Markets’ thumbs down to Budget

Markets have given a big thumbs down to Finance Minister Nirmala Sitharaman’s budget, presented last Friday. Investors, companies and foreign portfolio investors (FPIs) particularly feel let down by taxation proposals mooted in the first budget of the Narendra Modi government’s second term. Market players that expected a big bang budget with focus on reviving consumption and growth have virtually vetoed the budget proposals. Otherwise, how does one explain the wiping out of over Rs 5 lakh crore in investors’ wealth in just two trading days. Prime Minister Narendra Modi terming genuine criticism of the budget as the handiwork of ‘professional pessimists’ has further aggravated the sentiment. Losses have been booked across counters, a broad spectrum of stocks, and the downward pull seems to be spread deep and wide.

The despondency in the markets has some basis. For instance, the 3% surcharge on income tax paid by individuals with a taxable income of Rs 2-5 crore annually, which rises to 7% for those earning more than Rs 5 crore. The changes consequent in the long-term and short-term capital gains tax applicable to foreign portfolio investors has also unnerved the markets. Since FPIs operate as private trusts and associations of persons, they may have to cough up levies between 36-42%. Over 2,000 such foreign funds seem to have been impacted in the last two days. Fears are that the hefty rise in levies would only make the Indian market unattractive, thereby drying up foreign portfolio fund flows. The 20% tax on share buyback by companies is another dampener. Further, the move to mandatorily increase public holding in listed entities to 35% has not gone down well with managements and promoters that fear dilution in their holding. Finance ministry officials’ clarification that the provision is focused on State-run companies has not convinced market makers. The low sentiment on most global bourses due to West Asia tensions and the US jobs data has only added to the negative sentiment. If market participants are to be believed, the sentiment will only slide further by Deepavali.

The Modi government seems to have lost an excellent opportunity to pep up growth, improve investor sentiment and create a conducive atmosphere in which domestic and foreign private companies would set aside larger chunk of their funds for India. In the process, the biggest losers in the markets’ bloodbath are small investors that may not have been able to interpret the import of the budget proposals. The Modi government should shun histrionics and drama, and instead address the concerns of markets and investors.