Budget impact on markets

Kashmir Times. Dated: 7/12/2019 10:58:12 AM

Indian markets have reacted negatively to the Union Budget’s populism and its inability to carry forward reforms

Most of the investors, who were hoping to see specific measures aimed at business-friendly reforms in the financial sector in the second inning of the NDA-government appear to have been disappointed by the maiden budget presented by Finance Minister Nirmala Sitharaman. They were also not impressed by some of the proposals made by the centre in imposing taxes on the foreign investors and measures that could provide some impetus to the markets in the country. Most of the proposals made in the budget do not appear to be aimed attracting investors from the local markets or from abroad because of the inherent shortcomings in the financial reforms. The slowdown in Indian economy will take its own to recover in the face of the global meltdown of many economies that have impacted the economic structure of many countries. Similarly, after a moderate negative reaction when the budget was presented last Friday in the Parliament, both the Sensex and the Nifty witnessed their biggest fall in last over two years on Monday. The Sensex lost 792.82 points while the Nifty witnessed a huge loss of 250 points in one single day, which sent alarm signals to the financial markets. Banking, automobiles and power sectors appear to be the worst hit as each of them lost over 3 percent. The investors have also been adversely impacted by a variety of proposals made in the budget which are expected to increase tax burden on them. They include the proposal to increase long term capital gains tax on foreign portfolio investors and to tax the buyback of shares by companies at 20 percent. The negative signal sent by the increased surcharge on people earning over Rs 2 crore a year also weighed negatively on the markets. The much touted tax on the ‘super-rich’ is unlikely to make much of a difference to the government’s fiscal position or the revenue earnings in the current financial year. However, it does damage the image of the present government as a pro-business one and can affect fund flow into the country if the wealthy prefer to move to other countries. Already an estimated 50,000 super rich persons have moved lock stock and barrel to other countries where ease of doing business is better off in the last two years. The impact on the markets from the closure of over 6.8 lakh companies in the country has been very negative. The job creation has also suffered due to pack up of these companies. The proposal to raise minimum public shareholding in listed companies from 25 percent to 35 percent is also seen as an unnecessary intervention in markets. Global factors like strong jobs data coming from the United States which lowers the chances of an interest rate cut by the Federal Reserve, and the potential systemic risk posed by the troubles faced by Deutsche Bank may have also weighed on the markets. However, the losses experienced by western markets on Monday were nowhere as heavy as the losses faced by the Indian markets.
Apart from these factors, the biggest issue bothering the Indian investor may be the budget’s visible tilt towards populism as the NDA-government expands its welfare projects instead of initiating steps to revive private investment in the face of economic slowdown. Barring a few words from the Finance Minister on simplifying labour laws and relieving start-up investors from the regressive ‘angel tax’, the budget was largely bereft of any major structural reforms that could instill confidence among investors. The trajectory of markets in the coming months will depend on the kind of reforms the government manages to push through, and on the actions of central banks across the globe. While the Reserve Bank of India (RBI) looks to be easing its policy, any global liquidity tightening can affect foreign fund inflows. Despite lacklustre company earnings and other fundamental issues, markets in the past have been pushed up aggressively by the ample liquidity provided by central banks. But without enough reforms to strengthen the fundamentals that can back high valuations, it may be only a matter of time before markets begin to lose steam. This will further lead to creation of conditions which can impact the achieving the targeted growth rate of 7 percent or so in the years to come.

 

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