Now that we will soon face the budget, we need to figure out where the Sensex is headed. For this, you need to look at several factors. Let us take them one by one. Last week, I had pointed out that the sanctions were still taking shape, post-Pokhran. Now that Pakistan has exploded its bombs, the sanctions might acquire a keener and more urgent tone. It is quite likely that within the ambit of the WTO, the western nations and Japan will try and tighten the grip of sanctions on both nations. While a hardening of attitude at the World Bank and IMF cannot seriously hurt India at the moment, it has implications for the future.

Starting now, India would have to exercise far more caution on maintaining its balance of payments position and current account deficit. Given the pressures on fiscaldeficit, the nation can ill-afford the cost of taking a confrontationist approach with its neighbour. The BJP cannot escape seeing the economic realities and will have to opt out of any attitude of activism on Indo-Pak affairs. Deterrent was the need of the hour and it is time one calls a truce to concentrate on matters of economic development. If one must tackle long-pending issues, the government needs to buy time into the future. The political development has its own rub-off effect on the nation's economy. There is an even more urgent need now to keep foreign funds attracted. And towards this end the government is likely to come up with permission to cover exchange risks for FII portfolio investments in the budget for 1998-99.

That by itself could be a big boost to capital markets, for it is a fact that FII investments are a significant driving force on the bourses. Further, if the cover of exchange risk is extended to private placements, it would give a fillip to industrial growth at another level,even though the quantum of monies coming in is not great, for it would help send positive signals to the global investing community. The exchange risk cover alone has the potential to trigger the inflow of FII investments soon after the budget. As this is more or less a certain measure, one should not be surprised if punters decided to build positions from now to Monday in select scrips -- ITC, RIL, SBI included.

For the stock markets to stay healthy, the economy has to continue to grow. In the Indian context, this can happen only if there is an increase in public spending and if the infrastructure industry takes off. Sinha has limitations on increasing public spending. Therefore, one has to focus on the package of measures he has for the infrastructure industries. Talking of the power sector, the budget could possibly reduce the import duties connected with power generation and transmission equipment. As for fiscal incentives, they have continually been acted upon outside the budget. So, the budget mayoffer nothing new here.

On the development of roads and ports, a similar situation prevails. The fiscal incentives have been constantly improved and offered, but they do not appear to have resulted in any big size investment as yet. The cement industry is bound to languish in the light of additional capacities if the roads and ports do not take off. Only a deeper look here and additional catalysts to the housing industry can be a saviour. Of course, cement companies seem to be operating their cartel formulae to keep the prices up and maybe you cannot blame them. The pharma industry, comparatively, has better opportunities.

But pharma stocks, especially the MNC variety, have already appreciated even before the budget, driven not only by good performance but by a re-rating of price-earnings multiples. Commercial vehicles is another industry segment which has major players like Telco and Ashok Leyland. But the disconcerting scenario of industrial growth does not enthuse one about the fortunes of thisindustry. The growth of this segment is intricately linked to the growth in GDP. Given the lacklustre industrial growth, it is difficult to see a bright future for the commercial vehicles segment. One also needs to factor in that the Railways has decided to fight for their share of freight.

On the other hand, the tractor industry is on a firm track. Being an input for agriculture, this sector should continue to grow. Mahindra & Mahindra, though lacklustre on the bourses in recent times, is a scrip one should look at for long-term investment. Punjab Tractors has acquired its own blue-chip status.

If the slogan of self-reliance applies to any industry, it is the refinery industry. The nation is yet to build a decent owned capacity. Therefore, the government is likely to continue to favour this industry in the budget. The investor must also remember that the industrial lobby constantly keeps influencing government thinking to a line which is favourable to a particular industry. The refinery industry isrumoured to be greatly canvassed for in government circles for concessions. Punters might therefore take a stance on selective scrips in the refinery sector.

On the other hand, while reduction of custom duties for import of raw feed could give a fillip, the PSU scrips in the industry do not offer too much attraction to the investors. The removal of the administered price mechanism is a long drawn process. Also, it is clear that the government is not transparent yet on the administration of price or the oil pool account. The telecommunications sector is a hot favourite in many countries. In India, we have two major players, MTNL and VSNL. But investment here calls for extraordinary attention to keep track of the complexities that revolve around liberalisation and controls. Considering such imponderables, these scrips may not attract much fancy except at rock-bottom prices. It is good to pounce on MTNL at Rs 222 and ride on it till Rs 234. But beyond that, what?

The investor should give due attention tothe financial and banking sector, as it will be expected to play an increasing role for funding industrial growth in today's context. But be weary of financial institutions which resort to rolling over their non-performing assets (NPA) with fresh loan covers. If such scrips do not go up the logic is there for every one to see. If you chose your scrips carefully, you have a chance of earning a decent return in this sector.