India’s stock markets have not taken kindly to the country’s most recent union budget.
The Nifty 50 index has shed nearly 11% of its value since July 5, when finance minister Nirmala Sitharaman announced a slew of proposals, including tax surcharges that put off equity investors.
Besides, the budget had no major stimulus packages to lift economic growth, which further accentuated the stock market slide.
The equity deluge, over the last six weeks, has wiped out roughly Rs13.4 lakh crore ($190 billion) of investor wealth on the national stock exchange (NSE), as the bourse’s total market capitalisation fell from Rs151.46 lakh crore in early July to Rs138.05 lakh crore on Aug. 13.
Only a few months earlier, investors were anticipating that the markets would scale new peaks if Narendra Modi’s Bharatiya Janata Party returned to power.
While the election results, on May 23, did catapult the Nifty 50 to new highs, the rally was largely restricted to the bluechip stocks, or the big companies that comprise the indices. Stocks in the mid- and small-cap segment, which comprise the biggest share of most investors’ portfolios, remained sluggish, or declined.
Investors in these smaller companies were then awaiting cues from the budget for a reprieve. But the proposals only added to the negative signals.
Taxing times
The Modi government’s move to contain fiscal deficit, or the difference between revenue and expenditure, gave Sitharaman little scope for fiscal maneuvering. Instead, there was an attempt to mop up more income tax revenues.
The move to levy higher surcharges on individuals earning over Rs2 crore and Rs5 crore annually, hit around 40% of foreign portfolio investors (FPIs). By the second week of August, they had pulled out over Rs20,000 crore from Indian equities.
Mid- and small-cap indexes bore the brunt of the capital flight, falling by 30% and 45% respectively from their record peaks clocked in 2018.
The budget also imposed an additional 20% tax on share buybacks by listed companies, which was not received well by equity investors. A buyback is essentially a scheme where a company purchases a certain amount of its own shares from shareholders to incentivise them.
It is feared that the additionally tax burden may now force many companies to withdraw their buyback plans.
Meanwhile, the budget proposal to raise the minimum public shareholding limit in listed companies from 25% to 35%, left investors staring at the possibility of a liquidity squeeze.
These negative cues from the budget had a cascading effect on market sentiment, already dampened by weak micro- and macro-economic signals.
Nothing to cheer
Corporate India’s June quarter earnings had showed a visible downtrend in net profits, with auto and auto ancillary companies among the worst performers. IT companies, which form a major chunk of overall corporate earnings, also reported lower growth.
Macroeconomic parameters have also been deteriorating due to poor consumer sentiment.
India’s GDP has been lowered, domestic savings have fallen, private capex remains dormant, and exports sluggish. Besides, banks were seen passing only a miniscule portion of the several rate cuts announced by the Reserve Bank of India (RBI). The crisis among non-banking finance companies (NBFC) has also led to a liquidity crunch.
Given the micro- and macro-variables, and the lack of adequate budgetary support for the economy, most equity investors are in exit mode.
Turnaround plan?
The present downtrend maybe prolonged as it looks less cyclical, and more structural. Structural reforms, if any, need time to percolate into the economy’s veins before any results are visible.
But market sentiments, which are equally important, may improve sooner, if the reforms hit the right vein.
Relaxation of the super-rich tax has been the most audible demand so far, but the government would do well to look beyond this.
For instance, the automobile sector, which has seen the most visible fallout of the slowdown, will benefit if GST is slashed from 28% to 18%, in accordance with the industry’s demands. NBFCs, whose financing forms an integral part of auto sales in rural areas, also need to be strengthened.
At the core, however, remains the troubled banking system whose ability to leverage growth has been limited by non-performing assets. Banks require more capitalisation so that they can be active participants in facilitating growth.
Additionally, government must take measures to encourage and increase household savings.
These measures entail additional government expenditure, or trimming tax receipts, and will, therefore, be at logger heads with fiscal deficit targets.
Yet, the government must bite the deficit bullet and revive the animal spirits of the economy, before it’s too late.
First Published in Quartz India.
