycles.

Thus, despite the fact that India appears to be relatively insulated from the global economy in terms of low dependence on trade, these sectors remain susceptible to price deflation. That would pull the stock prices of these companies down.

Finally, lest I be accused of being unpatriotic, let me emphasise that there is a fair bit of structural change that has happened and is happening both in India's corporate sector and the policy domain.

That should keep growth ticking in the economy. But financial investments are not just about growth. The price at which you buy into the growth matters just as much.

My guess is that quite a bit of the India story is already "priced" in -- thus the possibility of a downward correction in prices grows stronger every day. The next surge in prices will come only if there is a strong trigger. The announcement of a comprehensive divestment programme could do the trick.