Mumbai: Equity investors voted with their feet after India’s annual budget slapped taxes on long-term capital gains, chucked prudent economics and pandered to populism, loosened fiscal consolidation and sowed seeds that could fire up inflation and pile upward pressure on interest rates.
After a series of record highs over the past few weeks, on Friday, a day after the budget was presented to parliament, shares posted their biggest one-day fall since the abrupt decision on November 8, 2016, to scrap high-value bank notes that constituted 86 per cent of the currency in circulation. The tumble wiped out $70 billion (Dh257.11 billion) from the total market value, with shares in small and medium cap companies falling the most.
“The budget is rhetoric heavy, but light on substance,” said equity strategist V. Venugopal. “It took away some of the froth in the market. There should be more unwinding over the near term.”
He said there was no clear roadmap on how New Delhi aimed to finance a plan touted by Finance Minister Arun Jaitley as “the world’s largest government funded health-care programme” to cover the country’s poorest 500 million people, nor on the ambitious higher support prices for farm produce.
Securities house Bank of America-Merrill Lynch said if 5 per cent of beneficiaries claim half the intended amount for health care, the total cost could swell to $20 billion, an amount the government may not have accounted for in the budget.
There were a few disconcerting notes. Faced with revenue shortfall Jaitley reintroduced long-term capital gains (LTCG) tax after a gap of 14 years, at 10 per cent on shares or equity mutual funds that are sold after a year or more. He also slapped a distribution tax on dividends from equity funds.
“This will chill equity markets which have worked so far to partially offset the credit slowdown of beleaguered banks,” the Times of India, the country’s largest circulated newspaper, wrote in an editorial.
Venugopal noted that the driving force behind the 28 per cent rally in the top-30 Sensex in 2017 was the flood of household savings that flowed into equity funds. “The salaried and the middle class have got a raw deal,” he said. “There will be an impact on equity fund flows.”
Populism trumps
It is no secret that widespread anger in the rural regions threatens to unravel the ruling Bharatiya Janata Party’s (BJP) chances for re-election due in just over a year’s time. A few thousand debt-ridden farmers have committed suicide because of failed crops or poor prices, while lack of jobs is pushing more youngsters into the arms of fiery opposition groups.
In Gujarat, the home state of Prime Minister Narendra Modi, the BJP just about managed to scrape through in December. And, on the day the budget was unveiled, the BJP was routed in by-elections in three sitting seats in its stronghold Rajasthan, a state that will go to the polls by December.
So Modi, whose five-year term ends in May next year, was expected to hand out goodies to disgruntled voters in key regions. However, the success of any initiative depends upon stronger economic growth, jobs, better living standards and prices. The government hopes its spending plans would accelerate growth to more than 8 per cent.
“The Narendra Modi government’s last full budget has chosen to tilt heavily in favour of its political priorities,” the Times of India wrote. “This is a budget mainly with an eye on the next general election.”
“Triggering the economy’s animal spirits is not what it is about.”
The benchmark Sensex fell 2.7 per cent over five days, its biggest weekly loss in more than five months, to 35,066.75 after hitting an all-time high of 36,443.98 on Monday. The broader 50-share Nifty also dropped by a similar percentage to 10,760.60, off a record 11,171.55 struck at the start of the week. The Sensex is up 3 per cent this year and the Nifty has gained 2.2 per cent.
The 250-share Small Cap Index plummeted 8.3 per cent over the week, and the 150-share MidCap Index shed 6 per cent.
RBI meet
Inflation, which accelerated to a 17-month high in December, could remain at elevated levels because of rising fuel prices and improving overall demand. India, which imports 80 per cent of the oil it consumes, is vulnerable to global price swings. Goldman Sachs believes Brent crude could hit $75 a barrel in three months and its six-month forecast is $82.50.
The budget’s promise to pay farmers 1.5 times the cost of production for crops also should have a direct impact on inflation. Average increases in minimum support prices for agriculture produce were in low single-digits over the past three years.
Added to this the fiscal deficit for 2017-18 slipped to 3.5 per cent of GDP from a targeted 3.2 per cent, and the shortfall is set at 3.3 per cent in 2018-19 from the roadmap of 3 per cent. Bond yields shot up on the news and this is bound to push up interest rates in the new financial year.
The Monetary Policy Committee of the Reserve Bank of India (RBI) is scheduled to announce its rate decision on Wednesday, and the consensus among economists and policy watchers is for status quo with comments that would portend to what is in store in the months ahead.
“The RBI will undoubtedly be more hawkish at its meeting. Our base case is for a rate hike in Q1 FY19 [the first quarter of fiscal year 2019], with an inflation-targeting central bank preferring to pre-empt a surge in inflation,” Nirmal Bang Institutional Equities said in a note.
Purple patch
The budget increased spending by 13.2 per cent in 2018-19, with the lion’s share going to improve infrastructure in the hinterlands. This should help boost rural incomes and bolster demand for industrial goods. Jaitley allocated Rs14.34 trillion (Dh817.68 billion) to build new roads, housing, sanitation and electrification in the countryside, home to more than two-thirds of India’s 1.3 billion people.
Engineering and construction companies, road builders, automobiles, wagon makers such as Larsen & Toubro Ltd, Hindustan Construction Company, NCC Ltd, IRB Infrastructure Developers, Dilip Buildcon, Ashoka Buildcon, Mahindra & Mahindra, Tata Motors, Maruti Suzuki, Bajaj Auto, Hero MotoCorp, Titagarh Wagons and Cimmco Ltd should benefit from increased orders.
Consumer goods makers that get a significant portion of revenue from the rural region like Hindustan Unilever, ITC, Britannia, Dabur and Marico, jewellery makers Titan, Tribhovandas Bhimji Zaveri and Gitanjali Gems as well as agriculture-focused companies Jain Irrigation, KSB Pumps, Avanti Feeds, PI Industries, Shakti Pumps, JK Agri Genetics and Agri-Tech India should also see their fortunes improving.
Aviation companies InterGlobe, which owns India’s largest carrier IndiGo, SpiceJet and Jet Airways as well as airport builders GMR Infrastructure and GVK Power & Infrastructure should gain from greater spending on the sector. General and health insurance companies and Apollo Hospitals Enterprise and Fortis Healthcare are expected to benefit from the government’s push to expand coverage.
Given the growth prospects for the economy, brave investors should use a dip in prices to accumulate as stocks would rise faster than other investments over the longer term, pundits say.
“New investors should use this correction as an entry opportunity as we believe long-term fundamentals of the economy remains intact,” the Economic Times quoted Sandeep Raina, associate director at Edelweiss Investment Research, as saying.
Geetha Bhaskaran is a journalist based in India.
